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Articles & Commentaries

2022/57 “Assessing the Belt and Road Initiative in Southeast Asia amid the COVID-19 Pandemic (2021-2022)” by Wang Zheng

 

Cambodia’s Prime Minister Hun Sen (front right) gestures as Chinese Foreign Minister Wang Yi (front Left) looks on as they attend a handover ceremony of the Morodok Techo National Stadium, funded by China’s grant aid under its Belt and Road Initiative, in Phnom Penh on 12 September 2021. Photo: TANG CHHIN Sothy/POOL/AFP.

EXECUTIVE SUMMARY

  • The year 2021 marked the 30th anniversary of ASEAN-China Dialogue Relations and the elevation of ASEAN-China ties to Comprehensive Strategic Partnership. Economic ties between China and ASEAN have grown stronger despite continuous disruptions by the COVID-19 pandemic and growing tensions in the South China Sea.
  • Data analysis from an original dataset tracking major China-financed projects under the Belt and Road Initiative (BRI) in Southeast Asia since January 2021 shows that China remains committed to boosting BRI projects’ progress.
  • Overall, the pandemic has accelerated China’s pivot towards “soft” infrastructure such as health services and digital economy as a priority in its economic engagement with the region. This is evident in the increasing prominence of the Health Silk Road (HSR) and Digital Silk Road (DSR) in China’s BRI agenda. These trends are likely to continue in the long run.
  • Despite the progress of BRI projects in Southeast Asia since January 2021, China still faces a bumpy road ahead. Negative effects posed by the ongoing pandemic will continue to impact the implementation of BRI projects, especially with the recent surge of COVID-19 cases in China.
  • Besides, local concerns about social and environmental costs will likely influence the prospects of BRI projects in the region.

*Wang Zheng is currently the Wang Gungwu Visiting Fellow at ISEAS – Yusof Ishak Institute. He is also a Ph.D. candidate in political science at the University at Albany, State University of New York.

ISEAS Perspective 2022/57, 26 May 2022

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INTRODUCTION

The year 2021 marked the 30th anniversary of ASEAN-China Dialogue Relations and the elevation of ASEAN-China ties to Comprehensive Strategic Partnership. Economic ties between China and ASEAN have grown stronger despite continuous disruptions by the COVID-19 pandemic and growing tensions in the South China Sea. According to China’s Ministry of Foreign Affairs, China-ASEAN bilateral trade reached US$789.53 billion and increased by 29.8 per cent in the first 11 months of 2021.[1] China has remained ASEAN’s largest trading partner since 2009; at the same time, ASEAN has been China’s top trading partner since 2020.[2] China’s rising economic impacts in Southeast Asia are reflected in the State of Southeast Asia 2022 Survey Report: over 76 per cent of respondents recognise that China is the most influential economic power in Southeast Asia, although 64.4 per cent of them are worried about China’s economic influence.[3]

As China’s flagship foreign policy, the Belt and Road Initiative (BRI) serves as a major channel through which China has been engaging with ASEAN since its inception in 2013. The COVID-19 pandemic has posed significant challenges to BRI projects worldwide—due to travel restrictions and social distancing measures, about 20  per cent of BRI projects were “seriously affected” as of June 2020, with another 30-40  per cent being “somewhat affected.”[4] Southeast Asia rose to become the top BRI investment destination in 2020, despite a steep decline in China’s overall BRI investments worldwide.[5] As its economy gradually recovered in 2021,[6] China stepped up its efforts to accelerate the progress of BRI projects globally. By the end of 2021, China’s non-financial investments in 57 BRI countries reached US$20.3 billion, with a year-on-year growth rate of 14.1 per cent. Among ten major recipient countries, seven are from Southeast Asia, namely Singapore, Indonesia, Malaysia, Vietnam, Laos, Thailand, and Cambodia, alongside Bangladesh, the Emirates and Kazakhstan.[7]

Given the BRI’s substantial engagement in Southeast Asia during the pandemic, it is necessary to assess the progress of BRI projects in the region. Analysing data from an original dataset tracking major China-financed BRI projects in Southeast Asia since January 2021, this study finds that China remains committed to boosting BRI projects’ progress amid the pandemic. Overall, the pandemic has accelerated China’s pivot towards “soft” infrastructure such as health services and the digital economy as new priorities in its economic engagement with the region. Nevertheless, two key challenges stemming from the ongoing pandemic and local concerns about social and environmental costs are likely to hinder the progress of BRI projects in the region.

DATA ANALYSIS

This study employs data from an original dataset recording major BRI projects in Southeast Asia between January 2021 and March 2022. In general, China’s involvement in foreign projects comprises two parts: 1) investments in the form of financial and technological support and 2) construction contracts financed by local or other foreign sources.[8] Due to the lack of an authoritative definition of what constitutes a BRI project, and to avoid labelling all China-involved projects under the banner of the BRI, this study adopts a narrower definition of BRI projects, which only considers projects meeting the following two criteria as related to the BRI: 1) they must be reported on the official website of the BRI—the Belt and Road Portal run by the Chinese government[9] or undertaken by Chinese companies listed on the website; and 2) they have to be invested in by Chinese sources, indicating China’s position as a key stakeholder. To be more specific, BRI projects recorded in the dataset take four forms: 1) projects financed by loans provided by Chinese financial institutions, either wholly or partially; 2) projects invested in by Chinese companies; 3) projects invested in by joint ventures between Chinese companies and their local partners; and 4) projects as part of China’s foreign assistance programme.

To ensure that the dataset captures BRI projects in Southeast Asia to the best extent possible, this study consulted three sources. The primary source of the dataset is the weekly/bi-weekly reports of BRI projects posted on the Belt and Road Portal. The second source is the websites of Chinese companies undertaking BRI projects which also include certain projects not listed on the Belt and Road Portal. The third source is media reports from platforms including Xinhua, The Strait Times, The Khmer Times, The Phnom Penh Post, The Jakarta Post, The Laotian Times, Reuters, which provide additional details regarding the projects listed in the dataset. It bears mentioning that the dataset is not an exhaustive list of all China-financed BRI projects in Southeast Asia since January 2021 and includes only verifiable sources. Due to the lack of data on project costs, this study mainly analyses three dimensions: project status, project sector, and major players.

Adopting a broader definition of BRI projects—one that includes projects financed by non-Chinese sources, the Belt and Road Portal has reported around 833 China-involved projects worldwide between January 2021 and March 2022, of which roughly 29 per cent take place in Southeast Asian countries. However, according to the narrower definition of BRI projects as mentioned above, the dataset in this study records 95 BRI projects invested in by China in Southeast Asia that have remained active since January 2021.[10] Standing at various stages of development, these projects belong to 87 master projects. These figures signify China’s commitment to BRI projects in the region even during the pandemic.

PROJECT STATUS [11]

Figure 1 below shows the status of major BRI projects in Southeast Asia that have remained activesince January 2021. Chinese companies have won 18 bids of such projects in Southeast Asia since January 2021. Major projects in this category include the Lanxang Culture Park Project in Laos[12] and Xinhai Industrial Park Combined Cycle Power Plant Design Project in Indonesia.[13] Chinese companies have also signed 18 contracts with their local partners, covering projects such as the Upper Stung Tatay Hydropower BOT Investment Project in Cambodia[14] and Golden Jubilee Seaview City Project in the Philippines.[15] Among the 13 projects that started construction are the Huaqing Aluminum Industry Aluminum-Power Integration Project in Indonesia[16] and Thatbyinnyu Phaya Repair Project  in Myanmar.[17] At least 22 projects are underway—including mega projects such as the Jakarta-Bandung High-Speed Railway in Indonesia[18] and the MRL East Coast Rail Link in Malaysia.[19] In addition, 24 projects have been completed since January 2021. The completed project that grabbed the most media attention is the China-Laos Railway, a signature BRI project inaugurated on 3 December 2021. The US$6 billion project—costing almost one-third of Laos’ GDP—cuts travel time from Vientiane to the Chinese border by four hours.[20]

Figure 2 depicts country-level variations in the distribution of BRI projects in Southeast Asia since January 2021. Among Southeast Asian countries, Indonesia has hosted 40 projects, ranking top on the list. These projects span multiple sectors, including energy, transportation, construction, chemicals, metals, among others. Cambodia and Laos both have hosted over ten projects. In terms of project status, Chinese companies have won the most bids (13), signed the most contracts (9), and completed the most projects (7) in Indonesia.  

PROJECT SECTOR

Figure 3 shows the distribution of BRI projects in Southeast Asia by sector and its national variations since January 2021. Most projects are clustered into five sectors: energy (29%), transportation (23%), metals (18%), construction (8%), and chemicals (6%). The data also show China’s efforts to diversify BRI projects in Southeast Asia by expanding its investment in health services, telecommunication, and education. Also, national variations are apparent: 75 per cent of energy projects are hosted by Indonesia, Laos, and Cambodia; 64 per cent of transportation projects are distributed in Indonesia and Cambodia; and 82 per cent of metals projects are located in Indonesia.

Figure 4 illustrates the distribution of specific types of energy projects at both regional and national levels. Power stations utilising clean energies—including hydropower, solar power and biomass—account for roughly 46 per cent of all energy projects listed in the dataset, indicating ASEAN’s growing need for green energy and China’s expanding role in the renewable energy industry in the region. Nevertheless, the data also demonstrate that China continues to invest in traditional energy sectors, accounting for 39 per cent of all energy projects in Southeast Asia since 2021. In particular, six coal-fired power plants—hosted mainly by Indonesia­—are still at initial stages since January 2021, contradicting the China Belt and Road Initiative (BRI) Report 2021’s key finding that “China did not engage in investments or construction projects related to coal in 2021”.[21] Furthermore, there exist national variations in the distribution of energy projects: while most power stations utilising hydropower are located in Cambodia and Laos, power stations fuelled by coal are mostly clustered in Indonesia.

MAJOR PLAYERS [22]

Figure 5 shows the top ten Chinese companies undertaking BRI projects in Southeast Asia since January 2021. Power Construction Corporation of China has undertaken the most projects (12), followed by China State Construction Engineering Corporation Ltd (10), China Energy Engineering Corporation (10), China Communications Construction Company Ltd (10), and China China Metallurgical Group Corporation (9). Figure 6 indicates types of parent companies listed in the dataset—76 per cent of Chinese companies undertaking China-financed BRI projects in Southeast Asia are state-owned enterprises (SOE) and 24 per cent are private companies.

NEW TRENDS

While traditional sectors constitute the majority of BRI projects in Southeast Asia since January 2021, the dataset also reveals some emerging trends that shed light on the BRI’s trajectory in the region. Overall, the pandemic has accelerated China’s pivot towards “soft” infrastructure such as health services and digital economy as new priorities in its economic engagement with the region,[23] as is evident in the increasing prominence of the Health Silk Road (HSR) and Digital Silk Road (DSR) in China’s BRI agenda.[24] These trends are likely to continue in the long run.

Health Silk Road

According to the China Belt and Road Initiative (BRI) Report 2021, China’s global engagement with BRI projects in the health sector surged from US$130 million in 2020 to US$450 million in 2021.[25] This trend is manifested in the progress of BRI projects in Southeast Asia since January 2021. For instance, on 28 December 2021, a China-assisted medical building at the Cambodia-China Friendship Preah Kossamak Hospital in Phnom Penh passed completion inspection. The facility is funded by the Chinese government’s grant aid and is equipped with modern medical technology.[26]

Also, on 16 December 2021, Huawei Technologies (Thailand) Co., Ltd, the Office of the National Broadcasting and Telecommunications Commission (NBTC), and Siriraj Hospital co-launched the “Siriraj World Class 5G Smart Hospital”—the first and largest 5G smart hospital in Southeast Asia.[27] Utilising Huawei’s technologies of 5G network, cloud services, and artificial intelligence, the hospital aims to provide more efficient and accessible health services—especially for those living in rural areas.

These projects are but a few examples of China’s endeavour to participate in the regional health governance via the HSR—a dimension of the BRI that has gained momentum in China’s foreign policy agenda amid the pandemic. While proposed by President Xi Jinping as a joint initiative with the World Health Organization (WHO) in 2017,[28] the HSR was officially associated with the BRI only after the outbreak of the COVID-19 pandemic in early 2020.[29] As part of the HSR diplomacy, China has been actively distributing—and partially donating—medical supplies such as masks and vaccines to Southeast Asia to help regional states combat the pandemic.[30] As of December 2021, China is said to have provided around 600 million doses of vaccines to ASEAN;[31] in addition, China has pledged to donate another 150 million doses to ASEAN and US$5 million to the ASEAN COVID-19 Response Fund.[32] ASEAN countries’ responses to China’s health diplomacy in the region, however, are mixed. As the State of Southeast Asia 2022 Survey Report shows, although over 57 per cent of respondents acknowledge China’s strongest vaccine support to the region, only 18.7 per cent indicate their trust in vaccines produced by Sinopharm/Sinovac,[33] resulting from a combination of factors including general vaccine hesitancy, concerns about Chinese vaccines’ efficacy, and mistrust in China.[34]

Digital Silk Road

The launching of Huawei’s 5G smart hospital in Thailand signifies another trend—the digitalisation of the BRI in the region. Similarly, the notion of the DSR was put forth long before the pandemic outbreak. It first appeared in the Ministry of Industry and Information Technology (MIIT)’s official document in 2014 and was incorporated into the BRI agenda during the First Belt and Road Forum in Beijing in 2017.[35] The core of the DSR is to push leading Chinese tech firms—mostly private companies such as Huawei, ZTE, Tencent, Alibaba—to gain the upper hand in the emerging global digital markets,[36] especially against the backdrop of the intensifying U.S.-China strategic rivalry.

The COVID-19 pandemic has highlighted the crucial role of digital infrastructure in the BRI agenda in two ways. First, it bolsters China’s HSR and DSR diplomacy by providing information technologies to enable BRI countries to battle against the pandemic, such as mass contact tracing, teleconference system, 5G-powered contactless delivery, etc. Second, it allows China to transcend physical barriers aggravated by lockdowns and social distancing measures, reducing damages to BRI projects caused by the pandemic.[37]

As the forerunner of China’s 5G technology, Huawei has been deepening its cooperation with ASEAN in the face of severe pushback from Western countries in recent years. Since January 2021, Huawei has made significant inroads into building digital infrastructure that aims to “excel in both performance and energy efficiency”[38] in the region. Huawei’s AI-assisted solutions and 5G technology have been applied in Thailand and Indonesia to help government hospitals combat the pandemic.[39] Huawei also launched the Customer Solution Innovation Center (CSIC) in Malaysia to “assist the nation in becoming the ASEAN digital hub.” [40] In Singapore, Huawei has partnered with the National University of Singapore Business Analytics Centre (NUS BAC) to “nurture talent and upskill students to help Singapore fill the talent gap in the technology sector.”[41]

Besides Huawei, ZTE is also a major provider of 5G network services in Indonesia, Malaysia and the Philippines.[42] It is worth noting that while private tech companies remain main drivers of the DSR in Southeast Asia, state-owned companies are key stakeholders, too. For instance, in May 2021, China Energy also signed The Philippines Common Cell Tower Contract to build 1,000 cell towers in the country.[43]

CONCLUSION

Despite the progress of BRI projects in Southeast Asia since January 2021, China still faces a bumpy road ahead. Negative effects posed by the ongoing pandemic will continue to impact the implementation of BRI projects,[44] especially with the recent surge of COVID-19 cases in China,[45] which puts to the test China’s zero-COVID policy. Lockdown measures adopted in Shanghai and neighboring provinces have led to production suspension and shipping delays,[46] which are likely to influence global supply chains and limit China’s ability to promptly export goods needed for the BRI projects overseas.

Besides, local concerns about the BRI’s social and environmental costs will persist. Issues such as forced relocation, compensation disputes, and influx of Chinese workers feature prominently in the media coverage of the BRI’s social impacts in the region. In Laos, many villagers displaced by construction of mega projects such as the China-Laos Railway and dams on the Mekong River have not yet received appropriate compensation as promised.[47] The influx of unskilled Chinese workers also gives rise to tensions in Indonesia as these workers are considered to have occupied jobs reserved for local workers.[48] The discussion about BRI’s environmental costs has largely focused on Chinese dams built on the upstream Mekong River, which are correlated to increasingly frequent droughts and loss of fish stocks and farmland in downstream countries.[49] The extent to which these concerns are addressed will influence local perceptions as well as long-term prospects of BRI projects in the region.

ENDNOTES

[1] “中国-东盟合作事实与数据: 1991-2021”,中国外交部,2021年12月31日, https://www.fmprc.gov.cn/web/wjbxw_673019/202201/t20220105_10479078.shtml.

[2]  “突破8000亿!东盟保持我国第一大货物贸易伙伴”, 新华丝路,2022年1月4日,https://www.imsilkroad.com/news/p/475336.html.

[3] Sharon Seah, et al., “The State of Southeast Asia 2022 Survey Report”, ISEAS-Yusof Ishak Institute, 16 February 2022, /articles-commentaries/state-of-southeast-asia-survey/the-state-of-southeast-asia-2022-survey-report/.

[4] Reuters Staff, “China says one-fifth of Belt and Road projects ‘seriously affected’ by pandemic, Reuters, 19 June 2020, https://www.reuters.com/article/us-health-coronavirus-china-silkroad-idUSKBN23Q0I1.

[5] Kaho Yu, “The Belt and Road Initiative in Southeast Asia after COVID-19: China’s Energy and Infrastructure Investments in Myanmar”, ISEAS Perspective 2021/39, 6 April 2021, /wp-content/uploads/2021/03/ISEAS_Perspective_2021_39.pdf.

[6] Luna Sun, “China 2021 economic growth ‘expected to exceed target’, despite headwinds” South China Morning Post, 1 December 2021,  https://www.scmp.com/economy/china-economy/article/3158004/china-2021-economic-growth-expected-exceed-target-despite.

[7] “2021年我国对‘一带一路’沿线国家投资合作情况”,中国商务部,2022年1月4日,http://fec.mofcom.gov.cn/article/fwydyl/tjsj/202201/20220103239004.shtml.

[8] For instance, many projects contracted to Chinese companies in Singapore fit into this category.

[9] See https://bit.ly/38hg9ya.

[10] Given the lack of data regarding exact financing sources of certain projects, the numbers presented here are based on the author’s estimation.

[11] This dataset only includes projects that have remained active since January 2021 and classifies project status into five categories— “bid awarded”, “contract signed”, “construction started”, “in progress”, and “completed”. Project status is based on the availability of the most up-to-date data. Project status is updated accordingly if there is evidence suggesting further progress. The label “construction started” mainly refers to projects that started after January 2021, while “in progress” describes projects that started before January but have not been completed yet. However, for projects labeled “construction started”, if there is evidence indicating substantive progress since the construction started, they are also treated as “in progress.” Projects are labeled “completed” if 1) the construction is finished, 2) project is handed over to the local partner, or 3) the project is put into commercial use.  

[12] “中建四局中标老挝市政工程设计项目”,见道,2021 年4 月19日,https://www.seetao.com/details/77088.html

[13] 陈语,“ 中国能建西南院中标印尼鑫海工业园区60万千瓦燃机联合循环电站可研、初施设一体化设计”, 国际电力网,2021年7月12日,https://power.in-en.com/html/power-2392417.shtml.

[14] “CHMC Signed Cambodia Upper Stung Tatay Hydropower BOT Investment Project Agreements”, China National Heavy Machinery Corporation, 10 March 2021, http://en.chmc.cc/contents/2786/61304.html.

[15] “面积约22.9万平方米!中建六局签约菲律宾金禧海景城项目”,见道,2022年1月12日,https://www.seetao.com/details/133746.html

[16] “ 二公司召开印尼华青1×380MW火力发电项目开工会”, 中国化学工程集团有限公司,2021年6月24日,https://www.cncec.cn/articledetail/124919.  

[17] “中国政府援助缅甸蒲甘他冰瑜佛塔修复项目正式启动”新华网,2022年1月8日,http://www.news.cn/world/2022-01/08/c_1128244803.htm.

[18] “中铁三局参建印尼雅万高铁最长隧道贯通”, 中国中铁股份有限公司,2022年3月1日,http://www.crecg.com/web/10089492/10091154/10191210/index.html.

[19] “中马合作马来西亚东海岸铁路项目首条隧道贯通”,中国中央人民政府,2021年4月9日,http://www.gov.cn/xinwen/2021-04/09/content_5598742.htm.

[20] Ayman Falak Medina, “The Completed China-Laos Railway: Bringing Opportunities for ASEAN and the Asia Pacific”, ASEAN Briefing, 21 December 2021, https://www.aseanbriefing.com/news/the-completed-china-laos-railway/.

[21] Nedopil 2022.

[22] For the sake of clarity, this study only reports parent companies. If the master project is contracted to different companies, the dataset only records the main contractor as indicated in the project title in the news coverage. While the dataset treats components of a single project as belonging to the same master project, it codes different phases of the same project as separate master projects.

[23] Min Ye, “Adapting or Atrophying? China’s Belt and Road after the Covid-19 Pandemic”, Asia Policy, Vol. 16, No. 1(January 2021), 65-95.

[24] Lee Dong Gyu, “The Belt and Road Initiative after COVID: The Rise of Health and Digital Silk Roads”, Asian Institute for Policy Studies, 15 March 2021, http://en.asaninst.org/contents/the-belt-and-road-initiative-after-covid-the-rise-of-health-and-digital-silk-roads/.

[25] Nedopil 2022.

[26] “China-funded medical building in Cambodia’s capital passes completion inspection”, Xinhua, 28 December 2021, http://www.xinhuanet.com/english/20211228/6045d479390447d2abe2f0e67f39ef95/c.html

[27] “Thailand Launches ASEAN’s First 5G Smart Hospital”, Huawei, 17 December 2021, https://www.huawei.com/au/news/2021/12/smart-hospital-thailand-5g-siriraj.

[28] “Towards a Health Silk Road”, World Health Organization, 18 August 2017, https://www.who.int/director-general/speeches/detail/towards-a-health-silk-road.

[29] Elizabeth Chan, “China’s Vaccine Diplomacy Revamps the Health Silk Road Amid COVID-19”, Jamestown Foundation, 12 November 202, https://jamestown.org/program/chinas-vaccine-diplomacy-revamps-the-health-silkroad-amid-covid-19/.

[30] Ngeow Chow-Bing, “COVID-19, Belt and Road Initiative and the Health Silk Road: Implications for Southeast Asia,” Friedrich Ebert Stiftung, October 2020,  http://library.fes.de/pdf-files/bueros/indonesien/16537.pdf.

[31] See “中国-东盟合作事实与数据: 1991-2021”

[32] “Full Text: Speech by Chinese President Xi Jinping at the Special Summit to Commemorate the 30th Anniversary of China-ASEAN Dialogue Relations”, Qiushi, 23 November 2021, http://en.qstheory.cn/2021-11/23/c_683703.htm

[33] See “The State of Southeast Asia 2022 Survey Report”. 

[34] Khairulanwar Zaini and Hoang Thi Ha, “Understanding the Selective Hesitancy towards Chinese Vaccines in Southeast Asia.” ISEAS Perspective 2021/115. 1 September 2021,  /articles-commentaries/iseas-perspective/2021-115-understanding-the-selective-hesitancy-towards-chinese-vaccines-in-southeast-asia-by-khairulanwar-zaini-and-hoang-thi-ha/.

[35] Ngeow Chow-Bing, “China-ASEAN Information Harbor: The Digital Silk Road from Guangxi to Southeast Asia”, Friedrich Ebert Stiftung, August 2021, http://library.fes.de/pdf-files/bueros/indonesien/18185.pdf.

[36] Paul Triolo et al, “The Digital Silk Road: Expanding China’s Digital Footprints”, Eurasia Group, 8 April 2020, https://www.eurasiagroup.net/files/upload/Digital-Silk-Road-Expanding-China-Digital-Footprint-1.pdf.

[37] See Lee 2021. 

[38] “Huawei’s Aaron Jiang: Green Innovation for Low-Carbon 5G”, Huawei, 19 October 2021, https://www.huawei.com/au/news/2021/10/green-low-carbon-5g-4et

[39] “Huawei Thailand Receives Prestigious Prime Minister Award as Digital International Corporation of the Year”, Huawei, 09 March 2021, https://www.huawei.com/au/news/2021/3/thailand-huawei-pm-award; “Indonesia’s Luhut Invites Huawei to Enhance Collaboration in Smart Future and New Energy”, Huawei, 08 December 2021, https://www.huawei.com/au/news/2021/12/indonesia-coordinating-minister-meets-guo-ping.

[40] “Malaysia Prime Minister Launches Huawei’s Customer Solution Innovation Center”, 23 November 2021, https://www.huawei.com/en/news/2021/11/huawei-malaysia-prime-minister-csic.

[41] “Huawei Partners NUS Business Analytics Centre to Nurture Digital Talents for Singapore”, Huawei, 15 December 2021, https://www.huawei.com/au/news/2021/12/huawei-nus-talent-cloud-big-data.

[42] See “中兴通讯菲律宾P3项目荣获2021年度PMI(中国)杰出项目奖”, 中兴, 2022年1月13日,https://www.zte.com.cn/china/about/news/20220113C3.html;“中兴通讯助力印尼运营商Telkomsel 5G商用发布”,中兴,2021年7月2日,https://www.zte.com.cn/china/about/news/20210702C1.html; “中兴通讯助力马来西亚电信构建新一代承载网”, 中兴,2022年3月2日,https://www.zte.com.cn/china/about/news/20220302C3.html.

[43] “中国能建签署菲律宾共享通信铁塔项目”, 走出去导航,2021年5月21日,https://www.investgo.cn/article/yw/alfx/202105/544855.html.

[44] P Prem Kumar and Kenji Kawase, “China-backed Malaysia megacity project struggles to gain momentum”, Nikkei Asia, 14 March 2022, https://asia.nikkei.com/Business/Markets/Property/China-backed-Malaysia-megacity-project-struggles-to-gain-momentum.

[45] “China Covid cases hit two-year high with millions in lockdown as outbreak spreads”, The Guardian, 15 March 2022, https://www.theguardian.com/world/2022/mar/15/china-covid-cases-hit-two-year-high-with-millions-in-lockdown-as-outbreak-spreads.

[46] Che Pan, “Shanghai lockdown: China struggles to maintain key supply chains amid ‘dynamic zero’ Covid-19 policy”, South China Morning Post, 26 April 2022, https://www.scmp.com/tech/big-tech/article/3175541/shanghai-lockdown-china-struggles-maintain-key-supply-chains-amid.

[47] See “Lao Villagers Displaced by Xayaburi Dam Still Lack Farmland, Water”, Radio Free Asia, 29 September 2021, https://www.rfa.org/english/news/laos/displaced-09292021174252.html; “Planned Lao dam raises concerns in Thailand over impacts on shared border”, Radio Free Asia, 21 December 2021, https://www.rfa.org/english/news/laos/dam-12212021155829.html; and “As first Chinese high-speed train reaches Laos, villagers demand overdue compensation”, Radio Free Asia, 19 October 2021, https://www.rfa.org/english/news/laos/high-speed-train-10192021141727.html.

[48] Leo Suryadinata, “New Chinese Migrants in Indonesia: An Emerging Community that Faces New Challenges”, ISEAS Perspective, 2020/61, 11 June 2020, /wp-content/uploads/2020/04/ISEAS_Perspective_2020_61.pdf; and Leo Suryadinata, “A Rising China Affects Ethnic Identities in Southeast Asia”, ISEAS Perspective 2021/74, June 3, 2021, /wp-content/uploads/2021/05/ISEAS_Perspective_2021_74.pdf.

[49] See “Planned Lao dam raises concerns in Thailand over impacts on shared border”, Radio Free Asia, 21 December 2021, https://www.rfa.org/english/news/laos/dam-12212021155829.html; and “Worries in Laos and Thailand as upstream dams drain Mekong River”, Radio Free Asia, 21 January, 2022. https://www.rfa.org/english/news/laos/mekong-water-01212022141419.html;


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2022/56 ““Hit Me Baby One More Time?”—Patriarchalism, Literalism and Androcentrism on the Rise in Malaysia” by Faris Ridzuan and Faizal Musa

 

Women in Malaysia have been participating in the public domain alongside their male counterparts. In this picture, Muslim women were attending the first evening prayer marking the start of Islam’s holy month of Ramadan at the Tuanku Mizan Zainal Abidin Mosque in Putrajaya, Malaysia, on 2 April 2022. Photo: Mohd RASFAN, AFP.

EXECUTIVE SUMMARY

  • Recent controversial comments made by Siti Zailah Mohd Yusoff, the Deputy Minister of Women, Family and Community Development and Malaysian Islamic Party (PAS) leader, suggesting that husbands could use a gentle but firm physical touch in order to educate recalcitrant wives, set off a furore amongst gender right groups over this apparent condoning of domestic violence.
  • The growing dominance of politicians and public servants with conservative, patriarchal and androcentric attitudes within the Ministry of Women, Family and Community Development is a discouraging setback for gender rights groups in the country.
  • Gender rights groups suffer from a perceived lack of religious legitimacy and their limited presence in mainstream religious domains. Conservative elements portray them as notoriously liberal.
  • Gender rights groups will need to regroup and engage anew with religious elites, especially those from non-traditionalist institutions. They need to cultivate like-minded allies in political and social circles to promote progressive views to counter the conservatives’ narrative. They should work with political parties to boost the selection of women from diverse backgrounds as electoral candidates and subsequently as lawmakers.

* Faris Ridzuan is Research Officer in the Regional Social and Cultural Studies Programme at the ISEAS – Yusof Ishak Institute. Mohd Faizal Musa is Visiting Fellow at ISEAS – Yusof Ishak Institute as well as Associate at Weatherhead Centre Harvard University working on Global Shia Diaspora.

ISEAS Perspective 2022/56, 24 May 2022

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INTRODUCTION

The contestation over gender relations, especially evinced by official government narrative and policy, is currently unevenly skewed to favour conservative attitudes as Malaysia lags behind in women issues. This article argues that the appointment of conservative political office holders who hold a patriarchal and androcentric worldview, especially on domestic violence, coupled with the dominance of literalist religious interpretations on gender, strongly inhibit gender equality in Malaysia as a whole.

In mid-February, Siti Zailah Mohd Yusoff, the Deputy Minister of Women, Family and Community Development and Malaysian Islamic Party (PAS) leader, made some controversial remarks in a video about how husbands should treat wives. Husbands, she ventured, should use a “gentle but firm physical touch” that is “educational”, on recalcitrant wives.[1] There has been a groundswell of outrage over this comment. What gender rights activists fear is that the phenomenon reveals the capture by conservative actors of key institutions meant to oversee and support family and gender development and relations.

This is not the first controversy involving public institutions signalling that occurrence. During the initial period of the Covid-19 pandemic in 2020, the Ministry of Women, Family and Community Development under Rina Harun introduced a series of posters that have been described by civil and women’s rights groups as an initiative that “could worsen gender stereotypes and to a certain extent encourage domestic violence”.[2] These posters seemed to emphasise the importance of women’s appearance and advised work-at-home mothers to “groom as usual” and always look neat. Furthermore, they extolled that wives, in educating their husbands on doing household chores, should adopt a “Doraemon-like” tone and giggle coyly, as opposed to “nagging”. This is in order to avoid quarrels.[3] Gender rights groups were shocked and confused by the underlying message of these posters.[4]

While Siti Zailah’s comment angered many, it received support from conservative groups. Sisters in Islam (SIS), a non-governmental organisation well-known for its progressive views, condemned Zailah’s advice for a husband to hit the wife gently to reprimand her, and considered it supportive of “women being treated as subservient, inferior beings who deserve to be disciplined and corrected in their character and behaviour.” [5] Joint Action Group for Gender Equality, a coalition of women’s groups, called for the resignation of Siti Zailah following the comments. Several MPs, such as MP Yeoh Bee Yin from the opposition Democratic Action Party and Nurul Izzah Anwar from the opposition People’s Justice Party, also expressed alarm over the Deputy Minister’s statements and highlighted their concerns over already increasing domestic violence during the pandemic. Meanwhile, conservative groups such as Ikatan Muslimin Malaysia (ISMA), Malay-Muslim NGO, supported Siti Zailah. 

With Siti Zailah helming the role of Deputy Minister for Women, Family and Community Development, policies and official government narratives on gender relations are set to become more conservative. It does not help matters that Rina Harun, the Minister, is seen by the public to be lacking in capability, giving Zailah ample space to gain public attention. While Rina was a relative unknown before 2018, Zailah is highly regarded by many in the conservative camp. She was a religious official at the Kelantan Islamic Affairs Department before joining politics. She was responsible for training religious officers in the state for five years. Between 2000 to 2006, she was nominated Senator and in 2008 contested in the parliamentary seat of Rantau Panjang, Kelantan, which she has represented since. She was also PAS’ women’s wing leader from 2011 to 2015.

In 2017, Siti Zailah endorsed child marriages[6] and more recently, she expressed that the government would have to consult the ulama to endorse the national road map to fight child marriage if the policies conflict with the Quran and Hadith.[7] Furthermore, she stated that policies that do not clash with Islam will continue under the new government. Siti Zailah has also asked for flight attendants to dress in a syariah-compliant manner.

There is no space in this article to explore progressive interpretations and hermeneutics of Islamic texts to counteract conservative, androcentric, patriarchal and literalist paradigms and interpretations. But most certainly, the vast majority of religious elites and functionaries in Malaysia’s bureaucracy and courts are conservative, and Siti Zailah is just one among many.

Given the apparent trend, Malaysia sorely needs a counteracting narrative to patriarchal and literalist interpretations of Islamic sources. Women clerics such as Nuridah Mohd Salleh, the leader of PAS’ Women Wing from Terengganu, or Asma Harun, a PAS leader from Selangor, carry the same tone as Zailah’s. Fatin Nur Majdina Nordin from the Islamic NGO, ABIM, or Dr Siti Mariah Mahmud and Aiman Athirah from PAS’ splinter party, Amanah, are no match for Zailah and are often considered to be much less charismatic than her. None of them openly challenged Zailah’s view on the permissibility of beating wives in Islam either. This leaves the interpretation of the Quranic verse 4:34, which seems to endorse the act of beating wives, confined to literalist and patriarchal readings.

Recently, the Department of Islamic Development of Malaysia (JAKIM) appointed Hakimah Mohd Yusoff as their new Director. She is its first woman head. Hakimah’s views on theological and contemporary jurisprudential discourses are however not known to many; she was formerly the head of Halal Hub, a less visible wing under JAKIM. Her appointment was based more on seniority in the organisation rather than anything else. It remains to be seen how she positions herself on matters such as the legal marrying age for Muslim women.

The conservatism of the abovementioned female politicians and religious elites stems from their tertiary training or alma mater. While Asma Harun has a degree from Al-Azhar, Nuridah Mohd Salleh and Hakimah Mohd Yusoff graduated from the Islamic Faculty of the University of Malaya, the alma mater of many PAS activists. Unfortunately, those who carry progressive views such as Dr Siti Mariah Mahmud and Aiman Athirah are not considered to be asatizah, for lack of a degree in Islamic studies.

Another impediment to the appearance and presence of progressive female voices may be the fact that female clerics became visible in Malaysia only in the 1990s, and they fall behind male clerics in Malaysia’s patriarchal climate. Women clerics are also expected to only discuss ‘fiqh wanita’ or women jurisprudential affairs and the role of parenthood, and no other themes.

CIVIL SOCIETY GROUPS LACKING RELIGIOUS LEGITIMACY

In 2009, Sisters in Islam (SIS) released a publication entitled “Are Muslim Men Allowed to Beat Their Wives?”.[8] SIS put forth compelling hermeneutical and socio-historical arguments that the Quranic verse 4:34 does not permit husbands to beat wives.[9] However, SIS lacks religious legitimacy in the eyes of the conservative and rural public, as its members are largely not from the fold of religious preachers or asatizah. It is also not part of their strategy to dominate the pulpits of mosques and religious platforms to spread their progressive ideologies, so their discourse does not gain public traction. To complicate matters, there is also a 2014 Selangor fatwa declaring SIS a deviant organisation for subscribing to “religious liberalism and pluralism”.[10] This proclamation still stands today, although it is being contested by SIS. Furthermore, their perceived standing as a liberal organisation hampers their ability to gain credibility in the public space where fearmongering against the dangers of liberalism is rampant.[11]

Patriarchalism was never as dominant or as strong before colonialism and Islamic revivalism as it is now. Before the colonial period, in fact, there were matriarchal systems in the Malay world, such as in Negeri Sembilan, but such systems were overshadowed and discarded during the colonial period. This trend was further compounded by the religious revivalism of the last 40 years, immersed within processes such as the Islamisation of economic and political systems. Islamic revivalism, in Islamising public space through government policies instead of leaving religion to personal choice, has strengthened extant conservative and patriarchal strands in Malay culture.

Ideology and praxis do not match though. On the one hand, ideologically conservative gender paradigms drive policies and laws and promulgate essentialized roles of women as child bearers and homemakers, and men as breadwinners. While on the other hand, in practice, we have the quotidian experience of women participating both in the public and private spheres. Hence, women with ideologically patriarchal views are more likely to gain prominence and power as they ironically espouse patriarchalism while climbing up the patriarchal social hierarchy. It is definitely hard for a woman espousing progressive, non-patriarchal, non-androcentric and gender egalitarian views, especially overtly, to climb up the social and political hierarchy, let alone disseminate their progressive views. This cultural dimension of patriarchy is not a culturalist analysis; there are very real structural impediments that women face in Malaysian society. For instance, while Kelantanese and Kedahan women are popularly known to be very capable, illustrious and business-minded, PAS’ laws and religious interpretations attempt to put women under gendered surveillance.

STRUCTURAL REFORM FOR GENDER EQUALITY

Beyond the lack of spaces for progressive interpretations and conservatives’ capture of Malaysia’s bureaucracy and courts, there is a need to examine the structural factors that drive patriarchy and gender inequality in Malaysia and what gender rights groups and gender movements can do to level the playing field.

As an indicator of Malaysia’s lack of structural progress in gender egalitarianism, Malaysia ranks 104th in the World Economic Forum’s Global Gender Gap Index 2020 out of 153 countries and 9th out of 11 countries in the Southeast Asian region.[12] Suhakam, a human rights institution in Malaysia, cites that according to this index, “Malaysia is still far behind in other key areas including literacy rates (86th), economic participation (97th) and political participation (117th). ”[13] Certainly, there are a lot of structural factors such as disparity in education, political and work opportunities that reinforce the patriarchal and androcentric paradigms of the religious and political elites who interpret Islamic sources and discourses. In turn, these patriarchal and androcentric paradigms also reinforce the structural gender inequality in a feedback loop.

As gender rights groups and gender movements in Malaysia try to gain momentum to galvanise structural change in gender equality through lobbying and discursive strategies, they are encumbered by religious and political elites as well public officers who hold androcentric and patriarchal views on gender relations.

In contrast, outside the religious domain such as in politics, Muslim women are doing quite well. For instance, Tengku Maimun Tuan Mat has been elected as Chief Justice; Latheefa Bibi Koya was briefly Chief Commissioner of Malaysian Anti-Corruption Commission; Nor Shamsiah Mohd Yunus is the Governor of the Central Bank of Malaysia and Wan Azizah Wan Ismail was Deputy Prime Minister during Pakatan Harapan’s administration. However, gender egalitarianism is not progressing as fast in the religious domain.

There is a need for systemic change, and gender rights groups and gender movements need to work in a concerted manner to reform religious elites, asatizah and preachers in the country to adopt a more gender egalitarian worldview. This is all the more important since their chances of lobbying government agencies and courts captured by religious conservatives appear slim. Instead, they need to cooperate with religious elites who are more gender-progressive in order to introduce the public to more progressive Islamic interpretations of gender relations and equity. This may be difficult since there is a scant number of progressive religious elites. Gender rights groups and gender movements also need to ensure that more progressive religious elites occupy influential positions in religious bureaucracies and key ministries. Key figures such as former Terengganu’s Mufti, Ismail Yahya who opposed female circumcision (FGM) and Mohd Na’im Mokhtar, Malaysia’s Sharia Chief Judge who appointed two women Sharia judges in Selangor in 2016, need to be engaged and given wider reportage.

While Malaysia and Indonesia are different from each other in terms of Islamic approach and climates, both countries are seeing more women participating in the public arena, and this includes Islamic missionaries.

Among the strategies to ensure the equal access of women to matters of justice within the Islamic arena is to follow the footsteps of the state of Selangor in electing more women as Sharia judges. At the moment there are only two women Sharia judges, one of them being Noor Huda who was trained at the School of Oriental and African Studies, University of London; the government is positioning her to disseminate a more creative and innovative outlook on Shariah law. Civil society groups such as Sisters in Islam, or ABIM must ensure that they have like-minded allies graduating from non-traditionalist institutions, who eventually move on to work in important positions in the religious bureaucracy and courts, as well as in key agencies such as the Ministry of Women, Family and Community Development.

In order to achieve a balanced participation of women and men in political and public decision-making, and gender mainstreaming in all policies and measures, political parties need to push for more women from all backgrounds to be electoral candidates.

One concrete strategy is for civil society actors and progressive actors to gain legitimacy by winning over the conservatives in a struggle over day-to-day women’s issues such as fair wages in employment, equity in access and opportunity to higher education, and support for mothers who take on the double shift of homemaker and n employee, self-employed person or entrepreneur. All these concrete efforts will ensure that overarching issues concerning women such as the legal marriage age for Muslim women will get fair attention, and not only from conservative voices. The call to add more women leaders must be made effortlessly with a coherence of concerted efforts from both political parties and civil society actors.

At the moment, Malaysia’s Director-General of Education is Nor Zamani Abdol Hamid, and there are other key positions held by women such as the Director of the Department of Islamic Development of Malaysia (held by Hakimah Mohd Yusoff), and the Information Director-General (held by Roselindawati Abdul Rahman). In addition, women who are influential within social media with more than a million followers include female celebrities such as Noor Neelofa Mohd Noor and Mira Filzah. Being in positions of influence and authority, these women can dismantle structural and cultural patriarchy to contribute to gender egalitarianism and women’s development and progress. They should work together with fellow male allies and not resort to blaming men and male actors per se. Humanistic and gender egalitarian Malay and Islamic traditions that can be gleaned from the historical past and continued intellectual heritage should be revived in public discourse.  

CONCLUSION

The capture of the key ministry dealing with women’s development, by conservative, patriarchal and androcentric political actors who adopt literalist and patriarchal interpretations of key Islamic sources and law does not bode well for gender egalitarianism in Malaysia. This has culminated in the ministry endorsing acts that may lead to domestic violence, and meeting with little to no opposition for doing so. Gender rights groups’ perceived lack of religious legitimacy and their little foray into mainstream religious discourse make little headway in changing the mainstream conservative religious discourse on gender relations and equity.

One important strategy for gender rights groups and movements is to work to reform religious elites, asatizah and preachers so that they can help propagate progressive religious discourse. This is necessary since the political and religious bureaucracy has been captured by patriarchal and androcentric elites, and seems impervious to progressives’ lobbying for now. There also needs to be a network of like-minded allies for civil society groups to work with, involving graduates from non-traditionalist institutions who can possibly go on to occupy positions of influence in government and in society in general.

Gender rights groups and gender movements need to pick up the momentum to galvanise grassroots actions to get women from diverse backgrounds appointed as electoral candidates and law-makers; this can counteract and dilute the dominance of conservative voices. Only then can systemic and structural changes occur to promote gender egalitarianism in Malaysia, alongside progressive and gender egalitarian hermeneutics and interpretations of key Islamic sources, laws and texts.

ENDNOTES


[1] Lingan Suganya, “Malaysian Minister under Fire for Apparently Endorsing Domestic Violence,” News, Benar News, Accessed May 6, 2022, 17:12:00+08:00,  https://www.benarnews.org/english/news/malaysian/video-fallout-02142022120855.html.

[2] Soo Wern Jun, “Women Ministry’s ‘Household Happiness’ Posters Could Fuel Gender Stereotypes and Domestic Violence, Advocacy Groups Say | Malay Mail,” accessed April 20, 2022, https://www.malaymail.com/news/malaysia/2020/03/31/women-ministrys-household-happiness-posters-could-fuel-gender-stereotypes-a/1852073.

[3] Ibid.

[4] “It implies that women are ultimately responsible for getting domestic chores done when the duty should be a shared one. It makes women the ones who need to persuade their partners to chip in, and worse, asks that women downplay a rightful request by using infantile language and mannerisms — so as not to offend the apparent sensitivities of men. The implicit message is that men are allowed to slack off on domestic work and it’s women who must follow up with them — but they should only do so nicely. In short, it sends the message that women are subordinate in the home and are not allowed to function as equals to men,” said Women’s Centre for Change in a strongly worded statement. (Soo Wern Jun, “Women Ministry’s ‘Household Happiness’ Posters Could Fuel Gender Stereotypes and Domestic Violence, Advocacy Groups Say | Malay Mail,” accessed April 20, 2022, https://www.malaymail.com/news/malaysia/2020/03/31/women-ministrys-household-happiness-posters-could-fuel-gender-stereotypes-a/1852073.)

[5] Lingan Suganya, “Malaysian Minister under Fire for Apparently Endorsing Domestic Violence,” News, Benar News, Accessed May 6, 2022, 17:12:00+08:00,  https://www.benarnews.org/english/news/malaysian/video-fallout-02142022120855.html.

[6] “Hannah Concerned about Deputy Minister’s Support of Child Marriage,” Malaysiakini, 10:56:00+08:00, https://www.malaysiakini.com/news/513990.

[7] M. Fakhrull Halim, “Child Marriage: Deputy Minister Says Policies That Don’t Clash with Islam Will Go On,” Malaysiakini, 20:14:00+08:00, https://www.malaysiakini.com/news/514611.

[8] Yasmin Masidi and SIS Forum (Malaysia) Berhad, Are Muslim Men Allowed to Beat Their Wives? (Selangor: Sisters in Islam, 2009).

[9] Amongst its arguments, SIS argued that the word “daraba” in the Quranic verse 4:34, which is traditionally understood as “strike”, could refer to the act where someone “strikes out” on a journey or “gives or sets as an example”. Furthermore, even if classical jurists were to accept that “daraba” means “strike”, SIS argues that the historical context tells us that it is not a license for men to beat their wives, considering that he final verse in the Qur’an on male-female relationships which regards women and men as being each other’s protective friends and partners. Ibid, 11-13.

[10] Hafiz Yatim / theedgemarkets com August 27 and 2019 15:29 Pm +08, “Selangor Fatwa Declaring Sisters in Islam as a Deviant Group Stands — High Court,” The Edge Markets, August 27, 2019, http://www.theedgemarkets.com/article/selangor-fatwa-declaring-sisters-islam-deviant-group-stands-%E2%80%94-high-court.

[11] After Malaysia experienced waves of Islamic revivalism in the 1970s, outward forms of symbolism and ethnoreligious identity markers such as the veil or tudung among women leaders also render more religious legitimacy to wearers of the tudung, and the leaders of SIS, many of whom do not don the tudung, do not have claim over this symbolic legitimacy of religiousness. 

[12] Klaus Schwab et al., Global Gender Gap Report 2020 Insight Report. (Geneva: World Economic Forum, 2019).

[13] “Gender Equality – SUHAKAM,” accessed April 20, 2022, https://suhakam.org.my/portfolio/gender-equality/.

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“Financial Technology Adoption in Greater Jakarta: Patterns, Constraints and Enablers” by Astrid Meilasari-Sugiana, Siwage Dharma Negara and Hui Yew-Foong

 

 

2022/55 “It Takes Two to Tango: Vietnam-US Relations in the New Context” by Hong Kong Nguyen and Pham Muoi Nguyen

 

US Secretary of State Antony Blinken (L) meets with Vietnamese Prime Minister Pham Minh Chinh during a bilateral meeting in Washington, DC, on 13 May 2022. Photo: Jose Luis Magana/POOL/AFP.

EXECUTIVE SUMMARY

  • Shifts in global politics, particularly in the wake of Russia’s invasion of Ukraine, raise questions about the prospects of Vietnam’s cooperative partnership with countries that are imposing anti-Russia sanctions, particularly the United States.
  • Since their diplomatic normalisation in 1995, Vietnam and the US have continuously strengthened their economic ties and deepened cooperation in both traditional and non-traditional security issues, a trend that is likely to endure in the future, given the increasing importance that the two countries attach to their bilateral relationship.
  • Vietnam’s delicate balancing act between major powers suggests that it is unlikely to advance a relationship with one power at the expense of another. Instead, it will try to maintain an independent position and promote ties with all powers, where possible.
  • While Vietnam and the United States increasingly see eye-to-eye on a number of strategic issues, certain political differences between the two remain. Going forward, they will need to address such differences while maintaining frequent political, economic, cultural and military exchanges in order to build an enduring partnership.
  • Upgrading ties to the strategic partnership level should also be a bilateral goal in the short to medium term.

*Hong Kong Nguyen is a PhD student in International Relations at Ritsumeikan Asia Pacific University and a non-resident WSD-Handa fellow at Pacific Forum. Pham Muoi Nguyen is a former Wall Street Journal reporter based in Hanoi and is currently director of Vietnam Panorama (Toan Viet), a private media monitoring company.

ISEAS Perspective 2022/55, 23 May 2022

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INTRODUCTION

When US President Joe Biden released his Indo-Pacific Strategy on 11 February 2022, Vietnam was named one of the leading regional partners of the United States, alongside India, Indonesia, Malaysia, New Zealand, Singapore, Taiwan, and the Pacific Islands.[1] Over the past two years, despite the COVID-19 pandemic, Vietnam has also been visited by various senior US officials, including then-Secretary of State Mike Pompeo in 2020, and Defense Secretary Lloyd Austin and Vice President Kamala Harris in 2021. All signs were pointing toward a positive trajectory for bilateral relations until Russia invaded Ukraine on 24 February. In the two months that followed, Vietnam found itself among a minority of countries that did not support efforts by America and its allies to punish Russia for its invasion. Specifically, Hanoi abstained on two United Nations (UN) General Assembly resolutions that condemned Russia’s invasion and demanded civilian protection and humanitarian access in Ukraine, and voted against a resolution that suspended Russia from the UN Human Rights Council.

Hanoi’s votes on the above resolutions disappointed Western countries. On 8 March, ambassadors of the European Union, Norway, Switzerland and the United Kingdom in Hanoi co-signed a letter urging Vietnam to stand with Ukraine because the Soviet Union, Vietnam’s historical ally, “is long gone and we are in a new era.”[2] However, from Hanoi’s perspective, Russia remains a highly important partner, especially in terms of arms supplies[3] and oil and gas cooperation.[4] Amid the growing pressure to side with the West on the Ukrainian issue, the Vietnamese government has continued business as usual, trying to maintain a balance between the major powers. On 12 March, Vietnam gave the green light for Gazprom International, a subsidiary of the Russian state-owned Gazprom, to go ahead with a US$293 million gas-fired power plant in the central province of Quang Tri.[5] Two weeks later, Foreign Minister Bui Thanh Son welcomed US Department of State Counselor Derek Chollet in Hanoi, and in early May, Vietnam announced that it would provide US$500,000 in humanitarian aid to Ukraine.

The chain of events raises questions about the prospects of Vietnam’s cooperation with partners that impose anti-Russia sanctions, particularly the United States. As Hanoi and Washington will mark ten years of their “comprehensive partnership” in 2023, this provides a timely opportunity to review recent developments in bilateral relations and assess their prospects, especially regarding the potential upgrading of bilateral ties to the “strategic partnership” level.

CEMENTING COMMON GROUND

Expectations for deepening Vietnam-US relations are grounded in a number of factors, but none clearer than the increasingly robust bilateral economic ties (Figure 1). The US is currently Vietnam’s second-largest trading partner after China, while Vietnam is among the top ten trading partners of the US. Between 2016 and 2021, two-way trade turnover more than doubled to US$111.56 billion.[6] In terms of foreign direct investment, America is Vietnam’s 11th biggest investor, with a total of 1,138 projects and accumulative registered capital of US$10.28 billion as of end-2021, up 32.8 per cent and 4.10 per cent from 2017, respectively.[7]

Vietnam’s emergence as a major trading partner of America has been driven partly by shifts in regional supply chains, such as the higher manufacturing costs in China as well as the trade frictions between China and the US. For this reason, although Vietnam and the US are not mutual parties to any comprehensive trade agreements, bilateral trade is likely to maintain its growth momentum. Recently, Washington has announced its Indo-Pacific Economic Framework (IPEF), an attempt to re-engage Asia in the economic domain. Although the IPEF does not offer greater access to the US market, it is envisioned as an inclusive and flexible framework, covering a wide range of issues, from trade facilitation, technology, digital economy, cross-border data flow, clean energy, infrastructure, to high labour and environmental standards.[8] With the US hosting the Asia-Pacific Economic Cooperation (APEC) summit in 2023, Vietnam and other APEC members can expect the US to take further concrete measures to roll out the IPEF, thereby further deepening America’s economic ties with the region.

Several outstanding trade issues remain between the two countries, including the US Trade Representative’s investigation into Vietnam’s timber trade practices, strict US regulations over the import of Vietnamese catfish, and high anti-dumping tariff on Vietnamese honey.[9] However, these are rather minor issues that are unlikely to significantly constrain bilateral ties going forward.

The two countries are also increasingly aligned on a host of traditional and non-traditional security issues. According to the US Department of State, between 2015 and 2019, the US authorized the permanent export of more than US$32.3 million in defense articles to Vietnam through Direct Commercial Sales. It also registered over US$162 million in active Foreign Military Sales with Vietnam during this period. From 2017 to 2021, Washington provided Hanoi with about US$60 million in security assistance under the Foreign Military Financing (FMF) programme and more than US$20 million under the Southeast Asia Maritime Security Initiative.[10] The FMF spending, which supports capacity building for Vietnam in military education and maritime security/domain awareness, is the third-highest by the US in ASEAN, jumping from merely US$100,000 in 2012 to US$40 million in 2019.[11] At a press conference in Hanoi on 20 April 2022, Ambassador Marc Knapper disclosed that the US was preparing to transfer a third coast guard cutter to Vietnam.[12] The announcement was made despite Vietnam’s unwillingness to side with the West on the Ukraine issue, showing the Biden administration’s strong commitment to promoting ties with Vietnam.

Deepening military-to-military ties are also evidenced by the frequency of US port calls to Vietnam. As shown in Figure 2, between 2009 and 2020, Vietnam received a total of 28 visits by US military vessels, including 13 official port calls, two oceanographic survey missions,[13] and six voyage repairs. There were also nine multilateral humanitarian assistance and disaster relief (HA/DR) preparedness missions within the annual US-led Pacific Partnership framework.

On non-traditional security issues, the United States Agency for International Development (USAID) is implementing different projects in Vietnam that focus on, among other things, infectious diseases control and prevention, environmental security, and overcoming war legacies.[14] Notably, by early May, America had donated nearly 40 million COVID-19 vaccine doses to Vietnam, in addition to US$23.46 million in COVID-19 assistance through USAID.[15] Another potential area for cooperation is energy; the US is committed to helping Vietnam reduce greenhouse gas emissions and develop clean and renewable energy.[16] Vietnam has also approved the USAID Vietnam Low Emission Energy Program II—a five-year US$36-million clean energy project announced by Vice President Kamala Harris during her visit to Vietnam in August 2021.

Currently, the two sides are doing a major dioxin remediation project at Bien Hoa air base, the largest remaining dioxin hot spot in the country.[17] The project, costing US$390 million, was launched in 2019 and would take at least ten years to complete. Although Vietnam and the US have moved beyond past hostilities towards talks of strategic alignment, addressing war legacies remains an important and relevant bilateral goal. The two countries only elevated their relationship to a “comprehensive partnership” in 2013, one year after the US initiated the first major programme for dioxin cleanup in Vietnam.[18] Addressing war legacy issues, including dioxin remediation, unexploded ordnance removal, cooperation on wartime remains recovery, and support for individuals affected by the war, is thus critical to cementing the common ground for a stronger, lasting partnership between the two former enemies.

REALITY CHECK

A recurring question over the past few years is whether and when Vietnam and the US would forge a strategic partnership. The idea was first proposed by then-Secretary of State Hilary Clinton during her visit to Hanoi in 2012 and has since been reiterated by numerous US senior officials, including Vice President Kamala Harris. In the nomination hearing at the US Senate Committee on Foreign Relations on 13 July 2021 for the post of US Ambassador to Vietnam, Marc Knapper said it would be a priority, both for him and America, to develop a strategic relationship with Vietnam during his posting in Hanoi.[19] According to Knapper, this objective can be realized by focusing on three aspects: “strengthening even further our security relationship,” “strengthening our trade and economic ties,” and “deepening our people-to-people ties.” Knapper reaffirmed this aspiration in an interview with a state-run Vietnamese newspaper in February, noting that the upgraded partnership would reflect the genuine nature of bilateral ties going forward.[20] He reiterated this point in April and May, suggesting an upgrade in 2023 as befitting to mark the 10th anniversary of the Vietnam-US comprehensive partnership.

While Vietnam is interested in strengthening ties with the US, China and Russia continue to feature prominently in Hanoi’s strategic calculations. Both countries, seen as America’s strategic rivals, are Vietnam’s “comprehensive strategic partners”—the highest level in Hanoi’s hierarchy of diplomatic relations. As a matter of fact, Vietnam maintains close cooperation with China and Russia in all the three areas that Ambassador Knapper mentioned. For example, while Vietnam is reliant on Russia for arms imports and oil and gas operations in the South China Sea, it is also heavily dependent on China for imports of a wide range of production inputs. As a result, Hanoi has been unwilling to upset its ties with Russia despite western pressures. At the same time, it is also trying to maintain regular high-level exchanges with Beijing despite China’s growing assertiveness in the South China Sea.

The nature of Vietnam’s relationships with China and Russia is not lost on the US. Although that will unlikely discourage Washington from strengthening ties with Hanoi, it prefers a higher diplomatic status, no less important than Vietnam’s three comprehensive strategic partners (China, Russia, and India) or its other 14 strategic partners (Japan, South Korea, Spain, the United Kingdom, Germany, Italy, Indonesia, Thailand, Singapore, France, Malaysia, the Philippines, Australia, and New Zealand).

To this end, both sides need to understand and even accept certain differences, and on that basis, deepen their cooperation. In a meeting with Ambassador Knapper in Hanoi on 30 March, Prime Minister Pham Minh Chinh mentioned the need for trust-building, particularly through overcoming war legacies.[21] The Vietnamese leader underlined that the comprehensive partnership should be deepened on the basis of “respect for each other’s independence, sovereignty, territorial integrity, political regimes and differences.” The “differences” undoubtedly include the human rights situation in Vietnam that the US has long expressed concerns about. However, even this issue is unlikely to be a major obstacle to bilateral ties going forward. Wishing to focus on economic and strategic cooperation with Hanoi to counter the China challenge, Washington has recently been less critical of Hanoi’s human rights record, making the Vietnamese leadership more comfortable in strengthening ties with Washington.

While the declaration of a strategic partnership between the two countries remains unlikely for now, the steady growth trajectory of bilateral ties since their normalisation in 1995 indicates the making of a reliable partnership. From economic to security cooperation, both sides are seeing eye-to-eye on various issues of strategic importance. In particular, Vietnam supports security-defense cooperative mechanisms suitable to its capabilities and interests, including those in the Indo-Pacific region, as affirmed in Vietnam’s 2019 Defense White Paper.[22] Vietnam and the US also share the same vision for a peaceful and stable regional rules-based order, and the respect for international law and the freedom of navigation and overflight in the South China Sea.

Such positions are unlikely to be affected by the ongoing Russo-Ukrainian conflict. If anything, the conflict is a useful lesson for the Vietnamese leadership. The ever-increasing pressures on Vietnam to side with either the US or Russia would only reinforce Hanoi’s long-standing belief that not taking sides is a wise decision given its strong desire for strategic autonomy. This view has been clarified by Former Deputy Minister of Defense Nguyen Chi Vinh, who stated in a recent interview that “Vietnam is not neutral, Vietnam is independent. Being independent is utterly different from being neutral. We are independent on the basis of ethical principles, international law, and Vietnam’s interests.”[23] Such an emphasis on independence may add further momentum to Vietnam–US ties if Hanoi sees a strengthened partnership with America as essential to its efforts to maintain strategic autonomy and independence, especially in the face of rising pressures from an increasingly assertive China. However, it may also mean that Vietnam will push back against America’s efforts to impose its will on Hanoi, including in the Ukraine issue, if Hanoi considers Washington’s pressures too intrusive and detrimental to its strategic independence.

CONCLUSION

Just as it has taken Vietnam and the United States decades to transform their relationship from foes to friends, it will take time for the two countries to build trust and deepen their current partnership. During this process, bilateral dialogues and engagements in different domains, including trade and investment, cultural, education and people-to-people exchanges, as well as defense and security cooperation activities, should be further strengthened and promoted.

Prime Minister Pham Minh Chinh led a Vietnamese delegation on a working visit to the US on 11-17 May, and joined the Special US-ASEAN Summit in Washington D.C. on 12-13 May. As Chinh’s visit was not a formal bilateral one, there was no bilateral meeting between Chinh and President Joseph Biden. However, during a short meeting on the sidelines of the summit, the two leaders touched on the “special” Vietnam-US relationship and reiterated their commitment to bolster bilateral cooperation.[24] President Biden also accepted Chinh’s invitation to visit Vietnam and said he would arrange it at a mutually suitable time. Should the visit happen, ideally next year when the two countries celebrate the 10th anniversary of their comprehensive partnership, it may be the right opportunity for the two sides to upgrade their relationship to the strategic partnership level as a landmark for their deepening ties over the past ten years and pave the way for an even stronger relationship going forward.

ENDNOTES


[1] White House, “FACT SHEET: Indo-Pacific Strategy of the United States,” 2022, https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/02/11/fact-sheet-indo-pacific-strategy-of-the-united-states/.

[2] “Op-Ed by the Ambassadors of the European Union, Norway, Switzerland and the United Kingdom in Hanoi,” Delegation of the European Union to Vietnam, 8 March 2022, https://www.eeas.europa.eu/delegations/vietnam/op-ed-ambassadors-european-union-norway-switzerland-and-united-kingdom-hanoi_en.

[3] Although Vietnam has been trying to diversify its arms imports away from Russia since 2014, Russia still accounted for 68.4 per cent of Vietnam’s arms imports in the period 2015-2021. See Le Hong Hiep, “Will Vietnam be able to wean itself off Russian arms?”, Fulcrum, 4April 2022.

[4] According to state media reports, about 30 per cent of crude oil and about 25 per cent of gas in Vietnam are exploited by firms involving investments from Russian companies such as Zarubezhneft, Rosneft, and Gazprom. See: Thanh Dat, “Russia-Vietnam plans displaying confidence, ” Vietnam Investment Review, 6 December 2021, https://vir.com.vn/russia-vietnam-plans-displaying-confidence-89887.html.

[5] Hoang Hiep and Van Tuan, “Gazprom International sẽ đầu tư dự án điện khí 297 triệu USD tại Quảng Trị [Gazprom International to invest in a gas-fired power plant worth USD297 million in Quang Tri], ” Vietnam Finance, 12 March 2022, https://vietnamfinance.vn/gazprom-international-se-dau-tu-du-an-dien-khi-297-trieu-usd-tai-quang-tri-20180504224266050.htm.

[6] “Tình hình xuất khẩu, nhập khẩu hàng hóa của Việt Nam tháng 12 và 12 tháng/2021 [Exports, imports of Vietnam in December and 12 months of 2021], ” Vietnam Customs, 19 January 2022, https://tongcuc.customs.gov.vn/portal/index.jsp?pageId=442&tkId=4682&group=Ph%C3%A2n%20t%C3%ADch&category=Ph%C3%A2n%20t%C3%ADch%20%C4%91%E1%BB%8Bnh%20k%E1%BB%B3.

[7] “Tình hình thu hút đầu tư nước ngoài tại Việt Nam năm 2021 [Foreign Direct Investment in Vietnam in 2021], ” Foreign Investment Agency, 24 December 2021, https://fia.mpi.gov.vn/Detail/CatID/f3cb5873-74b1-4a47-a57c-a491e0be4051/NewsID/5d476094-8272-4d9d-b810-1609ce7b67b3/MenuID.

[8] Andreyka Natalegawa and Gregory B. Poling, “The Indo-Pacific Economic Framework and Digital Trade in Southeast Asia, ” CSIS, 5 May 2022, https://www.csis.org/analysis/indo-pacific-economic-framework-and-digital-trade-southeast-asia.

[9] Congressional Research Service, Vietnam’s Economy and U.S. Trade: Key Issues in 2021, 1 February 2021, https://crsreports.congress.gov/product/pdf/IF/IF11753. While the anti-dumping duty for Vietnamese honey has decreased from 410.93% – 413.99% in the preliminary conclusion to 58.74% – 61.27%, the tax rates are ten times as much as those imposed on honey imported into the US from India (5.85%). See Thanh Nguyen and Ha Thanh. “Vietnamese honey cannot compete in the US despite the deep reduction in taxes, ” Customs News, 6 May 2022, https://english.haiquanonline.com.vn/vietnamese-honey-cannot-compete-in-the-us-despite-the-deep-reduction-in-taxes-22358.html.

[10] US Department of State, “U.S. Security Cooperation With Vietnam, ” 2 June 2021, https://www.state.gov/u-s-security-cooperation-with-vietnam/.

[11] Stephen Burgess, “The US–Vietnam Comprehensive Partnership and the Key Role of Air Force Relations, ” Air University, 13 December 2021, https://www.airuniversity.af.edu/JIPA/Display/Article/2870567/the-usvietnam-comprehensive-partnership-and-the-key-role-of-air-force-relations/.

[12] Viet Anh, “Time to upgrade US-Vietnam relationship, says US envoy, ” VnExpress International, 20 April 2022, https://e.vnexpress.net/news/news/time-to-upgrade-us-vietnam-relationship-says-us-envoy-4453788.html.

[13] These missions were jointly operated by US naval ships and Vietnamese vessels. For instance, the mission in 2011 was a month-long one conducted by the US Joint POW/MIA Accounting Command and the Vietnamese Office for Seeking Missing Persons.

[14] USAID Vietnam, “USAID/Vietnams Country Development Cooperation Strategy (2020-2025),” 2022, https://www.usaid.gov/vietnam/cdcs.

[15] USAID Vietnam, “COVID-19 Assistance,” 2022, https://www.usaid.gov/vietnam/covid-19-assistance.

[16] “Special Presidential Envoy for Climate John Kerry visited Vietnam, ” U.S. Embassy & Consulate in Vietnam, 2 March 2022, https://vn.usembassy.gov/special-presidential-envoy-for-climate-john-kerry-visited-vietnam/; “Vietnam seeks US investment in renewable energy,” Vietnam News Agency, 14 March 2022, https://en.vietnamplus.vn/vietnam-seeks-us-investment-in-renewable-energy/223430.vnp.

[17] Vi Vu, “Vietnam, US launch dioxin cleanup at Bien Hoa airbase, ” VnExpress International, 20 April 2019, https://e.vnexpress.net/news/news/vietnam-us-launch-dioxin-cleanup-at-bien-hoa-airbase-3912324.html.

[18] Thomas Fuller, “4 Decades on, U.S. Starts Cleanup of Agent Orange in Vietnam, ” New York Times, 9 August 2012, https://www.nytimes.com/2012/08/10/world/asia/us-moves-to-address-agent-orange-contamination-in-vietnam.html.

[19] U.S. Congress, “Nominations – Tuesday, 13 July 2021,” https://www.foreign.senate.gov/imo/media/doc/07%2013%202021%20Nominations%20–%20Smith%20Bitter%20Medina%20Knapper.pdf.

[20] Quynh Trung and Lan Huong, “Đại Sứ Marc Knapper: Việt Nam luôn chiếm vị trí độc nhất trong trái tim tôi’ [Ambassador Marc Knapper: ‘Vietnam always holds a unique place in my heart’],” Tuoi Tre, 2022,  https://tuoitre.vn/dai-su-marc-knapper-viet-nam-luon-chiem-vi-tri-doc-nhat-trong-trai-tim-toi-20220220154544323.htm.

[21] “Thủ tướng Phạm Minh Chính tiếp Đại sứ Hoa Kỳ Marc Evans Knapper [PM Pham Minh Chinh meets with U.S. Ambassador Marc Evans Knapper],” Vietnam News Agency, 30 April 2022, https://www.vietnamplus.vn/thu-tuong-pham-minh-chinh-tiep-dai-su-hoa-ky-marc-evans-knapper/781091.vnp.

[22] Ministry of Defense, “Quốc Phòng Việt Nam 2019,” 2019, http://mod.gov.vn/wps/wcm/connect/a7f22b32-724d-4643-9301-878e2ca4d8db/QuocphongVietNam2019.pdf.

[23] Van Kien and Luan Dung, “Thượng tướng Nguyễn Chí Vịnh: Việt Nam không chọn phe, Việt Nam độc lập! [Lieutenent General Nguyen Chi Vinh: Vietnam does not take side, Vietnam is independent!],” Tien Phong, 30 April 2022, https://tienphong.vn/thuong-tuong-nguyen-chi-vinh-viet-nam-khong-chon-phe-viet-nam-doc-lap-post1433614.tpo.

[24] “PM Pham Minh Chinh Meets with US President Joe Biden,” Nhan Dan, 13 May 2022, https://en.nhandan.vn/politics/item/11486202-pm-pham-minh-chinh-meets-with-us-president-joe-biden.html.

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2022/54 “Analyzing Public Opinion on Moving Indonesia’s Capital: Demographic and Attitudinal Trends” by Burhanuddin Muhtadi

 

President Joko Widodo spent the night camping in the Penajam North Paser Regency, East Kalimantan Province on 14 March 2022, where Indonesia’s new capital will be located. Picture: Facebook, Source: https://www.facebook.com/setkabgoid/posts/341484078009038.

EXECUTIVE SUMMARY

  • Public support for relocating the Indonesian capital to East Kalimantan is divided. In a national survey conducted in February 2022, 48.5% of respondents support the plan while 44% disagree with it.
  • Although a slight majority of respondents support the new capital city (IKN) initiative, the level of support in 2022 reflects a decrease of nearly 5 percentage points compared to a similar survey carried out two years ago. This decline in support may be due to the perception that managing the Covid-19 pandemic should be a higher priority.
  • Support for the IKN plan varies by demographics and region, but political affiliation seems to be the most salient factor in shaping public attitudes towards the plan. Jokowi’s base in the 2019 presidential election continues to support the IKN plan while Prabowo supporters in that election tend not to.
  • Support for the IKN plan is higher among those who understand the various technocratic reasons for moving the capital city, such as the water crisis and overcrowding in Jakarta and creating more balanced economic development between Java and the outer provinces. This suggests that the government must do a better job in explaining the rationale for a new capital.
  • The majority of respondents in Jakarta oppose the relocation of the capital, even though they directly bear the brunt of overcrowding and infrastructural problems in the city. They probably prefer the government to focus on fixing the problems in Jakarta rather than relocating the capital.
  • Failure to arrest the downward slide in public support for the IKN initiative may jeopardise the prospects for a successful move altogether.    

* Burhanuddin Muhtadi is Visiting Fellow in the Indonesia Studies Programme at ISEAS – Yusof Ishak Institute, and Senior Lecturer at Islamic State University (UIN) Syarif Hidayatullah.

ISEAS Perspective 2022/54, 20 May 2022

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INTRODUCTION

President Jokowi’s aspiration to move the nation’s capital is not a novel idea. This ambitious capital relocation plan has resurfaced in almost every Indonesian President’s term in office.[1] But it was only during Jokowi’s presidential term that this so-called national pipe dream has begun to be realised. President Jokowi himself only revealed the plan during a limited cabinet meeting on 29 April 2019, a few days after he was re-elected for his second term. Prior to that, he had never mentioned the idea at all, and certainly not during the election campaign. This probably reflects his awareness that the proposal was too controversial and could be strongly rejected by the public, especially by those who have benefited from having the capital city in Jakarta.

Since this idea was introduced, many analyses have appeared from technocratic, environmental, economic and legal perspectives, but little has been discussed about what public opinion towards the plan is like. How do Indonesians actually respond to the plan to relocate the nation’s capital? What factors best explain support for capital relocation? What are the demographics of supporters and opponents of the IKN plan? How does each political affiliation base and mass organization respond to the plan? And what strategies can the government use to increase public support for IKN? These are the questions addressed in this article.

PUBLIC ATTITUDES DIVIDED

To answer the questions above, I analyze two representative face-to-face national surveys conducted by an independent survey agency, Indonesian Political Indicators (Indikator), in 2020 and 2022.[2] In terms of issue awareness, in 2022, 84.3% of respondents claim to know or have heard about the plan to relocate the nation’s capital to East Kalimantan. The majority in almost all socio-demographic bases, except for respondents in the Maluku Papua region, are aware of the planned relocation of the capital.

However, at the public support level, there are indications of a decline in positive sentiment towards IKN. In 2020, 53% of citizens stated that they strongly or quite agreed with the plan to move the capital, but this support declined slightly to 48.5% in 2022. While in 2020 only 33.6% said they disagreed or strongly disagreed, in 2022 the level of public disapproval increased to 44 %. Unlike in 2020, current public attitudes are more divided between those who are for and those who are against IKN.

Note that the 2020 survey was conducted before the official government announcement was made on 2 March 2020 that Covid-19 cases had appeared in Indonesia. The pandemic has very likely reduced public support for IKN in the 2022 survey; the public health crisis having lowered its overall priority. This is evident even among citizens who agree with IKN; 51.1% of the supporting public stated that the idea was a non-exigent one to implement at the moment amidst more pressing issues facing the country. This means that many residents have a positive opinion about moving the capital city, but now find the timing inappropriate. Also, among those who disagree, almost 80% of them think that IKN is not urgent at all under present conditions.

It is not surprising that the survey also found that among citizens who are satisfied with President Jokowi’s performance, the majority agree with moving the capital city (54.4%). On the other hand, among dissatisfied citizens, most disagree with the IKN plan. However, the proportion of Jokowi’s satisfied voters who disagree with IKN is quite high, at 38.6%. This shows that even among supporters, the capital relocation idea has not gained enough traction. Why the capital relocation proposal now faces heavier resistance is due to the idea being considered less urgent amidst the pandemic situation. The fear is that the project may heavily burden the state budget while the country is still reeling from the economic slump of the pandemic. Moreover, the public perceives that economic recovery should take precedence over the ambitious capital relocation plan.

WHO ARE THE SUPPORTERS OF IKN?

The survey offers insight into the demographic characteristics of supporters and opponents of IKN. From the gender composition, men tend to show higher support for IKN than women. Based on age group, support among young voters under the age of 21 for IKN is slightly higher than that among those in the age generation above it.

Meanwhile, judging from ethnic composition, only Javanese and Batak ethnic groups tend to support the idea of moving the capital city, while Sundanese, Betawi, Minang, Malay, and Madurese ethnic groups tend to reject it. This is presumably related to partisan factors: ethnic Javanese and Batak make up Jokowi’s supporter base which delivered him his second presidential term, while Sundanese, Minang, Betawi, Madurese and Malays were Prabowo’s supporters in the 2019 election.[3]

The partisan factor is also evidently present in the breakdown based on religion. Non-Muslim voters who have been Jokowi’s main support base[4] solidly support his plan. On the other hand, Muslim voters are relatively divided; in absolute terms, there are slightly more Muslim voters who reject it than who support it.

The partisan element is also evident when dissected based on domicile, namely rural-urban and regional demographic background. The support from rural residents for IKN is slightly higher than that from urban residents; this fact mirrors exit poll data showing that Jokowi’s support in the presidential election was consistently higher in rural villages than in urban cities.[5] So, even though they were Jokowi’s opponent in 2019, Prabowo Subianto and his running mate, Sandiaga Uno, are now ministers in Jokowi’s cabinet, the attitude of their voter base has remained relatively unchanged. 

The same pattern is also evident where regional background is concerned. In regions where Jokowi had a landslide victory in the 2014 and 2019 presidential elections, a majority supports his plan to move the capital. The exceptions are in Maluku and Papua where the majority of the people do not have an attitude or opinion about the plan since they generally do not know about it. The biggest support comes from Kalimantan where an overwhelming majority is behind the government and DPR’s decision to move the capital to their island. In Jakarta, Jokowi had a slight advantage over Prabowo in the 2019 presidential election, but the absolute majority of Jakarta residents tend to reject IKN. This is expected because they have enjoyed the privilege of being residents of the nation’s capital for years. Be that as it may, in Prabowo’s strongholds such as West Java, Sumatra, and Banten, the majority also rejects IKN.

Meanwhile, when analyzed by education level, the higher the education level of a respondent, the higher is the level of support shown for IKN. 57.7% of those with university education and above support creating the new capital. At the same time, support among those with lower secondary education tends to be divided. The same pattern is also evident where income level is concerned. The higher the income level, the higher the support for IKN, and vice versa.

PUBLIC SUPPORT BASED ON POLITICAL AFFILIATION

The partisan factor for supporting IKN is highly evident when we break it down based on the presidential choice made in 2019 election. Among 55.5% of respondents who claim to be Jokowi-Ma’ruf Amin voters, the majority support building the new capital. On the other hand, 61% of Prabowo-Sandiaga voters reject IKN outright. Also, although the majority of Jokowi’s supporters support the plan, a significant minority among these display disagreement with IKN.

When analyzed further based on the respondents’ party vote in the 2019 legislative elections, we get further insight into why more than a third of Jokowi’s supporters have negative sentiments about IKN. The mass base of Jokowi’s coalition parties does not solidly support Jokowi’s ambition to develop a new capital city. Only the PDI-P and NasDem voter bases solidly support the plan. On the other hand, the majority of PKS and Democrat mass bases – the two remaining opposition parties in parliament – ​​reject IKN. Meanwhile, Golkar’s mass base is equally divided on that issue.

The variation in support for IKN is more visible when based on the supporter base of each of the presidential candidates projected to run in 2024. The polling firm Indikator asks about the electability of ten presidential candidates if the election were held during the 2022 survey. While the electability of the ten varies, the support bases of Ganjar Pranowo (Governor of Central Java), Erick Thohir (Minister of SOEs), Puan Maharani (Chairman of the DPR and PDIP elite) and Airlangga Hartarto (Coordinating Minister for the Economy and Golkar Chairman) tend to solidly support Jokowi’s agenda.

This is quite logical because apart from these four candidates viewed as individuals in close proximity to Jokowi, their support base at the same time also coincides with Jokowi’s base. What sticks out is the majority of Sandiaga’s supporters; these support IKN even though Sandiaga was Jokowi’s

adversary in the 2019 election. Sandiaga’s position as Jokowi’s minister as well as his public appearance with Jokowi on many occasions seem to have changed the attitude of his supporters towards being more positive towards IKN.

On the other hand, the majority of supporters of Anies Baswedan (Governor of Jakarta) and Agus Harimurti Yudhoyono (Chairman of Democrats) reject the new capital. These two figures have been presenting themselves as Jokowi’s oppositional figures, thereby attracting voters who are disillusioned or opposed to the Jokowi government. Prabowo supporters are quite divided, although slightly more among them support IKN than are against it. Supporters of the Governor of West Java Ridwan Kamil and of the Governor of East Java Khofifah Indar Parawansa are also sharply divided regarding the plan to move the capital.

HOW TO BOOST PUBLIC SUPPORT FOR IKN?

Given the downward trend of public support for the new capital, the government urgently needs to find ways to turn the situation around. Moreover, the IKN plan should no longer be seen as just a reflection of Jokowi’s personal ambition, but a long-term Indonesian project that was popularly passed into law on 18 January 2022. Of the nine factions in the DPR, only PKS firmly rejected IKN, while the Democrat party together with the remaining seven other governing coalition parties jointly voted to pass the IKN Bill.[6]

Our analysis suggests that one potential way for the government to boost public support is to disseminate the objective and practical rationales for why the capital needs to be relocated. Indikator’s survey posed to respondents a series of questions to ascertain the level of knowledge and support for various technocratic policy rationales that have been used to justify why a new capital is needed. The level of awareness among respondents from 34 provinces throughout Indonesia about the reasons behind moving the capital turns out to be underwhelming.

Only a third of the respondents are aware of the two main rationales that are used to justify relocating the capital, namely “Jakarta is threatened by the Sunda Strait Megathrust earthquake” (33.6% of the respondents were aware) and “the crisis of water supply in Java, especially Jakarta” (37% were aware).

For respondents who claim to be aware of the rationales for a new capital, Indikator then asked follow-up questions about how much they believed in or supported those rationales. I have correlated the public’s knowledge of the rationales with the level of trust/support for such rationales. The findings show that the absolute majority of respondents who are aware of the rationales express strong belief / support for these reasons (Table 4). In contrast, where respondents display lack of awareness of the rationales, their levels of skepticism and resistance to the capital move tend to increase. This finding clearly shows that if the government wants to boost positive perceptions of IKN, then the public needs to be made more aware of the reasons for the move.

CONCLUSION

The idea of ​​moving the Indonesian capital from Jakarta, which is widely considered to be overstretched in its ability to remain the seat of the central government and the locus of economic activities in the country, has persistently cropped up since the era of Indonesia’s founding father President Sukarno and been revisited in every presidential era ever since. However, this ambitious idea has failed to materialize, until now. It was only during the time of President Jokowi that proper plans for the construction of the new capital began to take shape. Parliament passed the IKN Bill into Law earlier this year. But instead of increasing public support after the legal instrument was passed, public resistance has increased instead. Opposition to IKN has increased from 33% in 2020 to 44% in February 2022.

If this deteriorating trend in public support for IKN continues, the government will find it difficult to carry out the stages of relocating the capital effectively. Public objection may also disrupt the process of relocating civil servants and public officials from the 82 state institutions or ministries to IKN, and it is highly plausible that in the future, dissent will increase among civil servants or public officials who refuse to relocate to the new capital. If public resistance grows, it is not impossible that the stance of government coalition parties that originally supported it could shift. Furthermore, if the Jokowi government fails to arrest the slide in public levels of support for the capital move, the next administration may be reluctant to follow through with it and instead place blame on the Jokowi’s administration for the costs and confusion involved.

For this reason, the Jokowi government urgently needs to increase public support for IKN. First, the partisan effect that affects support or rejection of IKN must be addressed. All parties supporting the government, including those who were previously in the opposition, must be involved in order to make the IKN agenda a success. Prabowo and Sandiaga, both currently serving as Jokowi’s ministers, including two former opposition parties, Gerindra and PAN, which are now part of the government coalition, need to be drawn in more intensely to shore up support for the IKN agenda. To further boost positive perceptions of IKN, the government also needs to intensify socialization on why the country needs a new capital.

The absolute majority of residents who know or display high level of awareness of these rationales tend to be strongly supportive of the IKN project, compared to citizens who are unaware of the rationales being presented. Of course, in communicating these rationales, the government risks being perceived to be ignoring the infrastructural issues facing Jakarta and to be instead taking the easy way out, by moving the capital. The government needs to convince the public that it remains committed to solving the classic problems that have long plagued Jakarta, such as the water crisis, the threat of earthquakes and Jakarta sinking, and others. If the government is successful in socializing the rationale why Indonesia needs to build a new capital, then public support for IKN should increase and Jokowi can leave a good legacy behind for the next government to build upon.

ENDNOTES


[1] Rohmatin Bonasir, “Rencana pemindahan ibu kota dari Jakarta: Berapa lama waktu yang diperlukan dan apa saja syarat-syarat ibu kota?” BBC News Indonesia, 29 April 2019, https://www.bbc.com/indonesia/indonesia-48093451

[2] The first survey was carried out simultaneously in all regions on 5-10 February 2020, while the second survey was conducted on 11-21 February 2022. The population for this survey were Indonesian citizens with the right to vote, who were thus 17 years old and above, or already married when the survey was conducted. Using a questionnaire, the interviews were conducted face-to-face by our interviewers on 1,220 voting-age adults in the first survey and 4,220 respondents in the second survey who were selected with multistage random sampling. These were proportionally distributed over the 34 provinces.

[3] Indikator Politik Indonesia, “2019 General Election exit poll,” 17 April 2019, p. 42 https://indikator.co.id/rilis-exit-poll-pemilu-2019-2/

[4] Ibid, p. 41. For comparison, see the results of the 2014 presidential election exit poll, Indikator Politik Indonesia, “Hasil exit poll Pemilu Presiden,” 9 July 2014, p. 21, https://indikator.co.id/laporan-exit-poll-pemilu-presiden-2014/

[5] Ibid, p. 43.

[6] Nicholas Ryan Aditya, “PKS Tolak RUU IKN Disahkan di Rapat Paripurna, Ini Alasannya”, Kompas.com, 18 January 2021, https://nasional.kompas.com/read/2022/01/18/09200151/pks-tolak-ruu-ikn-disahkan-di-rapat-paripurna-ini-alasannya?page=all.

ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute   30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735   Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed.   Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission.  
© Copyright is held by the author or authors of each article.
Editorial Chairman: Choi Shing Kwok  
Editorial Advisor: Tan Chin Tiong  
Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha.  
Managing Editor: Ooi Kee Beng  
Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng  
Comments are welcome and may be sent to the author(s).

 

2022/53 “Uncertainties in Malaysia’s Economic Recovery” by Cassey Lee

 

A woman carries an infant upon arrival from Jakarta after landing at Kuala Lumpur International Airport 2 (KLIA 2), as Malaysia reopened its borders for travellers fully vaccinated against the Covid-19 coronavirus, in Sepang on 1 April 2022. Photo: Mohd RASFAN/AFP.

EXECUTIVE SUMMARY

  • The prospects for a more robust economic recovery in Malaysia are being clouded by a number of uncertainties. Bank Negara Malaysia’s minor downward adjustment of a mere 0.2% of Malaysia’s economic growth forecast to 5.3-6.3% seems somewhat optimistic in the light of recent developments.
  • The shift to the endemic phase of Covid-19 will undoubtedly increase domestic economic activities, but the economic gains from the easing of restrictions on mobility of people and goods may be lower than expected.
  • The war in Ukraine and the de-coupling of Russia from major economies are expected to cause disruptions which in turn are likely to slow down the global economy and generate inflationary shocks.
  • Malaysia’s growth will probably be adversely affected by the external conditions, despite the higher market prices for some of its exports, such as crude oil and palm oil.
  • Inflation is already creeping upwards, especially in food prices. Such inflationary pressures are likely to be aggravated if the Ringgit weakens further due to higher interest rates in the United States.
  • If inflation in Malaysia worsens, policymakers may have to tighten monetary policy further, combined with additional fiscal stimuli funded by debt and petroleum royalties.

*Cassey Lee is Senior Fellow at ISEAS – Yusof Ishak Institute. The author thanks Francis Hutchinson, Lee Hwok Aun, Tham Siew Yean, Siwage Dharma Negara, Serina Abdul Rahman, Quah Boon Huat and Marc Foo for their useful comments and suggestions. The usual caveat applies.

ISEAS Perspective 2022/53, 19 May 2022

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INTRODUCTION

In October last year, official forecasts projected the Malaysian economy to grow by 5.5 to 6.5 percent in 2022.[1] More recently, Bank Negara Malaysia has downgraded its forecasts for the country’s economic growth in 2022 to 5.3 to 6.3 percent.[2] This minor adjustment of a mere 0.2 percent belies the uncertainties generated by recent events that cloud the prospects of the country’s continuing recovery in the coming months. These include the impact of the war in Ukraine, the ongoing un-coupling of the Russian economy from the global economy and inflationary pressures in developed economies.

Given these uncertainties, what are the prospects of recovery for the Malaysian economy in the coming months and beyond? A good place to start is an assessment of how far the Malaysian economy has recovered thus far.

THE ECONOMIC RECOVERY SO FAR

The Malaysian economy suffered a severe contraction of -5.6% in 2020. This was a consequence of the implementation of a series of control measures starting from the lockdown (Movement Control Order) from 18 March 2020 to 3 May 2020. As a result, the country’s real GDP plunged by 16 percent (quarter to quarter) in the second quarter of 2020 (Figure 1). Subsequent relaxation of control measures brought about a sharp economic recovery in the third quarter of 2020. Further relaxation of the control measures in 2021 generated a further though modest 3.1 percent recovery in 2021. As a whole, the economic recovery in 2021 was very uneven: the economy was still relatively weak in the second and third quarters of 2021, but showed a strong recovery in the fourth quarter.

At the time of writing, the Malaysian economy has not fully recovered. Before the pandemic, between 2016 and 2019, the economy grew at a compound annual growth rate (CAGR) of 5.0 percent per annum. Comparing the actual 2021 GDP with a counterfactual GDP derived by assuming a five percent CAGR growth rate, the “lost output” amounts to about 11.8 percent of the GDP (Figure 2). This figure is a measure of the economic cost of the pandemic for the past two years. The real GDP in 2021 is estimated to be 97.3 percent of the level attained in 2019. Thus, the level of economic activity at the end of 2021 is still slightly below the level achieved before the pandemic began.

Based on components of GDP by expenditures, the recovery in 2021 was driven primarily by private consumption (Figure 3). The external sector’s contribution was mixed given the sharp decline in export in Q3-2021, which was due to the lockdown from June 2021 to August 2021. This took place amidst a growing global demand for electrical and electronic goods in 2021. Investment recovered slightly in Q4-2021 but was below the historical average.

From a sectoral perspective, the services sector is the main component of the GDP. Examining trends in the sectoral components of GDP, the services sector only recovered in the second half of 2021 (Figure 4). The sector’s future trajectory remains uncertain as the sector already began plateauing in 2019 before the pandemic. The manufacturing sector also picked up in the second half of 2021.

More recent trends in economic recovery can be partially inferred from the mobility of the population. Population mobility for business-related activities increased since mid-2021 driven by gradual relaxation of Covid-19 restrictions especially in the last quarter of 2021 (Figure 5).[3] However, mobility associated with these activities declined slightly in January and February 2022.

Labour market conditions also provide some indication of the extent of recovery achieved so far. Before the pandemic, the unemployment rate was hovering around 3.3 percent (Figure 6), but increased to 5.1 percent in Q2-2020. By early 2022, this rate had declined and stabilised around 4.1-4.2 percent.[4]

In terms of the composition of the unemployed, workers in the 15-24 age group account for the largest share despite a slight decline in the past two years. The weakness in the labour market is also reflected in the sharp decline in wages experienced in 2020; median salaries and wages declined by 15 percent (Figure 7). This decline has been particularly steep for younger workers (20-29) and older workers (60-64). Workers with a lower level of education are also more severely affected (Figure 8). More recent data are not available. However, given that the unemployment rate only declined slightly from late 2021 to early 2022, median salaries and wages are unlikely to have fully recovered to pre-pandemic levels. This can also be seen in the job creation figures which only increased in the last quarter of 2021 (Figure 9). The level of job creation is still about one-third below levels observed before the pandemic. Also, though job creation in the manufacturing sector has rebounded, the services sector remains a laggard.

UNCERTAINTIES IN THE HORIZON

Surveys conducted in early 2022 are optimistic about Malaysia’s growth prospects in 2022. The Business Confidence Indicator (BCI) published by the Department of Statistics in late February 2022 showed that economic activities were expected to increase in the first quarter of 2022 (Figure 10).[5] Whilst the floods in January and March 2022 are likely to have short-term impact on growth in this quarter, they are not likely to have large impact for the rest of the year.[6] In contrast, two factors will determine the trajectory of the economy in the coming months. The transition to the Covid-19 endemic phase, which began on the first of April 2022, is expected to boost domestic sources of growth. However, the growth induced by the Covid-19 endemic phase may be neutralised by adverse and inter-related developments abroad, such as the war in Ukraine and inflationary pressures in developed economies.

Covid-19 Endemic Phase

Malaysia is currently undergoing its fifth wave of the Covid-19 pandemic. The number of daily new Covid-19 cases in this current wave is higher than during previous waves (Figure 11). However, the number of daily new Covid-19 deaths has remained relatively low (compared to the number of new cases). This is likely to be due to the high vaccination rate in the country. About 79 percent of the country’s population have been vaccinated with two doses.[7] This has prompted the Malaysian government to relax the control measures further. The country officially entered the Covid-19 endemic phase starting 1 April 2022.

How much will the economy be boosted by the implementation of the endemic phase? In theory, an increase in population mobility for retail activities is likely to increase private consumption. Though the endemic phase will impact domestic economic activity positively, the size of this impact is difficult to ascertain in any precise manner. For starters, the mobility indicators for economic activities such as retail and work have been increasing since June 2021 (Figure 12). It already peaked in late December 2021, before declining slightly – mostly likely due to the floods and seasonal effects. Hence, the domestic economic gains from transitioning to the Covid-19 endemic phase may be smaller than expected.

However, there is one potential silver lining – the move to the Covid-19 endemic phase may be able to support the revival of Malaysia’s tourism industry. In 2019, the sector supported about 3.5 million workers, or 23 percent of total workers in Malaysia.[8] The pandemic has had a severe impact on the sector, with tourist arrivals and tourism receipts both plunging by more than 80 percent in 2020 following border closures (Figure 13).

While the revival of the tourism sector is likely to take a long time, it might be possible to achieve faster gains in some markets, such as tourists from Singapore. Before the pandemic, Singapore accounted for the most significant number and share of inbound tourist arrivals (Figure 14). The reopening of the land borders between Singapore and Malaysia for fully vaccinated travellers on 1 April 2022 is expected to provide a near-term boost to the recovery of the tourism sector.

War in Ukraine

The war in Ukraine and economic sanctions on Russia have created some uncertainties. There are several dimensions to these uncertainties, which are all still evolving. The war and the de-coupling of the Russian economy continue to worsen the supply shocks in various commodities markets such as crude oil, natural gas, wheat, and sunflower oil. Both Ukraine and Russia are major exporters of these commodities, with a combined global export share of 69 percent for sunflower oil, 25 percent for wheat, 18 percent for barley, and 14 percent for corn.[9] Russia is a major exporter of fertilizers (13.1 percent), crude petroleum (12.5 percent global trade share), and refined petroleum (9.62 percent).[10] Expectations of supply shocks – either through reductions induced by war destruction or trade sanctions on Russia, have driven up the prices of food commodities (Figure 15). Food prices had already been trending upwards since mid-2020 due to drought and recovery in demand, but the more recent price increases are driven mainly by supply shocks. In mid-May 2022, India’s decision to ban wheat exports has exacerbated food prices further. Oil price has also been increasing since April 2020. The war in Ukraine, which began in February 2022, increased the level and volatility of oil prices (Figure 16).

The annual CPI values showed that Malaysia transitioned from a deflationary (-1.2 percent) economy in 2020 to an inflationary one (+2.5 percent) in 2021. Looking at the price changes in the CPI components, the inflation in 2021 was driven by sharp increases in transport and food costs (Figure 17). The increase in transport costs would have been higher without fuel subsidies (for RON95 petrol and diesel). This can be seen from the increasing gap between the prices for these fuel products and the price of RON97 petrol (which is not subsidised) (Figure 15). With the relatively high weightage of the transport and food costs in the CPI, the inflation rate is likely to be higher in Malaysia in 2022. Recent inflation data suggest that inflation has remained moderate on the whole but food prices have risen significantly. Comparing 2022 to 2021, the price of food has risen by 3.6 percent in January 2022, 3.7 percent in February 2022 and 4 percent in March 2022 (Table 1).

On the production side, the price shocks in the commodities market could benefit producers and exporters of crude oil, liquefied natural gas (LNG), and edible oils (e.g. palm oil). The rise in the price of oil and gas will positively impact the value of Malaysia’s exports of crude oil, LNG and palm oil. However, in the case of crude oil, the net benefit from higher prices might be smaller than expected, seeing how the country’s net exports for crude oil has declined in recent years (Figure 19).

Expectations of shortages of edible oil have also driven up the demand for and prices of palm oil. The current settlement price for palm oil futures rose by 42.9 percent between 3 February 2022 and 1 March 2022.[11] Prices have since declined slightly but remain 25-30 percent higher than before the commencement of the Russian invasion of Ukraine. Palm oil prices are expected to remain high until the third quarter of 2022.[12]

The war in Ukraine and sanctions on Russia are also expected to increase the risk of a slowdown in global economic growth. In April 2022, the IMF revised downward its growth projection for the world economy in 2022, from 4.4 percent to 3.6 percent.[13] As an open economy, Malaysia’s growth prospects will also be adversely affected by a global economic slowdown. This effect is an indirect one through weakening demand by its major trading partners (such as China, the US, and the EU).

Malaysia’s direct exposure to Ukraine and Russia in terms of trade is relatively small. Ukraine and Russia account for only 0.05 percent and 0.31 percent of the country’s total exports in 2020, respectively.[14] Ukraine and Russia’s shares of Malaysia’s total imports in 2020 are 0.12 percent and 0.41 percent, respectively. However, about 25 percent of Malaysia’s wheat imports is from Ukraine.[15] Thus, the war likely to affect Malaysia’s wheat imports in terms of both quantity and price.

Another global development that will impact Malaysia is the Federal Reserve’s response to inflationary shocks in the US. The current inflation rate in the US is close to double the earlier forecast for 2022. The Federal Reserve raised the federal funds rate by a quarter of a percentage point in March 2022, and further hikes in interest rate are expected in the coming months. Aside from slowing down the US economy, further increases in US interest rates will likely to trigger short-term capital outflows from Malaysia, which will weaken the Ringgit. The Ringgit has depreciated by about four percent from Mid-March to late April. Though this will make Malaysia’s exports more competitive, such an effect might be dampened by a more sluggish global economy. One downside of a weaker ringgit will be higher import costs which can exacerbate inflationary pressures in Malaysia.

ECONOMIC STABILIZATION CHALLENGES AHEAD

With external headwinds on the horizon, the growth prospects of the Malaysian economy will also depend on what policymakers can do. Malaysian policymakers will face several challenges in stabilizing the country’s economy. At present, there are still significant uncertainties about the trajectory of global economic growth and inflation. The global economic slowdown and inflationary pressures are imminent, but their quantum and duration are unknown. Irrespective of these uncertainties, the global economic slowdown, and inflation shocks will undoubtedly impact the Malaysian economy in the coming months.

In terms of policy responses, the near-term goals of economic stabilization should continue to focus on supporting domestic demand and, at the same time, neutralising the effects of imported inflation (driven by higher fuel prices and weaker exchange rates). These will be challenging times for monetary policy. If inflation becomes a severe problem in the coming months, a gradual upward adjustment in the interest rate might be needed. This process has begun with Bank Negara decision to raise the overnight policy rate (OPR) from 1.75 percent to 2 percent on 11 May 2022.

Fiscal stimulus might be required to mitigate the effects of this rate hike and support economic growth. The fuel subsidy is a double-edged sword – it helps keep down the cost of fuel for consumers but also saps the government’s fiscal resources. Government fuel subsidies are expected to increase from RM11 billion in 2021 to RM28 billion in 2022 if oil prices remain above USD$100 per barrel.[16] This will shrink the country’s fiscal space further. The Federal government’s debt-GDP ratio was reported to be at 63.3 percent in June 2021 against the 65 percent threshold set by the parliament.[17]

Thus, unless the limit for the debt-GDP ratio is raised further, the fiscal resources from additional borrowings could also be limited, especially if the economic recovery is lacklustre. One temporary fix is the drawing of royalties from Petronas, which is made feasible by higher prices of oil exports. Tax reforms could be another medium-term policy option but this is unlikely to take place soon, given the imminence of a general election.

CONCLUSION

Malaysia’s prospects for a more robust economic recovery in 2022 have been clouded by a number of uncertainties. The transition to the Covid-19 endemic phase will undoubtedly increase domestic economic activities; however, the economic gains from greater mobility might be lower than expected. A weak labour market and sluggish domestic consumption could affect the country’s growth prospects.

A slowdown in the global economy and inflationary shocks will adversely impact the country’s growth despite the higher market prices for some of the country’s exports. Inflationary shocks could be worsened by a weakening Ringgit if the Federal Reserve raises its interest rates further to battle domestic inflation in the US. If inflation in Malaysia worsens, policymakers may have to implement a more restrictive monetary policy combined with fiscal stimulus funded by debt and petroleum royalties.

ENDNOTES


[1] Source: https://www.theedgemarkets.com/article/malaysias-economy-grow-65-2022-%E2%80%94-bnm, accessed 9/3/2022.

[2] Source: https://www.theedgemarkets.com/article/bnm-sees-2022-gdp-growth-53-63-shade-below-official-projection, accessed 21/4/2022.

[3] The monthly mobility index is constructed by summing up the daily change in mobility.

[4] Labour Force Report, February 2022.

[5] The rise in business confidence is also mirrored in MIER’s Business Confidence Index (up to Q4-2021): https://www.mier.org.my/post/business-conditions-index-4th-quarter-2021, Accessed 8/3/2022.

[6] Severe and intermittent floods since mid-December 2021 have caused severe damages. Official estimates of the economic damages caused by floods from December 2021 to January 2022 stood at RM6.1 billion (0.4 percent of the 2021 GDP). Significant material losses were incurred in public assets and infrastructure (RM2 billion), living quarters (RM1.6 billion), and vehicles (RM1 billion). The estimated loss in sales for the manufacturing sector was estimated to be RM891 million or 0.06% of the total sales of the sector in 2021. See Laporan Khas Impak Banjir di Malaysia 2021, Department of Statistics, Malaysia. The study was conducted between 30 December 2021 and 27 January 2022.

[7] Source: https://covidnow.moh.gov.my/, Accessed 11/3/2022.

[8] Sources: Tourism Satellite Account 2020, Department of Statistics Malaysia.

[9] 2019 figures, Source: Observatory of Economic Complexity at: https://oec.world/en/home-a, Accessed 13/3/2022.

[10] 2019 figures, Source: Observatory of Economic Complexity at: https://oec.world/en/home-a, Accessed 13/3/2022.

[11] Author’s computation based on data from CEIC.

[12] Source: https://www.reuters.com/business/energy/palm-oil-prices-set-new-record-highs-coming-months-analyst-fry-2022-03-09/, Accessed 15/3/2022.

[13] Source: https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022, Accessed 27/4/2022.

[14] Source: Final Trade Statistics 2020, Department of Statistics, Malaysia.

[15] Author’s calculation based on Comtrade data for year 2020.

[16] Source: https://asia.nikkei.com/Economy/Malaysia-oil-subsidies-could-more-than-double-in-2022-finance-chief, Accessed 27/4/2022.

[17] Economic Outlook 2022, Ministry of Finance, Government of Malaysia.

ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute   30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735   Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed.   Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission.   © Copyright is held by the author or authors of each article.Editorial Chairman: Choi Shing Kwok   Editorial Advisor: Tan Chin Tiong   Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha.   Managing Editor: Ooi Kee Beng   Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng   Comments are welcome and may be sent to the author(s).

 

“Understanding and Reducing Methane Emissions in Southeast Asia” by Qiu Jiahui and Ryan Wong

 

 

2022/52 “Investment Trends and Industrial Prospects in Indonesia” by Yanuar Fajari and Siwage Dharma Negara

 

Technicians work on an assembly line of the BMW 7 series in Jakarta on 30 November 2016, as part of BMW announcement as they have started to assemble the luxurious series for the first time in Indonesia in that year. Photo: BAY ISMOYO/AFP.

EXECUTIVE SUMMARY

  • Investment trends in Indonesia in recent years present a mixed picture. Although total investments increased, much of this was driven by a rapid increase in domestic direct investment (DDI) while foreign direct investment (FDI) remained relatively stagnant. The DDI share of total investment rose from 35% in 2015 to 50% in 2021.  In the manufacturing sector, however, FDI’s share increased to 51% in 2021, while DDI’s share declined, because domestic investment flowed mostly to the services sector. 
  • The overall increase in investments has been fuelled by the Jokowi government’s active measures to facilitate business, streamline bureaucratic procedures and improve tax incentives, particularly after the Investment Coordinating Body (BKPM) was upgraded to Ministerial status in April 2021.
  • However, more can be done to improve Indonesia’s attractiveness to foreign investors vis-a-vis other investment destinations (such as Vietnam), and to encourage the growth of manufacturing activities in sectors which align with the national priorities to create jobs, move up the value chain and enhance knowledge and technology transfers. More policy support is needed to improve the capability of local firms to become reliable suppliers or partners with foreign clients, as well as to address lingering regulatory uncertainties arising from Indonesia’s Job Creation Law and land acquisition issues.
  • There is also the need to harmonise investment promotion and facilitation measures with suitable industrial policies such as downstream industry development and local content requirements. The latter must be implemented with caution as they violate WTO rules and may turn out to be counterproductive for the economy in the long run.

* Yanuar Fajari is Deputy Director for Investment Planning in Energy at Ministry of Investment/Indonesia Investment Coordinating Board (BKPM). Siwage Dharma Negara is Senior Fellow at ISEAS – Yusof Ishak Institute. We thank Cassey Lee, Tham Siew Yean and Jayant Menon for their useful comments. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the Indonesian government.

ISEAS Perspective 2022/52, 13 May 2022

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INTRODUCTION

Last year, Indonesia’s foreign and domestic direct investment realisation reached Rp 901 trillion (US$ 62 billion),[1] surpassing the official annual target of Rp 900 trillion. This is good news for the country, which is struggling to create employment opportunities and to bring its economic growth back to its pre-pandemic level. In 2022, the government has set a more ambitious investment target of Rp 1,200 trillion (US$ 83.8 billion).[2] 

Several reasons underline the government’s projection: First, the decline in Covid-19 cases and increase in vaccination rate;[3] second, political and macroeconomic stability remain strong, and; third, strong investor confidence in economic prospects in the country.[4] Yet, given rising geopolitical uncertainties, growing protectionism and increasing financial markets uncertainty due to US monetary policy, achieving the investment target for 2022 will not be easy.

This essay looks at investment trends in Indonesia with a particular focus on the industrial (manufacturing) sector.[5] The growth of this sector is critical to sustainable job creation for millions of workers in the country. The following section will give an update on investment trends in Indonesia, while the subsequent section discusses national investment policies and strategies, and follow that up with a discussion on key industrial policies that may affect investment trends. It concludes with some thoughts on future challenges.

INVESTMENT TRENDS

Since President Joko “Jokowi” Widodo took office, investment has been driven by a rapid increase in domestic direct investment (DDI) (Figure 1). Foreign direct investment (FDI), however, seems relatively stagnant. From 2014 to 2021, DDI grew by 16.4 per cent annually on average, while FDI grew by only 1.4 per cent annually. Indonesia’s relative unattractiveness is partly to blame for causing the slow growth in FDI, compared with other investment destinations, especially Vietnam.[6] The DDI share in total investment increased from around 35 per cent in 2015 to 50 per cent in 2021.

Source: BKPM

While DDI as a whole grew faster than FDI, in the manufacturing sector, domestic investment did not grow as fast as in the services sector. Figure 2 shows that DDI in the manufacturing sector has been relatively stagnant while in the services sector has been increasing since 2016.[7] Interestingly, the industry share of total FDI realisation has increased since 2020, reaching 51 per cent by 2021. This is driven by significant FDI in the base metal and metal goods sector (Table 1), with the government actively inviting FDI to promote downstream industries in mineral resources, especially nickel, bauxite, and copper.

Table 1: FDI realisation in the manufacturing sector (US$ million), 2015-21

 2015201620172018201920202021
Base metal & metal goods2,4213,0682,9692,2193,5595,9696,974
Food1,5212,1151,9701,3071,2721,5922,337
Chemical & pharmacy1,9562,8892,5781,9381,4861,7431,657
Motor vehicle & transport equipment1,7572,3701,2719717549421,502
Paper & printing7122,789606668446943953
Machinery, E&E, medical equipment6788388171,341500601679
Leather & footwear162144369244188214486
Non-metal mineral1,3031,076672456475248327
Textiles433321372305239280312
Rubber & plastics694737633447292291262
Wood & furniture47268396276958568
Others8375504174245294246
Sum of Manufacturing11,76816,69013,15910,3489,55113,20215,804
Total FDI29,27628,96432,24029,30828,20928,66631,093
Share of total FDI40%58%41%35%34%46%51%

Source: BKPM

Most of the investments in the metal industry are located outside Java, concentrated in mineral-rich provinces such as Central Sulawesi, Southeast Sulawesi, and North Maluku. The biggest investors in this sector come from China, Hong Kong and Singapore.

Meanwhile, investments in the food industry are primarily located in East and West Java, Riau and Banten provinces. The major investors in this sector come from Singapore, Malaysia and the United Kingdom. For the chemical industry, most investments come from Singapore, Japan and Malaysia, with central locations in Banten, Riau, and West and East Java provinces.

Table 2: DDI realisation in the manufacturing sector (Rp billion), 2015-21

 2015201620172018201920202021
Food24,53432,02938,54039,08836,60327,87320,427
Chemical & Pharmacy20,71230,05413,73413,3389,48422,52612,240
Base metal & metal goods7,08210,12811,34510,4688,1838,85810,399
Paper & printing6,5335,2589,0232,8942,9503,7467,834
Rubber & plastics3,6963,5774,8233,4153,0694,4297,803
Non metal mineral20,50215,4057,6414,5233,5735,8626,522
Textiles2,7253,2107,8633,5971,3132,1031,972
Motor vehicle & transport equipment1,0711,7141,3131,8372,6082,5561,459
Wood & furniture1,1853,1511,5691,5361,5861,2631,144
Leather & footwear56919628277395700
Machinery, E&E, medical equipment8561,4462,4641,9501,1521,156535
Others1477446787172,0762,0511,192
Sum of manufacturing88,901106,04098,51282,92770,59780,76793,506
Total DDI179,466216,231262,351328,605386,498413,536447,064
Share of total DDI50%49%38%25%18%20%21%

Source: BKPM

Figure 3 shows that Singapore is the top source of FDI in Indonesia, accounting for around 30 per cent of total inward FDI. FDI from China has increased significantly since 2016, reaching 17 per cent of total FDI in 2019 and 2020, then falling to 10 per cent in 2021. The decline is mainly caused by the Covid-19 pandemic, which caused some investment delays. Interestingly, FDI from Hong Kong has increased during the pandemic, reaching 15 per cent of total FDI in 2021.[8]

Figure 4 shows that most investment realisations are concentrated on Java island (48 per cent of total investment realisation). Resource-rich islands, Sumatera and Sulawesi, received about 21 per cent and 11 per cent of total investment realisation in 2021. Meanwhile, Kalimantan only received about 10 per cent of total investment. It is projected that investment in the island will further increase, boosted by the new capital relocation plan.

Regarding sectoral distribution, metal processing and construction, especially industrial estate and warehouse, received the largest investment realisation in 2021, at around 13 per cent each. This trend is related to the targeted sectors that are given special facilities by the government, especially for integrated industrial estate, special economic zones, and the smelter industry.

POLICY & STRATEGY TO PROMOTE INVESTMENT

The recent growth of investment realisation is partly related to new policy initiatives to facilitate investment realisation. Understanding these policy changes in greater detail is important as they will continue to drive future investments. The key change happened in April 2021, when President Jokowi decided to upgrade the Investment Coordinating Board (BKPM) to Ministry status. The Ministry, led by  Bahlil Lahadalia, has a pivotal role in implementing regulatory reforms to promote a more business-friendly environment.

Investment Facilitation

Indonesia has taken several initiatives to improve investment facilitation. It passed Law No. 11/2020 on Job Creation (also known as Omnibus Law), to simplify investment regulations and licensing procedures. As part of the law’s implementation, BKPM introduced a new risk-based investment licensing system, Online Single Submission (OSS), in August 2021. OSS is a web-based business licensing system for expediting business permits and integrating central government and regional administrative procedures. Under the new OSS system, low-risk businesses, especially small-medium enterprises (SMEs), only need a single licensing, i.e., Business Identification Number (NIB), to gain legal status.

Furthermore, President Jokowi has established a task force headed by Minister Bahlil to help resolve investment delays and ensure that investment plans that have received permits can be realised immediately. The task force consists of representatives across ministries/agencies, the National Police, the Attorney General’s Office, the entire Regional Police Chief, and the Regional Prosecutor.[9] At the point of writing, of the total of Rp 708 trillion associated with identified stalled investment projects, the Ministry has succeeded in facilitating Rp 558.7 trillion (78.9%).

The Ministry of Investment has also prepared pre-feasibility studies on some investment projects that will be offered (IPRO) to investors. These studies provide specific and comprehensive information about legal and technical aspects, economic feasibility, social and environmental impacts, business model schemes, and facilities from the government. As of time of writing, there have been 46 IPROs offered in various sectors, involving a total value of Rp 155.12 trillion.[10]

Tax Incentives

The government has also been providing several fiscal incentives to attract investors, especially in the so-called strategic sectors. For example, a tax holiday is provided for pioneer industries, defined as industries with broad linkages that offer added value and high externalities, introduce new technologies, and have strategic importance to the economy. Based on Finance Minister regulation no. 130/2020, there are 18 industrial sectors that fall within the scope of pioneer industries, including base metal, oil & gas, chemical, pharmacy, and infrastructure-related sectors.

To encourage job creation and absorption of local workers, the government offered incentives for labour-intensive sectors in the form of facilities to reduce net income tax by up to 60 per cent of specific tangible fixed assets values within a certain period. In 2021, there were 45 labour-intensive industrial sectors employing an average of 300 workers who received the investment allowance. And to promote the knowledge and innovation ecosystem,  the government has introduced a super tax deduction for industries engaging in vocational activities to provide knowledge and encourage knowledge and technology transfer; a maximum reduction of 200 per cent gross income from costs in the context of providing work practice, apprenticeship, and/or learning activities, and; an R&D super deduction to increase the role of industry in fostering innovation and the use of the latest technology in the production process. This incentive provides a maximum gross income deduction of 300 per cent over R&D costs carried out in Indonesia.

Special Economic Zones

The government has created several special economic zones (SEZs), free trade zones and industrial estate, with special regulations and incentives to lure investors. As of now, there are 18 SEZs covering a total area of more than 18 thousand hectares, and 122 industrial estates covering a total area of 47 thousand hectares. Two new SEZs are located in Batam, Riau Islands province. These SEZs focus on the digital economy (Nongsa Digital Park) and maintenance, repair and overhaul (MRO) services for aircraft (Batam Aero Technic), and are projected to create 26,476 jobs for local workers. The authority has set a target of attracting US$1.5 billion investment to the two SEZs in Batam by 2040. It remains to be seen how these SEZs can attract investments, but there is an indication of realisation challenge. In January, the government decided to remove the status of SEZ in Tanjung Api-Api, South Sumatra due to lack of progress in terms of land acquirement.[11]

Land Reallocation

One of the most challenging obstacles investors face is land acquisition. Yet, many companies have owned land rights for several years without realising their investment. To solve the ‘idle land’ problem, the government plans to revoke 2,078 mining business permits (IUP), 192 forest area use permits (IPPKH, Izin Pinjam Pakai Kawasan Hutan), and 34,448 Ha rights to cultivate (HGU)/right to build (HGB). After revoking the land rights from these companies, the government will offer them to new investors.

INDUSTRIAL POLICIES

The effectiveness of investment promotion and facilitation is tied to the national industrial policy. Historically, Indonesia’s participation in the global supply chain has been limited to the low technology, labour-intensive, natural resources-based industries.[12] These industries have a comparative advantage in cheap labour and abundant raw materials, such as mineral products. Indonesia has been trying to change these trends to no longer rely on minerals or commodities exports but move up the manufacturing value chain. Given this, the government has been facilitating investment in the downstream mineral-processing industry.[13]

Mineral export ban to promoting downstream industry

To encourage downstream industry development, since 1 January 2020, the government has prohibited nickel ore exports.[11] In addition, it also regulates the Mineral Standard Price (HPM: Harga Patokan Mineral) for nickel ore; the HPM is set 30-40% below the international market to provide an incentive for the smelter (mineral processing) industry.

These policies have in the last two to three years driven significant investment into nickel processing and nickel-based commodities. It has been reported that several prominent companies have shown interest in investing in the electric vehicle (EV) battery industry. For instance, Korea’s LG Energy Solution signed an MoU with Indonesia Battery Corporation (IBC), a consortium of four state-owned companies consisting of PT Indonesia Asahan Aluminum, PT Aneka Tambang Tbk., PT Pertamina, and PT Perusahaan Listrik Negara, to develop a US$ 9.8 billion integrated EV battery factory in Batang, Central Java.[14][15] IBC has also approached China’s CATL (Contemporary Amperex Technology) to develop a US$ 5 billion national EV battery industry ecosystem.[16] Finally, Taiwan’s Foxconn is reported to invest US$ 8 billion EVs industry in Batang integrated industrial estate, Central Java.[17] Whether or not their investment will materialise depends on many factors, including the EV manufacturers’ global strategies and Indonesia’s trade and industrial policies.

Promoting Local Content

One policy that arguably can become a constraint for attracting FDI is local content requirements (TKDN or Tingkat Komponen Dalam Negeri) and imports restrictions in the respective sectors. TKDN is designed to spur the productivity and competitiveness of the national industry amid more restricted global trade conditions. This essentially goes against WTO rules on Trade-Related Investment Measures (TRIMs).[14] With TKDN, the government requires the use of local-made goods and services that have been certified by official surveyors. This requirement has been strongly applied to foreign companies that want to operate and sell their products in Indonesia, and there is a task force that reports to the President to supervise the implementation of this programme. Moreover, the government encourages big investors to partner with MSMEs to increase domestic companies’ role. Recently, the Ministry of Investment initiated a new requirement for every company that obtains an investment incentive to submit a commitment to partner with MSMEs in the project’s region. The local partner must also go through verification by the business association, local government, and the Ministry of Investment. This policy aims to encourage economic equity and promote the local economy.

Nevertheless, the effectiveness of the TKDN and partnership programme needs further evaluation. There is evidence around the region that local content requirement often fails to achieve the desired ends and imposes huge costs on the economy. Indonesia’s and Malaysia’s national car experiments are examples of such failure and of the costs. 

CONCLUSION

While investment prospects in Indonesia remain promising, it is not easy to attract particular investments, especially those that will contribute to more inclusive and sustainable economic growth. The biggest challenge at this time is related to unpredictable business regulations. The Constitutional Court’s order for the government to amend the Job Creation Law gives negative signals to investors about Indonesia’s regulation uncertainties. The government should amend the law as soon as possible and ensure that it follows the proper mechanism, including public consultation. Then, the next step is to finalise the implementing regulations for the Job Creation Law in a consistent, reasonable and prudent manner to give business and legal certainty to investors. If the implementation regulations of the Job Creation Law are inconsistent, this will add to the challenge of attracting new investments.

Finally, it is important to harmonise investment promotion and facilitation measures with suitable industrial policies. In recent years, the latter have become more inward-looking and politically driven, making the FDI investment climate less attractive. Strict local content requirements put in place without domestic firms upgrading their capacity to be “linkage ready”, i.e., having the standards that international investors expect from their suppliers, will not benefit the national economy and international investors.

ENDNOTES


[1] https://www5.bkpm.go.id/id/publikasi/siaran-pers/readmore/2450401/80401. Accessed 30 January 2022. This figure is implemented investment projects and not approved investments figure.

[2] https://money.kompas.com/read/2022/01/27/210944326/kejar-target-investasi-rp-1200-triliun-bahlil-memang-tidak-mudah. Accessed 18 March 2022.

[3] https://sehatnegeriku.kemkes.go.id/baca/rilis-media/20220303/3139457/tren-perbaikan-kasus-covid-19-terus-terjadi-salah-satunya-penambahan-jumlah-provinsi-dengan-kasus-turun/. Accessed 16 April 2022.

[4] https://www.dbs.com/newsroom/DBS_Asian_Insights_Conference_2022_Strategi_percepatan_pemulihan_ekonomi_Pemerintah_RI_menuju_endemi_COVID_19. Accessed 16 April 2022.

[5] Here, industrial sector refers to manufacturing sector. It does not include mining, but includes mineral processing industry.

[6] https://www.gatra.com/news-442797-ekonomi-jokowi-marah-inilah-alasan-indonesia-kalah-dari-vietnam.html. Accessed 16 April 2022.

[7] https://finance.detik.com/berita-ekonomi-bisnis/d-3046027/menkeu-sebut-era-harga-komoditas-tinggi-sudah-berakhir. Accessed 30 January 2022.

[8] Hong Kong is an investment hub, like Singapore, in which many companies have based themselves. Therefore, any investments from there would seem to be from Hong Kong by source although the actual investing ncompany may be from a third country.

[9] https://www.bkpm.go.id/id/publikasi/siaran-pers/readmore/2424801/75101. Accessed 29 March 2022.

[10] PIR: Potensi Investasi Regional https://regionalinvestment.bkpm.go.id/pir/peluang-investasi/

[11] https://www.kompas.com/properti/read/2022/01/22/063000921/pemerintah-cabut-status-kek-tanjung-api-api-ini-alasannya?page=all. Accessed 19 April 2022.

[12] https://unctad.org/system/files/official-document/BRI-Project_RP09_en.pdf. Accessed 30 January 2022.

[13] https://jakartaglobe.id/business/raw-material-exports-have-gone-on-too-long-jokowi. Accessed 18 March 2022.

[14] https://bisnis.tempo.co/read/1548308/ungkap-faedah-larangan-ekspor-nikel-jokowi-19-bulan-neraca-perdagangan-surplus/full&view=ok. Accessed 29 March 2022.

[15] https://www.cnbcindonesia.com/news/20201028201426-4-197837/pemerintah-buka-bukaan-alasan-penerapan-harga-patokan-nikel. Accessed 29 March 2022.

[16] https://www.cnbcindonesia.com/news/20201231091958-4-212731/ngeri-investasi-baterai-lg-rp-142-t-terbesar-pasca-reformasi. Accessed 29 March 2022.

[17] https://www.cnbcindonesia.com/market/20210326070718-17-232976/diumumkan-hari-ini-cek-8-fakta-indonesia-battery-corporation. Accessed 29 March 2022.

[18] https://money.kompas.com/read/2021/04/02/192501126/produsen-baterai-asal-china-akan-investasi-rp-725-triliun-di-indonesia. Accessed 29 March 2022.

[19] https://oto.detik.com/berita/d-5923118/sugeng-rawuh-foxconn-investasi-rp-114-t-bangun-pabrik-kendaraan-listrik-di-jateng. Accessed 29 March 2022

[20] https://www.wto.org/english/news_e/news19_e/trim_06jun19_e.htm. Accessed 16 April 2022.

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2022/51 “Malaysia’s Bumiputera Development Action 2030: Maintaining Focus, Moderating Ambition” by Lee Hwok Aun

 

People walking past a building along a street in Kuala Lumpur on 24 March 2022. Photo: Mohd RASFAN/AFP.

EXECUTIVE SUMMARY

  • Malaysia’s Bumiputera Development Action 2030 (known by its Malay acronym TPB2030) is a major blueprint. Its genesis can be traced to Pakatan Harapan’s rule; its continuity across changes in Prime Ministers reflects the embeddedness of Bumiputera policies.
  • TPB2030 largely maintains the focus of the Bumiputera Economic Transformation programme, its predecessor, on cultivating dynamic and competitive enterprise. These are justifiably high priorities in Bumiputera development, and also areas of acute under-achievement.
  • The blueprint brings added focus and structure compared to preceding efforts, with targeted sectors, more integrated support, and high-powered oversight. Gaps in the formulation of policy targets and funding, however, need to be addressed.
  • More fundamentally, TPB2030’s sweeping ambition – conflated with the expansive Shared Prosperity Vision 2030 – departs from its specific scope and may detract from policy coherence and efficacy. Median income of urban Bumiputera households is on par with urban Indian households. Disparities in well-being have diminished as a justification for Bumiputera development policies, underscoring the imperative of TPB2030’s focus on disparities in participation and capacity.
  • Policy design and evaluation programmes must resolutely and rigorously maintain focus on TPB2030’s primary mission of developing Bumiputera enterprise. Malaysia must monitor progress and draw lessons, not just for Bumiputera policies but also for broader group-targeted policies based on ethnicity and gender.

* Lee Hwok Aun is Senior Fellow and Co-coordinator of the Malaysia Studies Programme at the ISEAS – Yusof Ishak Institute. The author thanks Serina Rahman, Francis Hutchinson and Cassey Lee for their helpful comments on an earlier draft. The usual disclaimer applies.

ISEAS Perspective 2022/51, 12 May 2022

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A MAJOR PROJECT BEHIND THE SCENES

The year 2021, the fiftieth anniversary of the New Economic Policy (NEP), concluded with the 9 December launch of the Bumiputera Development Action 2030 blueprint, widely known by its Malay acronym TPB2030 (Tindakan Pembangunan Bumiputera) (Teraju 2021a). TPB2030 sets out clear objectives and targets related to Bumiputera enterprise development, an area of acute underachievement despite many decades and multiple modes of policy intervention. The blueprint will also establish high-powered structures for implementation and oversight, helmed at the top by the Prime Minister, with clearly delegated coordination and monitoring mechanisms.

TPB2030 is authored by Teraju, the agency under the Prime Minister’s Department tasked with overseeing Bumiputera development, and follows on the Twelfth Malaysia Plan (2021-25) unveiled in August 2021. The Twelfth Plan prominently features Bumiputera programmes within the country’s development framework (Malaysia 2021). The Plan also incorporates Malaysia’s overarching pursuit of the Shared Prosperity Vision 2030 (SPV2030), which was formulated in 2019 under the Mahathir-Pakatan Harapan government and inherited with minimal revision by both the Muhyiddin-Perikatan Nasional and Ismail Sabri-UMNO-led administrations (Ministry of Economic Affairs 2019).

Riding as it does on the Twelfth Plan and SPV2030, TPB2030 is poised to make a big impact on Malaysia’s policy regime, even if it has garnered little attention so far. The political weight behind TPB2030 holds out the potential to make an impactful and productive contribution – most fundamentally in broadening participation and enhancing the capacity of Bumiputera SMEs. Such centralization, of course, can marshal resources and coordinate actions – but also face the pitfalls of political patronage and stifled ground-up initiatives, which have marred similar agendas in the past.

This Perspective provides some background and context to TPB2030, highlighting elements of continuity and difference from previous iterations, and shows how it connects with development policies moving forward. I then survey the key policy contents and assess both TPB2030’s rationales and targets, and its key programmes and priorities. Due to the breadth and nascence of this blueprint, my analysis identifies salient aspects of the policy design and implementation, with emphasis on TPB2030’s enterprise development thrust and the concomitant loss of basis and coherence when the agenda sprawls toward vague notions of prosperity. I also reflect on how these Bumiputera-targeted measures fit within the broader scheme of Malaysia’s policy framework, especially other group-targeted measures benefiting ethnic minorities and women. It is premature to reach concrete conclusions, but not too early to underscore the dual importance of implementing the policy effectively so that Bumiputera business and workforce make steady progress, and of learning from TPB2030 in ways that inform other group-targeted policies.

PRO-BUMIPUTERA AND GROUP-TARGETED POLICIES: EMBEDDED AND EVOLVING

Bumiputera preferential policies such as the contents of TPB2030 are deeply embedded, being constitutionally authorized since Malaya’s independence in 1957.[1] The NEP, launched in 1971, massively expanded this policy regime, which principally involves promoting Bumiputera participation and achievement in higher education, high-level occupations, enterprise development and wealth ownership (Table 1). Over time, some programmes have become firmly entrenched – notably, ethnic quotas or Bumiputera-exclusive access in higher education, public procurement, SME loans and support, and de facto ethnic preference in public sector and government-linked company (GLC) employment. Some others have undergone change, most saliently the efforts to build a Bumiputera Commercial and Industrial Community (BCIC), which was centred on state-owned enterprises in the 1970s, heavy industries and foreign corporate takeovers in the early 1980s, then privatization in the 1990s until the 1997-98 Asian financial crisis (AFC). Post-AFC, following the collapse of major privatized entities and their renationalization, GLCs spearheaded the BCIC.

Since 2011, with the formation of Teraju,[2] Malaysia launched the Bumiputera Economic Transformation (BETR) programme emphasizing the growth of high-performing companies, with some attention to higher education and skills development (Teraju 2012). The follow-up BETR 2.0 broadened the scope to Bumiputera well-being, even while the programmes under Teraju’s purview remained a small subset of the vast system of Bumiputera development programmes (Teraju 2017, Lee 2017). This discrepancy – between the focused Teraju-coordinated interventions and the sweeping ambit of ‘transformation’ agendas – has persisted. On the whole, it is fair to say that BCIC agendas have been undone by a quest for rapid returns instead of patient progress.

The Bumiputera policy regime has endured across changes in federal government. The agenda was established throughout six decades of Alliance-Barisan Nasional rule, and was comprehensively maintained by Pakatan Harapan in the wake of its pathbreaking electoral victory in 2018. Formulation of the Shared Prosperity Vision 2030, which sought to reinvigorate Bumiputera enterprise development and laid the groundwork for TPB2030, was initiated by Pakatan.

It is important to note that TP2030 is neither the product of Pakatan’s power being usurped in 2020, nor of UMNO’s return to the Prime Ministership in 2021. Whichever the coalition in power, a Bumiputera blueprint would have emerged, though possibly with a different name and varying features. We must also note that Bumiputera preferential policies enjoy solid popular support among the Bumiputera population.[3] The system extensively allocates socioeconomic opportunity and facilitates upward mobility. The primary policy shortcomings for the Bumiputera community are deficiencies in cultivating capability, competitiveness and confidence – which inhibit the country’s ability to shift away from overt quotas and preferences.

At the same time, group-targeted policies favouring Indians, Orang Asli and women, mostly in small business financing and higher education access, have become increasingly mainstream in the past decade. Since the Tenth Malaysia Plan (2011-15), policy frameworks have allocated sections expressly for Bumiputeras and for minority groups, women, and persons with disabilities. This juncture in Malaysia’s history thus presents an opportunity to reset the discourses by recognizing the objectives and mechanisms of these group-targeted policies as a distinct policy domain, and focusing on efficacy and fairness in all these efforts to promote participation and capability (Lee 2021c).

Since TPB2030 is bringing the Bumiputera agenda back to basics, its implementation must stay focused, circumscribed and patient, rigorously implemented and monitored based on its direct objectives and targets instead of diffused notions of prosperity. It also aspires to change mindsets and mechanisms, not just dispense copious funds, and hence stands to generate learnings along the way. The broader impact of TPB2030, therefore, will depend on whether its achievements and shortfalls will inform further policy. Unfortunately, TPB2030 appears quite disconnected from Malaysia’s policy mainframe (Lee 2021a).

RATIONALES, OBJECTIVES, AND TARGETS

The empirical rationales for Bumiputera policies derive from the community’s socioeconomic disadvantages, which are continuously changing as policies increasingly provide opportunity and expand participation. TPB2030 builds on SPV2030 and the Twelfth Plan, giving prominence to selected targets from both documents. The driving goals for 2030, derived from SPV2030, are:

Key targets for 2025, as outlined in the Twelfth Plan:

The integration of TPB2030 with its parent policy frameworks yields a mixed bag. Three major issues merit our attention.

First, TPB2030 abides by the novel emphasis on gross operating surplus (GOS), which can be defined as the surplus generated after compensating workers but before deducting interest and rental payments. The concept of Bumiputera GOS merges the goals of Bumiputera effective ownership and productive output. At the same time, a further crucial element of Bumiputera development – the growth of small- and medium-scale enterprises – warrants more weight than currently given, in view of the higher concentration of micro-scale businesses – mostly self-employed solo operators – among MSMEs.[4] TPB2030 missed an opportunity to set the scaling-up of enterprises from micro to small, and especially from small to medium, as a driving policy objective. Questions also remain on the extent to which the aspired increase in Bumiputera GOS will proportionately take away from GLCs or non-Bumiputera companies, and thus avoid reducing the share of workers’ compensation. In fact, Malaysia aspires to raise the share of workers’ compensation. GOS of foreign-owned companies should also be part of the computations, providing a fuller picture of Malaysian ownership.

Nonetheless, this new anchor, in contrast to the erstwhile fixations with equity ownership, is a welcome shift. Policy predispositions toward passive equity holdings, political patronage and acquisitive behaviour, at the expense of effective control and productive participation, can be traced to the 30 per cent Bumiputera equity ownership target that commandeered national policy for some decades (Lee 2021b). That target undoubtedly remains, but keeping it in a supplementary position, as seems to be the case, bodes well for TPB2030.[5]

Second, TPB2030 replicates some conceptual and empirical missteps of the Twelfth Plan, most consequentially the misguided reference to national inter-ethnic household income disparity as grounds for continuing Bumiputera preferential treatment. Malaysia’s Chinese and Indian populations are overwhelmingly urbanized, while a quarter of the Bumiputera population still reside in rural areas where incomes are lower. When comparing household income between groups, taking the nationwide population is misleading because Bumiputera income levels are deflated by the much higher presence of rural households, which in turn overstates the Bumiputera to non-Bumiputera gap. Indeed, the median income of urban Bumiputera households is precisely on par with urban Indian households (Lee 2021a).[6] If anything, referencing household income provides justification for more group-targeted assistance for the Indian community.[7]

Moreover, highly aggregated targets such as household income and individual wages are impacted by numerous factors, whether related to economic conditions, labour market dynamics or social policy, while TPB2030 is both narrower in scope and also contains various experimental components. Bumiputera household income will assuredly continue to increase, due to complex reasons beyond TPB2030’s focused projects. Fixing household income as a performance indicator may perilously provide misleading or even false validation that TPB2030 policies are succeeding, and possibly perpetuate experiments that should be revisited or discontinued.

Third, despite Prime Minister Ismail Sabri, in his TPB2030 foreword, declaring the paramount importance of grooming new Bumiputera generations that are self-reliant and visionary, the blueprint neglects to consistently emphasize capacity-building policies. This includes a lack of attention to higher education and training. In large part, these omissions result from the fact that TPB2030 is demarcated based on extant institutions or new initiatives under Teraju’s purview, instead of the comprehensive system of Bumiputera programmes overseen by myriad ministries: education, finance, rural and regional development, and more. Nonetheless, the end result is that education, despite being the policy area most instrumental for upward mobility between generations, features rather peripherally in Malaysia’s flagship Bumiputera policy. This gap is amplified by the fact that Malaysia has made strides in mass provision of higher education, but needs to shift from more quantitative to qualitative emphases, such as quality of graduates and participation in various specialized fields.

KEY PROGRAMMES AND PRIORITIES

TPB2030’s sprawling, and in parts unwieldy, 600-page document is too vast to be discussed at length.[8] Nonetheless, the basic elements of seven key economic growth areas (KEGA), seven priority areas, and three Bumiputera economic transformation areas (BETA) provide an outline for summarising the basic contents and drawing out notable features. This article focuses on the KEGAs and priority areas. On the proposed investment amounts, public sources will account for RM10.9 billion (10.8 per cent) while private sources, including government-linked investment companies and state-owned commercial entities, will provide RM90.4 billion (89.2 per cent). This corresponds with an annual quantum of RM10 billion for the period 2021-30 and represents a modest portion of total investment, which registered RM297 billion in 2020, with a 25-to-75 public-to-private breakdown (Malaysia 2021). The KEGAs, aggregates of which are shown in Table 1, carry high hopes of extensive impact despite modest outlays. TPB2030’s exceptionally high reliance on private sector investment balance raises concerns on feasibility in general, and more specifically on the actual contribution of government-linked entities and the justification for tapping such sources. These questions demand more robust answers than provided so far.

The blueprint articulates the case for intervention in each of the KEGAs and their respective development programmes. On the whole, we can readily grasp the basis for various selections, especially when there is clear potential or existing capacity, while some are venturing into new terrain or aligning with economic trends. The land-owning segment of the Bumiputera community is positioned to take agricultural activities to a higher plane. Sizable numbers should also be able to make productive inroads in halal industries and Islamic finance. The digital economy, of course, has been a priority for Bumiputera development in recent years, and foreseeably will accelerate in the post-Covid era, with spillovers into the logistics and transportation spheres.

The summation of numbers of projects, investments, jobs and surplus generated are helpful for gaining impressions of the scope and scale of TPB2030 (Table 2). However, differences in the form and timeframe of these major categories warrant further clarification. Gross operating surplus constitutes a flow; the reported targets, totalling RM201.7 billion, evidently refer to the GOS generated in one year, 2030. This annual flow is distinct from the cumulative form of the other components – the total amounts for the 2021-30 period. Further clarification would also be welcome on the job creation estimates. If these numbers refer to Bumiputera workers, questions immediately arise as to whether the entire workforce of companies cultivated by TPB2030 will be ethnically homogeneous, and whether this is wise and fair, or will some degree of workforce diversity also be pursued. The selection of KEGAs should be scrutinized, but it is more important for the performance of policy beneficiaries to be monitored, and success cases rigorously documented.

The Bumiputera Economic Transformation Areas are more exploratory and potentially impactful, but merit scrutiny. The designation of defence and security industries as a BETA sector might cause some unease. The proclivities of this sector toward political patronage raise concern that past entanglements in abuse and corruption may recur. The second BETA of modern construction, specifically the adoption of industrialized building systems (IBS), relies predominantly on public procurement. While the gains from broader IBS application are undeniable, reforming public procurement presents steep hurdles. Aerospace, the third BETA, leveraging as it does on existing capacity and skills training institutions, may hold out distinct positive prospects, albeit in a challenging and uncertain sector.

TPB2030’s seven priority areas span a vast array of interventions that enable the agenda more broadly, with notable proposals in governance or facilitation systems, enhancement of existing programmes, and empirical exercises. Correspondingly, the estimated investment funds amount to a mere RM5.2 billion. Table 3 presents a selection of initiatives or proposals associated with the priority areas.

Three observations arise from this expansive menu of proposals, with ensuing questions. First, TPB2030 establishes an elaborate governance structure that centralizes oversight powers. At the apex, the Bumiputera Prosperity Council, chaired by the Prime Minister and comprised of relevant Cabinet Ministers and Bumiputera figures, oversees the entire process. Teraju serves as the main coordinator and secretariat of the Council, including the Council’s steering committee involving ministry secretaries-general and GLC/GLIC CEOs, and the Council’s working committee, as well as a special committee for GLCs and GLICs. Teraju’s project management teams will oversee the overarching KPIs the KEGAs and priority areas. The Bumiputera agenda empowerment committees (JPAB), chaired by the secretary-general of the relevant line ministry, are primarily responsible for policy monitoring, with Bumiputera agenda empowerment units (UPAB) in each government ministry tasked with tracking performance and intermediating between stakeholders.

The frame grants hierarchical, top-down authority. However, TPB2030’s progress will also depend on striking an astute balance of centralized control with self-claimed “bottom-up” monitoring by the UPABs. Fostering private sector buy-in, amid heavy presence of government and GLCs, will also be challenging – and decisive for TPB2030 to sustainably develop Bumiputera talent and capacity. The general critique of lack of focus emerges again, in the context of a proposed act of parliament to empower Teraju. Given the potentially sprawling scope of TPB2030 and its articulated sweeping ‘prosperity’ objectives far beyond Teraju’s ambit, including a questionable Bumiputera Prosperity Index, there are grounds to be circumspect toward this proposal, which may vest too much power in an agency without clarifying its limits.

Second, among TPB2030’s distinctive propositions are some facilitating roles and new institutions. Facilitative interventions, such as entrepreneurship ecosystems, growth hubs and an exchange platform for land-based assets, and fresh ideas such as a rent-to-own housing scheme, stand out for their novel characteristics. Many of the problems being addressed have been intractable for decades and hence new approaches may be necessary, although the complexities of these challenges raise questions about the government’s capacity to effectively implement all the plans. It is also imperative to ask whether Bumiputera-exclusivity is warranted. Access to shelter is a human right and home ownership is principally a policy objective that applies to all groups. Existing SME programmes for the Indian and Orang Asli communities, and for women, surely can also benefit from the creation of ecosystems and growth hubs, which by definition involve linkages and spillovers. Malaysia should decide sooner rather than later whether TPB2030’s priority area interventions will make room for non-Bumiputeras, or will introduce parallel programmes for other target groups.

Third, a few priority areas resemble past efforts. Malaysia has previously divested state-owned assets, promoted business through preferred tenancy arrangements, and executed the “carve out and compete” scheme in public procurement. TPB2030, of course, articulates principles for these initiatives to be executed more successfully than in the past. On a positive note, these aspirations align with the core objective of Bumiputera enterprise development. However, expectations must be tempered, and progress vigilantly monitored, in view of the vested interests that may come to bear on lucrative opportunities and wealth transfers, and the difficulties in enforcing discipline.

CONCLUDING THOUGHTS

Malaysia stands on the cusp of the next big push in Bumiputera enterprise development. The past decade saw new efforts to promote Bumiputera SMEs, under the Bumiputera Economic Transformation Programme coordinated by the federal agency Teraju. However, the agenda also strayed from that focus by imbibing foggy well-being related goals far beyond Teraju’s capacity. Bumiputera Development Action 2030 (TPB2030) appears on track to become the next policy driver, undergirded by the Shared Prosperity Vision 2030 and the Twelfth Malaysia Plan, 2021-25.

TPB2030 projects a more methodical and integrated approach than previous iterations but encounters the same challenge of maintaining focus. Enterprise development is daunting enough, and deserves full attention with sustained effort, especially considering Malaysia’s shortcomings in developing a Bumiputera Commercial and Industrial Community envisaged by the NEP since 1971, rebranded the Bumiputera Economic Community in 2015. TPB2030 can broaden its impact not by venturing into overambitious and tenuous interventions in ‘prosperity’, but by drawing out lessons in SME development for group-targeted programmes favouring ethnic minorities and women.

REFERENCES

DOSM. (2020). Household Income and Basic Amenities Survey Report 2019. Putrajaya: Department of Statistics Malaysia (DOSM).

DOSM. (2021). Labour Force Survey Report 2020. Putrajaya: DOSM.

Lee Hwok Aun (2017). Malaysia’s Bumiputera preferential regime and transformation agenda: Modified programmes, unchanged system. Trends in Southeast Asia 2017 No. 22. Singapore: ISEAS.

Lee Hwok Aun. (2021a). Mapping Errors and Missed Opportunities in the Twelfth Malaysia Plan. ISEAS Perspective 2021 No. 152. Singapore: ISEAS.

Lee Hwok Aun. (2021b). Malaysia’s New Economic Policy and the 30% equity target: Time for a revisit and reset. ISEAS Perspective 2021 No. 36. Singapore: ISEAS.

Lee Hwok Aun. (2021c). The New Economic Policy Beyond Fifty: Assessing its Strengths and Weaknesses to Chart a Cohesive Malaysian Society. IDEAS Policy Paper 73, November 2021. Kuala Lumpur: IDEAS.

Malaysia. (2021). Twelfth Malaysia Plan, 2021-2025. Kuala Lumpur: Government of Malaysia.

Ministry of Economic Affairs. (2019). Shared Prosperity Vision 2030. Putrajaya: Ministry of Economic Affairs.

Teraju. (2012). Hala Tuju Transformasi Ekonomi Bumiputera,Petaling Jaya: Teraju.

Teraju. (2017). Bumiputera Economic Transformation Roadmap 2.0. Mutiara Damansara, Selangor: Unit Peneraju Agenda Bumiputera (Teraju).

Teraju. (2021a). Tindakan Pembangunan Bumiputera 2030 (Bumiputera Development Action 2030). Mutiara Damansara, Selangor: Teraju.

Teraju. (2021b). Soalan lazim Tindakan Pembangunan Bumiputera 2030 (TPB2030) (Frequently asked questions on TPB2030). Mutiara Damansara, Selangor: Teraju.

ENDNOTES


[1] Article 153 stipulates that the Yang di-Pertuan Agong can exercise his functions, “as may be necessary”, to safeguard the special position of the Malays and natives of Sabah and Sarawak – i.e. those formally identified as Bumiputera – through reserving for these designated groups a reasonable proportion of public sector employment, scholarships, training and licensing. A 1971 amendment added higher education admissions to this list.

[2] Teraju, meaning lead, is the acronym for Unit Peneraju Agenda Bumiputera, or Bumiputera agenda lead unit.

[3] Solid Malay support for the policy has been repeatedly documented. The most recent findings are provided by a nationally representative survey of March 2022 on ethnic relations, conducted as part of the Institute for Democracy and Economic Affairs’ tracking of perceptions toward ICERD (https://www.ideas.org.my/publications-item/the-2nd-national-perception-survey-towards-icerd-and-etnic-relations-in-malaysia/). Strikingly, the survey found 50 per cent of all Malaysians, and an overwhelming 81 per cent of Malays, agree with the statement “Malay special rights and privileges are a core feature of our society and should stay in place forever”.

[4] Among Bumiputera MSMEs, 88 per cent fall in the micro category, while 11 per cent are small, and only 1 per cent medium. In comparison, the distribution of non-Bumiputera MSMEs is 69 per cent micro, 28 per cent small, and 3 per cent medium (Teraju 2021a: 578). Such data are available for medium-term policy monitoring, but have yet to be given due prominence.

[5] Following official estimates, in 2019 Bumiputeras held 17.2 per cent of total equity, with non-Bumiputeras holding 25 per cent and nominees 12.3 per cent, while the mammoth’s share of 45.5 per cent was in foreign hands. These figures are contested due to methodological controversies and the considerable presence of nominees, but the equity ownership agenda also warrants less weightage because of its tendency to foster passive ownership and to deviate toward profiteering behaviour (Lee 2021b).

[6] TPB2030 conveys that, in 2019, Bumiputera households received 27 per cent less income than Chinese households, and 9 per cent less than Indian households. These disparities combine urban and rural populations. The more valid comparison limited to urban households changes the picture: the Bumiputera-Chinese gap falls to 19 per cent, while urban Bumiputera household income is 2 per cent higher than urban Indian household income (author’s calculations from DOSM 2020).

[7] Population census data are scarce, but labour force statistics show the stark contrasts in urban concentration between the main ethnic categories. Among the working age population, 74 per cent of Bumiputeras reside in urban areas, compared to 95 per cent of Chinese and Indians. Bumiputeras account for 91 per cent of the rural working age population and 62 per cent of the urban working population (author’s calculations from DOSM 2021).

[8] TPB2030 is currently published only in the Malay language (https://www.tpb2030.gov.my/).

ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute   30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735   Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed.   Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission.  
© Copyright is held by the author or authors of each article.
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Editorial Advisor: Tan Chin Tiong  
Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha.  
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Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng  
Comments are welcome and may be sent to the author(s).

 

2022/50 “Why Vietnam Might Want to Reconsider its Russia Policy” by Derek Grossman

 

Russian President Vladimir Putin (R) shakes hands with Vietnam’s President Nguyen Xuan Phuc during their meeting in Moscow on 30 November 2021. Photo: Mikhail KLIMENTYEV/SPUTNIK/AFP.

EXECUTIVE SUMMARY

  • Russia’s war in Ukraine has put many countries in a tough spot, pitting them between maintaining healthy ties with Moscow and supporting Western punitive measures. One such nation is Vietnam.
  • Despite their close cooperation on military affairs, Vietnam and Russia have been drifting apart for decades. The primary impetus for their cooperation during the Cold War—countering China—is no longer applicable to their partnership. Russia’s positions on the South China Sea disputes and Mekong River issues also do not align with Vietnam’s strategic interests.
  • Much to the chagrin of the West, Vietnam’s “comprehensive strategic partnership” with Russia is likely to persist due to Hanoi’s reliance on Russian arms, bureaucratic momentum, the China factor, and shared ideology.
  • Vietnam will try to weather the Russia storm and preserve ties with both Moscow and Washington, as well as other Western nations.
  • For now, the best that the West can do is consistently note their concerns and the likely implications that refusing to condemn or punish Russia might have on Vietnam’s own security. No amount of poking or prodding by outside powers will be successful or be appreciated in Hanoi.

* Guest writer, Derek Grossman, is a senior defence analyst at the non-profit, nonpartisan RAND Corporation, and an adjunct professor at the University of Southern California. He formerly served as the daily intelligence briefer to the assistant secretary of defence for Asian and Pacific security affairs at the Pentagon.

ISEAS Perspective 2022/50, 11 May 2022

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INTRODUCTION

Russia’s war in Ukraine has put many countries in a tough spot, pitting them between maintaining healthy ties with Moscow and supporting Western punitive measures. One such nation is Vietnam. Earlier this year, Washington spotlighted Hanoi as a “leading regional partner” in its Indo-Pacific strategy, and Vietnam has been bolstering ties with American allies and partners, including Australia, India, Japan, South Korea, as well as key European nations.[1] Vietnam also recently completed its two-year term as a non-permanent member of the United National Security Council (2020-21), reinforcing its image as a responsible player on the international stage.

However, when the West introduced resolutions at the United Nations (UN) to condemn or punish Russia, Vietnam has either abstained or rejected each motion. On 2 March, Vietnam was one of the 35 nations that abstained from a vote on the UN General Assembly’s resolution to condemn Russia’s invasion of Ukraine, with the Vietnamese envoy to the UN simply noting that his country is “against all attacks on civilians that were in violation of international laws on humanitarianism and human rights.”[2] Hanoi’s latest vote on 7 April 2022 to reject ousting Moscow from the UN Human Rights Council may have struck a particular nerve among Western nations, potentially jeopardizing Vietnam’s bid to become the chair of the Council from 2023 to 2025.[3] And on 19 April, a report surfaced quoting a Russian source that Vietnam and Russia are planning a joint military exercise.[4]

The above developments show that Vietnam is facing a mounting challenge in maintaining a strategic balance between Russia and its Western partners, especially the United States. How Hanoi handles this challenge in the coming years will have important implications for Vietnam’s foreign policy outlook and the West’s future strategic engagements with the country.

After providing a brief overview of the modern history of Vietnam-Russia ties, this article argues that despite some limited benefits, the partnership is rapidly becoming a Cold War relic and may increasingly harm Hanoi’s overall security interests. However, much to the chagrin of the West, Vietnam’s “comprehensive strategic partnership” with Russia is likely here to stay for the foreseeable future due to Hanoi’s reliance on Russian arms, bureaucratic momentum, the China factor, and shared ideology.

HOW VIETNAM AND RUSSIA GOT HERE

Vietnam’s partnership with Russia was borne out of hard national security interests. During the Cold War, Moscow supported Vietnamese anti-colonialists to oust France, and later assisted the Vietnamese communists’ fight against the US military and its South Vietnam ally to reunify the nation. China also supported Vietnam in both efforts. However, by the 1960s, Moscow and Beijing’s doctrinal differences and their competition to lead the socialist bloc led to the Sino-Soviet split. Vietnam initially adopted a neutral stance between the two powers, but later sided with Moscow, partly due to China’s support for the anti-Vietnam Khmer Rouge regime in neighbouring Cambodia. One month prior to invading Cambodia to remove the Khmer Rouge regime in December 1978, Vietnam signed a Treaty of Friendship and Cooperation with the Soviet Union, establishing a de facto security alliance between the two countries. In response, China launched an invasion of its own into northern Vietnam in February 1979.

Although Hanoi received only limited military assistance from Moscow in this war effort, and by 1985 the Soviet Union and China were reconciling their differences to Vietnam’s detriment, the Vietnam-Russia partnership endured. Throughout the early 1980s, Soviet economic assistance was crucial to keeping the Communist Party of Vietnam (CPV) in power. After the breakup of the Soviet Union in late 1991, Vietnam and Russia tried to maintain the momentum of their traditional relationship, and on 16 June 1994 signed an agreement on basic principles of the “friendly relationship” between the two countries to replace the 1978 Treaty of Friendship and Cooperation. In March 2001, the two sides signed a “strategic partnership agreement,” and in July 2012, upgraded their relationship to a “comprehensive strategic partnership,” the highest level of Vietnam’s partnership with a foreign country.

Economic ties between Russia and Vietnam, however, are minimal. In 2020, for example, their two-way trade turnover was less than US$5 billion. For comparison, Vietnam’s combined trade with China and the United States during the same year reached US$153.4 billion and US$87.2 billion, respectively.[5] Russia’s accumulative investment in Vietnam also remains modest, at only US$944 million across 144 projects by the end of 2020.[6] A significant component of economic cooperation is joint energy extraction operations. For example, Vietsovpetro, a joint venture established in the 1980s between Russia’s Zarubezhneft and PetroVietnam, had by the late 2010s produced approximately 242.7 million tonnes of crude oil and 37.3 billion cubic metres of gas from the South China Sea.[7]

The main feature of their partnership, however, has been military cooperation, primarily in the form of Russian arms sales to Vietnam. Approximately 80 per cent of Hanoi’s military systems are from the Soviet Union/Russia, although the Vietnam People’s Army (VPA) has been trying to diversify suppliers in recent years. Notable Russian systems procured by the VPA include dozens of Su-30MK2 maritime strike aircraft, four Gepard-class frigates, six Kilo-class submarines, and a range of different air defence missile systems, among other platforms. Russia has also provided training for VPA officers and maintenance services for Russian systems. In perhaps the most potent sign of their military cooperation, the Soviet Union/Russia maintained access to Vietnam’s naval base at Cam Ranh Bay from 1979 to 2002. In 2014, the two sides signed an agreement allowing Russia to have unlimited port calls to Cam Ranh through simplified administrative procedures. The Russian air force was also reportedly using the Cam Ranh airfield for its refuelling aircraft that service Tu-95 Bear long-range nuclear-capable bombers.[8]

VIETNAM-RUSSIA PARTNERSHIP A COLD WAR RELIC

Despite their close military cooperation, Vietnam and Russia have been drifting apart for decades. Most significantly, one of the primary drivers of their cooperation during the Cold War—countering China—is no longer applicable to their partnership. This is because China-Russia relations today are perhaps at their best in history. On 4 February, President Putin visited China for the Opening Ceremony of the Beijing Winter Olympics, at which the two sides highlighted that their partnership has “no limits.”[9] As Hanoi is the junior partner in its relationships with both Russia and China, it is vulnerable to the two major powers’ strategic manipulations, including in the South China Sea.

Indeed, Moscow’s current position on the South China Sea does not align with Hanoi’s preferences. When asked in an interview in September 2016 if Moscow supported the Permanent Court of Arbitration’s (PCA) landmark ruling in July 2016 that dismissed Beijing’s claims to much of the South China Sea, Putin responded that he did not. This is a blow to Hanoi’s efforts to uphold the PCA ruling to counter China’s mounting aggression in the South China Sea and seek peaceful resolution to the dispute through international law.[10] Although Moscow’s neutral position on the South China Sea is generally shared by the United States, there are key differences. Notably, much to Hanoi’s delight, Washington welcomed the PCA ruling, and since July 2020, has upheld the legality and integrity of counterclaimants’ exclusive economic zones.[11] Washington also regularly conducts open sea patrols and freedom of navigation operations in the South China Sea to challenge Beijing’s expansive maritime claims based on its notorious “nine-dash line”.

When it comes to the Mekong River, an issue of increasing strategic significance to Vietnam where Hanoi worries that the construction of hydropower dams upstream is generating calamitous environmental consequences for Vietnam’s Mekong Delta, Russia is indifferent. In a move echoing Chinese behaviour, a Russian investor in 2013 planned to invest in three Laotian hydropower dams along the Mekong’s tributaries, with at least two of them posing serious consequences downstream.[12] By contrast, the United States established the Lower Mekong Initiative in 2009 along with Cambodia, Laos, Thailand, and Vietnam to discuss solutions to common problems, and promote sustainability of river resources.[13]

Vietnam’s traditional ties with Russia and its reliance on Russian arms may have explained its reluctance to condemn Russia’s invasion of Ukraine. However, this position is incongruent with Hanoi’s wish to uphold international law, especially in resolving the South China Sea dispute. Hanoi should not endorse, even tacitly, the invasion of a sovereign state, particularly since Vietnam itself has been the victim of foreign aggression multiple times throughout the 20th century. Indeed, Vietnam’s 2019 Defence White Paper states that it is against “using force or threatening use of force in international relations.” This is not a mere recitation of an obvious norm of modern international relations, but a new “no” to add to the pre-existing “Three No’s” defence policy of the country, namely no foreign bases on Vietnamese territory; no military alliances; and no siding with one country against another.[14]

The decision not to uphold this position at the UN carries some inherent risks for Hanoi. It inadvertently signals to other states in the Indo-Pacific that they might also remain silent when great powers invade smaller countries. If China were to attack Vietnam over South China Sea disputes, for example, these nations might adopt a “neutral” posture, just like what Vietnam has done during the Russia-Ukraine conflict. Rather, Hanoi should be seeking to send the opposite message—that unprovoked, unilateral military action against any state, anywhere, is unjustified. Doing so is more likely to convince other states that Vietnam will stand up for them, and in turn, they should stand up for Vietnam to oppose unilateral aggressions.

In sum, while the benefits for Vietnam from a close Russia partnership keep diminishing, Moscow’s strengthening ties with Beijing and the collateral damage from its invasion of Ukraine are putting Vietnam into an increasingly precarious strategic position. Maintaining close ties with Moscow may become a liability that undermines Vietnam’s reputation and national interests in the long run. Going forward, Vietnam should therefore reconsider the nature and future direction of its partnership with Russia.

VIETNAM UNLIKELY TO BUDGE FOR NOW

However, Hanoi is likely to maintain the current state of its relationship with Moscow for several reasons. One is sheer bureaucratic momentum. The reality is that Vietnam and Russia have been on good terms since the early days of the Cold War, and the two sides are quite comfortable with each other. Many older CPV leaders and VPA officers were trained in Russia. The camaraderie runs deep. As such, it would require a significant rupture in their bilateral ties to convince the Vietnamese leadership that friendly Russia ties were no longer in their interests. War in Eastern Europe does not impact Vietnam directly, and unless Moscow does something in the Indo-Pacific that hurts Hanoi’s key interests, the current situation is likely to persist.

Another factor is China. Although Moscow and Beijing are strengthening bilateral ties, Vietnamese leaders probably still believe there is some residual benefit in maintaining a close relationship with Russia, as such a partnership might temper China’s worst impulses. Another benefit for Hanoi in maintaining close ties with Moscow is the latter’s continued arms sales to Vietnam which help offset Beijing’s military advantages in the South China Sea.[15] Hanoi will certainly look to keep this pipeline open, even though it has diversified arms imports away from Moscow in recent years.[16]

Vietnam’s energy cooperation with Russia in the South China Sea also provides Hanoi with important resources that it might have to make up elsewhere if Vietnam-Russia ties were downgraded. Additionally, such cooperation activities in waters claimed by China complicate Beijing’s response—another advantage for Vietnam.

Finally, there is an unmistakable ideological component. Both Vietnam and Russia are authoritarian regimes, making them naturally comfortable with each other. This is important for Vietnam’s old guard who continue to be suspicious of the West and the perceived threat that it is fostering democratization in the country through political and economic interactions, a quiet and incremental process known as “peaceful evolution.” Russia shares similar suspicions of the West. Hence, Western democracies are unlikely to ever become as close to Vietnam as authoritarian states like Russia.[17]

HOW SHOULD THE WEST RESPOND?

From Hanoi’s perspective, while it values Russia ties, it does not wish to see its relations with Washington and other Western partners, including on the South China Sea and Mekong issues, negatively impacted by its position on Russia’s war in Ukraine. As such, it’s likely that Vietnam will try to weather the Russia storm and preserve ties with both Moscow and Washington, as well as other Western nations.

America and its allies can threaten consequences to move Vietnam’s position, but the risks probably outweigh the costs for them. Indeed, the Biden administration strongly values Vietnam’s role in its Indo-Pacific strategy, and Washington probably would not want to sacrifice this burgeoning strategic partnership for an unrelated war in another part of the world. Washington in recent weeks has shown that it is willing to look the other way on partner policies that it disapproves of in order to retain cooperation. For example, the Biden administration appears to have relented on India’s rebuff against Washington’s calls for Delhi to choose between Moscow and the West.[18] The one potential caveat is, however, on the enforcement of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which was designed to sanction both Russian entities selling military equipment above a certain threshold and the recipients. Thus far, the Biden administration has been silent on whether it would seek a CAATSA waiver for Delhi’s previous purchase of Russia’s S-400 missile system and any future deals. Given its high dependence on Russian arms sales, Vietnam is probably in a similar predicament with regard to CAATSA if it were to make new purchases while Putin’s war still rages in Ukraine.

For now, the best that the West can do is consistently note their concerns and the likely implications that refusing to condemn or punish Russia might have on Vietnam’s own security, whether in the form of unprecedented China-Russia collaboration or standing up for invaded nations. At the end of the day, it is Hanoi—and Hanoi alone—that can make adjustments to its Russia policy, either because it finally realizes the negative consequences of its partnership with Moscow, or because its old guard who hold strong sentimental attachment to Russia fade away. In the meantime, no amount of poking or prodding by outside powers will be successful or appreciated in Hanoi.

ENDNOTES


[1] White House, Indo-Pacific Strategy of the United States, February 2022, https://www.whitehouse.gov/wp-content/uploads/2022/02/U.S.-Indo-Pacific-Strategy.pdf. For an earlier mention of Vietnam’s importance to the Biden administration, see White House, Interim National Security Strategic Guidance, March 2021, https://www.whitehouse.gov/wp-content/uploads/2021/03/NSC-1v2.pdf.

[2] “Vietnam’s vote for Russia on UN council could damage campaign to lead it,” Radio Free Asia, 8 April 2022, https://www.rfa.org/english/news/vietnam/russia-04082022183521.html.

[3] Ibid. Vietnam’s position is not unique within Southeast Asia, where only Singapore, a de facto US ally, has signed on to Western sanctions, and only the Philippines (a US treaty ally) and Myanmar (still represented by the previous civilian government at the UN) voted in favour of expelling Russia from the Council. Although expected, Hanoi’s position is nevertheless disappointing for the West because it shows that despite recent progress, engagement of Vietnam has not resulted in further alignment with the West on key initiatives.

[4] It is important to note that Vietnamese state-run media thus far have not reported on this planned exercise, and my sources indicate that Hanoi probably has some hesitation with proceeding. For the original report on the proposed exercise, see “Russia Says Military Drills Planned with Vietnam,” Benar News, 19 April 2022, https://www.benarnews.org/english/news/philippine/vietnam-russia-military-drills-04192022170936.html.

[5] “Russia-Vietnam; China-Vietnam; United States-Vietnam,” Observatory of Economic Complexity, https://oec.world/en/home-a

[6] General Statistics Office, Statistical Yearbook of Vietnam (Hanoi: Statistical Publishing House, 2021), p. 281.

[7] Vietsovpetro, Gioi thieu (Introduction), https://www.vietsov.com.vn/Pages/GioiThieuCT.aspx.

[8] Anton Tsvetov, “Vietnam–Russia Relations: Glorious Past, Uncertain Future”, in Vietnam’s Foreign Policy under Doi Moi, edited by Le Hong Hiep and Anton Tsvetov (Singapore: ISEAS – Yusof Ishak Institute, 2018), p. 153.

[9] Chao Deng, Ann M. Simmons, Evan Gershkovich and William Mauldin, “Putin, Xi Aim Russia-China Partnership Against U.S.,” Wall Street Journal, 4 February 2022, https://www.wsj.com/articles/russias-vladimir-putin-meets-with-chinese-leader-xi-jinping-in-beijing-11643966743.

[10] “Answers to Journalists’ Questions,” Hangzhou, 5 September 2016, http://en.kremlin.ru/events/president/news/52834. For Vietnam’s position on the ruling, see “Vietnam Welcomes South China Sea Ruling, Reasserts its Own Claims,” The Straits Times, 12 July 2016, https://www.straitstimes.com/asia/se-asia/vietnam-welcomes-south-china-sea-ruling-reasserts-its-own-claims.  

[11] Edward Wong and Michael Crowley, “U.S. Says Most of China’s Claims in South China Sea Are Illegal,” The New York Times, 13 July 2020, https://www.nytimes.com/2020/07/13/world/asia/south-china-sea-pompeo.html.

[12] “Russian Firms Steps Up Dam Deal,” Radio Free Asia, 16 February 2013, https://www.rfa.org/english/news/laos/hydropower-02062013151208.html.

[13] US Department of State, “Lower Mekong River,” 21 February 2019, https://www.state.gov/lower-mekong-initiative/.

[14] For more insights on Vietnam’s 2019 Defense White Paper, see Derek Grossman and Christopher Sharman, “How to Read Vietnam’s New Defense White Paper: A Message to Great Powers,” War on the Rocks, 31 December 2019, https://warontherocks.com/2019/12/how-to-read-vietnams-latest-defense-white-paper-a-message-to-great-powers/.

[15] Derek Grossman, “Can Vietnam’s Military Stand Up to China in the South China Sea?,” Asia Policy, January 2018, https://www.rand.org/pubs/external_publications/EP67504.html.

[16] Le Hong Hiep, “Will Vietnam Be Able to Wean Itself Off of Russian Arms?,” Fulcrum, 4 April 2022, https://fulcrum.sg/will-vietnam-be-able-to-wean-itself-off-russian-arms/.

[17] It is interesting to note that Hanoi’s only democratic comprehensive strategic partner is India which also maintains good ties with Russia. 

[18] Vikas Pandey, “How India and US Agreed to Differ on the Ukraine War,” BBC, 12 April 2022, https://www.bbc.com/news/world-asia-india-61042314.

ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute   30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735   Get Involved with ISEAS. Please click here: /support/get-involved-with-iseas/ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed.   Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission.  
© Copyright is held by the author or authors of each article.
Editorial Chairman: Choi Shing Kwok  
Editorial Advisor: Tan Chin Tiong  
Editorial Committee: Terence Chong, Cassey Lee, Norshahril Saat, and Hoang Thi Ha.  
Managing Editor: Ooi Kee Beng   Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng  
Comments are welcome and may be sent to the author(s).