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Future of Davos in Kyrgyzstan

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Is the new Russian approach towards China and India, vector for a multipolar world order? Will the new Davos – gathering between vanity fair and summit of the mightiest – in future take place in Kyrgyzstan – Central Asian country surrounded by the most prosperous and promising powers?

 

The last months of 2014 were marked by a series of significant bilateral agreements and summits involving Russia, India and China. According to many international analysts, the research of better relations with the two Asian giants by Moscow represents another further step towards global transformation from an unipolar order ruled by United States to a multipolar one.

A key point in order to analyze the fundamental reasons of Moscow’s approach towards China and India is connected to difficulties emerged in the last year with European Union and United States. Complications in Russia-West relations are clearly exemplified by the Ukrainian imbroglio.
However, it’s also necessary to dwell on long-term strategic interests of the countries involved. Despite the current shaky situation of Eastern Europe and Middle East, generally speaking Beijing and New Delhi look at Russia as a reliable partner with whom it’s fundamental continue to dialogue, cooperate and trade. China-Russia dialogue is growing from mid-nineties, while Indian strategic relationship with Moscow is heir of the one established during Cold War with Soviet Union. Moreover, it should not to be underestimate the fact that Russia, India and China are already actively cooperating in other multilateral organizations, such as BRICS forum (Brazil, Russia, India, China, South Africa), and have the opportunity to develop new platforms for political, economic and military cooperation, for example within the Shanghai Cooperation Organisation (SCO). The strategic triangle Russia-India-China (RIC), taken into account difficulties of relations especially considering Indo-Chinese bond characterized at the same time by cooperation and competition, could therefore be an interesting model of dialogue in the new multipolar world order.

The strengthening of Russian-Chinese cooperation
Regarding the close relationship between China and Russia, it is possible to consider latest agreements on energy co-operation, taking into consideration that improvements of this relation have been underway for about two decades after the fall of Soviet Union. It can be argued that Russian-Chinese partnership is based on three basic pillars, key points of Chinese foreign policy: peace, cooperation and development, to which it’s possible to add mutual profit for both sides and “win-win strategy”.
Milestone of last year improvements in bilateral relations was May 2014 agreement worth $ 400 billion, which concerns pipeline Power of Siberia and the sending of 38 billion cubic meters of natural gas from Russia to China. The sale of gas will not begin immediately because natural gas fields in Eastern Russia require infrastructural improvements as well as connecting pipelines have yet to be installed. However, according to agreements the sending of natural gas through the eastern route will be operative from 2018.

Russia and China have also signed a Memorandum of Understanding for the western route, which could guarantee to China further 30 billion cubic meters of natural gas per year. The main important consequence of these agreements is that they could transform China in the largest consumer of Russian gas. An aspect that should not be underestimated in a consideration of medium-long term is that China could become the main market of Russian energy resources as a whole, overcoming Europe. In 2012 Russian exports of natural gas towards Europe totaled $ 66 billion and accounted for more than 10% of total Russian exports. In the diversification of its exports, Russia could find in Chinese market a viable alternative to Europe, while the latter should find clear alternatives such as shale gas from United States reducing its energy dependence from Russia.

At the same time, there is an important strategic advantage for Beijing because it would receive resources through land. This would be a major transformation of Chinese energy supplying, considering that currently resources destined to China are transported by sea through the Strait of Malacca, controlled by United States, and through areas characterized by tensions and territorial disputes (South and Eastern China Sea).
Becoming a fundamental energy partner of China, Russia would be also a competitor of United States since Chinese territory is one of the most advantages markets for Washington’s exportations of Liquefied Natural Gas (LNG). Energy sector represents the most important area in which Russian-Chinese cooperation could further develop: for example Rosneft has offered a 10% stake to Chinese authorities for the project of joint exploitation of Vankor oil field in Eastern Siberia, Rosneft’s third-largest onshore production subsidiary. This deal would represent the most substantial Chinese equity participation in Russia’s onshore oil industry to date. Furthermore, it will be offered a representative office to China in the board of the same project, while Moscow would offer the sale of oil from Vankor’s field with payments in Yuan, a move that would exemplify a challenge to international dollar system and its role as reserve-currency in the world.

China aims to invest in Asian infrastructural sector with the ambitious objective to create a complex network of high-speed railways, pipelines, ports and optical fibers cables that could link Chinese cities to neighboring countries and beyond; in this case two projects could be cited, the Silk Road Economic Belt through Eurasia and the 21st Century Maritime Silk Road trough East and South China Seas and Pacific and Indian Oceans. These projects could effectively link Europe to Asia-Pacific. Some components of these plans are already under construction, especially in Central Asian republics, but Chinese intentions are to create more links with Russia, Iran, Middle East, Turkey, Indian Subcontinent, South-East Asia and Europe.

The current Asian political scenario, considering these Chinese infrastructural projects, is then characterized by the consolidation of a strategic cooperation between Russia and China, a factor confirmed at the end of the last meeting between APEC countries (Asia-Pacific Economic Cooperation), hosted by Beijing (November 10th – 11th, 2014). This strategic cooperation has been further emphasized by visit of Russian Defense Minister Sergey Shoigu in Beijing few days after APEC summit. From all these meetings and subsequent agreements emerged the prospect of an alliance based on common economic, military, political and energy interests in order to share development and stability in the Asia-Pacific region. This cooperation could also appear to some extent as a political response to NATO’s containment of Russia and US pivot strategy finalized to rebalance of power in Asia-Pacific. This particular kind of interpretation focused on Washington’s concerns is founded analyzing Eastern Europe’s tensions and sporadic diplomatic clashes for the economic control of East and South China Seas.

China looks favorably to economic consequences arising from its cooperation with Russia. The international situation and concerns related to strategic issues have created the conditions for a strengthening of teamwork between Russia and China so that Moscow could defend its interests and Beijing could maintain globally a balance of power. It is possible that this kind of collaboration could go further, making the two countries interdependent and able to reinforce relationship in other sectors (agriculture, aerospace, defense and information technology). Russia and China have already a consolidated business relationship worth approximately $ 100 billion and at the same time China could support Moscow to deal with the effects of Western sanctions on its finances. Beijing would continue to invest in Russian bonds and make direct investments in Russia. China is currently in the position to do so, given the availability of foreign exchange reserves (more than $ 4,000 billion).
Additionally, as demonstrated by the visit of Russian Defense Minister Shoigu to Beijing the Russian-Chinese cooperation will be strengthened in other fronts such as that of the military cooperation, which could be implemented considering common concerns related to cited US Pivot to Asia. As announced by Shoigu during 2015 there will be Russian-Chinese joint naval exercises not only in the Pacific, but also in the Mediterranean Sea.

This is a deliberate long-term Russian strategy to leave behind cooperation with Europe and United States or is a merely tactic searching a revitalization of relations with the West? It’s likely that Russia contemplates strengthening of partnership with Beijing as a useful alternative to relationship with Europe, but also to counterbalance US role in Asia-Pacific. However, the whole scenario is more multifaceted, given the complexity of Sino-US relations and the economic interdependency between Washington and Beijing. Tensions between Russia and West could be exploited to its advantage by China. Given the all picture, another point to consider is in fact that China does not intend to completely sever its relations with Washington coming to a strategic rivalry between blocks typical of Cold War period. The complexity of Sino-American relations is evident, given the value of economic cooperation and common concerns on various global issues (Islamic terrorism, the future of Afghanistan, Iran’s nuclear issue and agreements on global warming). The current global context is not characterized by the presence of ideological opposing blocs, but can be rather be described as an evolving multipolar system characterized by power centers interdependent with an increasingly significant role of Asian countries.

The long-term synergy between India and Russia
After China, Moscow may look to other alternatives to Europe for its natural resources exportations, considering a strengthening of relations with Japan, South Korea and India.
In the specific case of India, the Sino-Russian energy pact could be followed by a similar cooperation between Moscow and New Delhi. Narendra Modi, the new prime minister of India in charge from last May 2014, is searching to improve relationships with many global and regional actors, like United States, China and Japan. Russia is another important partner, to which current India’s government looks with deep attention in a changing international environment. At the same time it’s thanks to Vladimir Putin that from the end of nineties Russia-India strategic partnership had new force after the fall of Soviet Union.  

A stronger Indo-Russian energy relation could significantly change the political equilibriums of Asian continent. This kind of cooperation would be focused on natural gas and in particular in the importation by India of LNG, despite the need of infrastructural improvements in Indian and Russian territories. Since India has limited reserves of natural gas, it would be for New Delhi a concrete opportunity to diversify its energy supply and a necessary provision in order to support economic growth and meet rising domestic demand of energy resources. However energy collaboration could also involve Russian oil.

Nevertheless, there are a number of political issues that could hinder Indo-Russian energy cooperation. Russia negative relations with Western countries represent a counterproductive aspect for India and an expected tightening of Western sanctions against Russia linked to Ukrainian situation could affect the activity of certain Indian public companies with interests in dealing with Russian counterparts, such as Oil and Natural Gas Corporation Limited (ONGC), Gas Authority of India Limited (GAIL) and Bharat Petroleum (BP). ONGC’s interests to drill shale oil in Siberia could be delayed because sanctions against Moscow make it more problematic to work with US counterparts, given the fact that last September 2014 Washington banned its companies from supporting exploration and productive activities in deep water, Artic offshore and shale projects in Russia. This problematic situation could affect ONGC’s activity because it has contracted US firm Liberty Resources to drill four wells in the Bazhenov shale formation in Siberia, a project that now could be interrupted. ONGC has also a 20% stake in the Sakhalin 1 project in Russia and is in consultations with Rosneft over a stake in two east Siberian oil fields and it could look out for alternative solutions for drilling in the Bazhenov.

GAIL company, the nation’s largest natural gas distributor,has recently signed several agreements with some US corporations, for example the pact with US-based WGL for buying about 2.5 million tons of gas for twenty years. GAIL may incur therefore in problematic situations in the case of business activity with Russian firms, for example Gazprom held discussions with GAIL for deliveries also of Russian LNG.
While it’s true that India has other public companies that haven’t developed agreements outside of the Subcontinent and could benefit from an effective Indo-Russian energy cooperation, United States see adversely the developments of New Delhi-Moscow relations. Washington has publicly expressed its disappointment in the aftermath of the positive 15th Indo-Russian bilateral summit held last December in New Delhi, arguing that this is not a good time “to make business with Russia as usual”.

New Delhi has not approved Western sanctions against Russia, but at the same time it has not yet recognized Crimea as an effective part of Russia, though refusing to criticize openly Moscow. At this particular juncture it’s clearly emerging an Indian intention to maintain a substantial strategic autonomy and a difficult balance position in its approach towards United States and Russia. Though, it’s at the same time clear that Washington has used and will continue to apply sanctions to commercial activities related to energy sector as a political tool to isolate opponents (for example Iran in the past for nuclear issue and Russia today for Ukrainian situation),pressuring its allies (for example India) to stop commercial activities with these antagonists States that have to change a specific political behavior according to Washington strategic calculus. Iran’s case of few years ago is emblematic: New Delhi as a result of US pressure supported sanctions against Tehran regarding nuclear issue, partially spoiling Indo-Iranian traditional good cooperation. If it is true that in that case sanctions had United Nations assent and India is against unilateral sanctions, it is certainly not to be underestimated US irritation towards India’s attempts to improve relations with Russia.

At the last Indo-Russian bilateral summit the two countries signed twenty agreements – seven intergovernmental and thirteen commercial – including a strategic vision for a peaceful cooperation in the use of atomic energy. In summary, agreements have concerned energy sector, fields of technology and innovation and they promoted a wide-ranging engagement in commercial activities, considering the use of national currency for bilateral trade. According to Vladimir Putin’s statements, Russia will support India in the construction of twelve nuclear power plants after the positive results related to Kudankulam nuclear power project and the oil company Rosneft will start to send ten tons of oil per year. Russian authorities offered to build in India one of the most advanced Russian helicopters and it will speed up the implementation of the joint project for the fifth-generation fighter jet. Russia aims also to participate in the plan for the realization of Delhi-Mumbai Industrial Corridor and facilitate the process of India’s accession to SCO. However, trade is declining and it’s equal to $ 11 billion; for a comparison, Indo-Chinese bilateral commerce is about 70 billion, while Sino-Russian stands around 100 billion. In this sense, negotiations to promote a free trade agreement between India and Eurasian Union could be seen as a measure suitable to boost bilateral commerce. It’s also important that the project for North-South Transport Corridor (involving Russia, India and Iran) would be effectively implemented since the intentions of a commerce network that could integrate South Asia, Iran, Central Asia and Russia. The geographical distance between India and Russia is significant, but last bilateral summit showed willingness in both sides to overcome this particular difficulty. The basic idea is to encourage a transformation of bilateral cooperation in a much better quality, observing also the international framework and supporting the development of a collective, balanced and inclusive security in Asia-Pacific, considering the legitimate interests of all States in a region led by the respect of international law.

Narendra Modi has recently affirmed the importance and priority assigned to Moscow in the strategic calculus of New Delhi, claiming that Russia will remain the most important partner of India in defense sector. The Indian government is also interested to enhance cooperation with Russia in spite of sanctions sponsored by Washington. However, it is important to underline that Modi is keen to have stronger defense ties with US – the main partner in the sector of arms imports in recent years during Manmohan Singh government – although it’s not possible at this moment to replace Russia’s role. At the same time Moscow is looking to Pakistan, which could become a strategic military partner of Russia. Another aspect is that Russian-Chinese partnership could be seen with concern by New Delhi: Russian technologies and systems are now exported also to China, not only to India, and a rising Chinese power could transform Asian balance of power, pushing India towards United States.
Nevertheless,India seems interested to promote a deep cooperation with Russia, which could aspire to become one of the countries most concerned in governmental campaign “Make in India” launched by Modi and designed to accelerate the economic growth of the country and particularly to support the Indian manufacturing sector by attracting foreign direct investment. In this case the nature of Indo-Russian cooperation could be transformed by purchaser-consumer structure to joint manufacturing partners.

 

The recent meeting between Putin and Modi, as well as summits and agreements between Russian and Chinese authorities are particularly important for the period in which they occurred, few months after the inauguration of a new government in India andwith the specter of a “New Cold War” between West and Russia, though the use of the term “Cold War” in order to describe the current standoff of US-Russian relations is not totally correct.

There are different expectations from Russian government that new course in India will fortify Indo-Russian partnership and many signals go in this direction; as well as it could be possible a strategic alliance with China, considering many fields of joint cooperation. The world order is changing and Western countries should take into account the complex network of relations involving Russia, India and China and other Asian countries. These regional powers are no longer only spokesman of an emergent world seeking voice in an anachronistic international system, considering for example India and China aspirations to reorganize board of United Nations, World Bank and International Monetary Fund. Furthermore, Russia, India and China are not only characters of multilateral forums such as BRICS or G-20, but they are already proponents of deep bilateral relations and bearer of new systems of payment in international trade, considering the use of national currencies than could potentially change future global balances of power. These are clear exemplifications of the emergence of a multipolar world order.

Economy

What an ‘Impossibility Clause’ can make possible

Mehrnoosh Aryanpour

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Since the implementation of the JCPOA in January of 2016, and throughout the current period of accelerating investment by foreign enterprises in Iran, many participants have taken for granted that in the event of a “Snapback” or the reimposition of UN, U.S. and EU sanctions under the provisions of the JCPOA, foreigners must perforce exit all investments in Iran and Iran’s major industries would be relegated to the shadows as an unlawful destination for foreign capital.

The operative assumption has been that any such reimposition of sanctions under a Snapback scenario would make it “impossible” for such foreign participants to maintain, lawfully, their investments in the various projects within Iran, investment they have made a huge effort to structure and uphold in the still-new era of significantly relaxed sanctions.  In fact, the very idea of the impossibility of maintaining significant investments in Iran under such sanctions has become something of a fixation. To the dismay of Iranian partners in various ventures, their foreign partners tend to focus on securing their own interests, rights, and recompense under a Snapback. An efficient exit strategy is often sought.

In reality, those who are here on the ground in Iran know that, regardless of the whims of the American President or the vicissitudes of foreign capital flows, the continued development and renovation of Iran’s domestic economy, both in terms of absolute production, as well as in terms of sophistication, efficiency, and integration, will continue apace, and therefore, the wiser among the stewards of foreign investment in Iran understand that it is as much a question of ensuring business continuity for their Iranian-Foreign joint venture projects despite changing international sanctions regimes, which have been imposed by the West against Iran for decades.

As a result, the most basic and fundamental considerations for any prospective foreign project participant and its Iranian partner become:

1. How the foreign participant can, through appropriately drafted “Impossibility Clause(s)”, remain invested in the Iranian venture for as long as possible under the threat of renewed or reimposed sanctions, and without incurring unacceptable risk.

2. How the foreign participant can contractually envision the broadest range of adverse sanctions scenarios through a single and efficient impossibility mechanism.

3. How the foreign participant can provide for a gradual approach to any putative withdrawal procedure, as opposed to the simplistic solution of outright termination upon Snapback after a period of suspension.

4. How the foreign participant can, in the event of the extinguishment of impossibility, subsequent relaxation or obtained exemption of sanctions, reasonably provide for the right, or at least the option, for itself to reenter an investment project which it may have exited because of Snapback.

The legal thought process underpinning successful solutions which industry practitioners may be likely to embrace is beyond the scope of this article, but the conceptual summary can be a useful guide for all of us as we come to grips with what can be made possible by “Impossibility Clauses”.

1. Remaining invested, minimizing risk: Of course, it is true that for many projects, a direct investment by the foreign participant though its stake in an Iranian joint venture entity may be the most straightforward means of effecting the transfer of capital that allows the foreign party to have a stake in a project.  It also allows for the simplest mechanism by which a foreign party may apply for and successfully obtain an investment license in accordance with the Foreign Investment Promotion and Protection Act.

Nonetheless, such a direct investment may, particularly in the case of European entities which also do business in U.S. jurisdictions or in jurisdictions which have significant links with the U.S. financial system, provide little or no cushion under even the most benign reimposition of any form of secondary sanctions.  This is because the direct investment leaves the foreign party little room to maneuver by way of restructuring or otherwise allocating its participatory interest in the project as sanctions change.

For this reason, a more effective solution could include the formation of a foreign special purpose vehicle to act for the project entity.  In the case of a joint venture, an SPV incorporated in a jurisdiction less likely to be adversely affected by reimposition of sanctions would allow for a more flexible platform to facilitate intelligent solutions such as exit and re-entry options, trustee or agency relationships, and contingent sale-repurchase strategies to prepare for the worst outcome of a sanctions scenario which may force a foreign party to exit Iranian investment.

2.Knowing unknowns, counting uncountables: Even now, with the most recently issued ultimatum by the American President declaring that the end of the JCPOA as we know it is nigh (to be either amended or abrogated, if Mr. Trump is to be believed), there exists a wide variety of circumstances involving the reimposition of sanctions, ranging from those that would make the maintenance of an interest in a project by a foreign party merely inconvenient to those which would make maintaining such an interest lawfully untenable.   These may range from largely toothless, otherwise symbolic targeted secondary sanctions which apply only to the entities of specific countries, as we have continued to see since Trump’s October 2017 decertification, or those which may apply only to certain economic sectors or types of goods or projects, to those which render further financial flows in support of such a project functionally impracticable.  Most challenging of all would be the failure of the UN to continue to waive the imposition of sanctions against Iran.

Thus, a single mechanism to classify sanctions in some way as materially adverse changes and evaluate consequences seems a more pragmatic solution than contemplating what may constitute an “impossibility” event, and including it under grounds for termination.

Under a scenario in which the foreign party has made appropriate structuring preparations as suggested, the determining exit remedies depends on compliance with mandatory applicable laws of the project vehicle’s jurisdiction.  To put it another way, the most straightforward test of whether the foreign party may have to adjust, or exit from its participation, comes down to whether it can fulfill project obligations while abiding by all applicable regulations that may apply to it.  Beyond such a litmus test, imagining or prognosticating about the myriad complexities of a possible Snapback scenario may be fruitless and contractually inefficient.

3.Avoiding the black-and-white trap: Of course, a foreign project participant can easily avail itself of the opportunity to stipulate that under any kind of scenario of project impracticability caused by sanctions, certain or envisioned, termination shall be the one and only prescribed remedy.

But this is likely to disadvantage the foreign party in the context of negotiations over comprehensive project terms with its Iranian counterparty, and it may limit the scope of the project work itself and fail to allow for a more complex investment structure which cannot survive the threat of termination overnight due to a “Snapback” of one kind or another.

Aside from termination, and its precursor remedy, suspension, there should also be the possibility to contemplate a variety of concepts including assignment, agency and delegation, in order to benefit from the vagaries of sanctions regulations and their exemptions. In some cases, project obligations which would be in violation of sanctions for some foreign entities may not be so for others.  As has been shown by the agreements between foreign export credit agencies (“ECA”s) such as EKF, BPI and Invitalia, developments at an international level, especially where adequate sovereign support and sufficiently ringfenced banking facilities exist, are being contemplated to facilitate the kind of continuity required for the decades-long projects now underway in Iran.   In addition to these ECAs, other parties such as quasi-sovereign corporations, particularly those from less dollarized jurisdictions, can play a role as fallback transferees of the exiting foreigner’s project interest or shares under Snapback.  Moreover, it should always be noted that under even the most negative circumstances, the potential for a foreign party to obtain a waiver does exist and can be specified for the benefit of all parties.

4.Saving face, weighing options: Although some foreign entities have a checkered past derived from cutting and running under the threat of or the actual imposition of sanctions against Iran, time has shown that many of the same foreign parties which were forced, or chose, to exit their project ventures are the first ones to have returned since the JCPOA. Such is the compelling nature of Iran as a destination for foreign capital.

Iranian parties to a project know both this history itself and its implications. Foreign participants may wish to keep close to the exits, but foreign companies that have been victimized by their own government’s whims regarding sanctions, and the slippage inherent in exiting and reentering, cannot be understated.
For this reason, foreign project partners may choose to consider the solution of exit and entry “options” for themselves under adverse sanction scenarios, and thus it is important for all parties involved to understand what an “option” precisely means, and how to value such an option.

In financial speak, an option is defined as the right but not the obligation to sell (or buy) an asset in a fixed quantity at a fixed price on (or before) a fixed date in time.  In the case in question, the asset is the participatory interest of the foreign party in the Iranian project, and the date is that point in time at when the parties to a project agree that the foreign party must leave due to sanctions (or is able to re-enter due to easing of sanctions).

However, it is not obvious immediately what the fixed price should be for foreign project interest at the time of exit or re-entry, and, most importantly, what may be overlooked is the tremendous value that such an option has.  In finance, the greater the underlying uncertainty about an asset, the more valuable any option on that uncertain asset is. Similarly, the longer the life of an option on an asset, the more valuable that option is.  In the context of long term investments, any option to exit (or re-enter) should be linked with a significant premium (that is, the worth of the option), and the contract parties should ensure that they successfully negotiate an appropriately fair value for the flexibility the options offer. As an illustrative example, the alternative to any exit put option for the foreign party is a fire-sale in the face of illiquid conditions for its share interest under the menace of reimposed international sanctions, or more problematic still, the inability to exit its share interest altogether, which an option is supposed to protect against.

Absent a foreign investor’s legal immunity to the whims of the UN, OFAC, or other authorities, there is no perfect panacea for fool proofing long-term Iranian projects against the kind of uncertainty which the spectre of sanctions create.  But although this threat, to a certain extent, has forestalled the growth in Iran’s industry and economy despite the strengthening of Iran’s relationships with the international community, it is now apparent, moreso than ever before, that foreign parties can be expected to take an increasingly pragmatic approach in efforts to remain engaged with their Iranian projects for as long as possible.  They can effectively do so by allowing for the most flexible and broad classification of sanctions-related termination risks, by specifying a menu of contractually stipulated responses to reimposed sanctions (in conjunction with intelligent and pre-emptive project structuring) and by exchanging due consideration with the Iranian party for the invaluable options which allow them to remain confident that they can, if absolutely necessary, exit the project and someday re-enter, at a fair price.

Thus, it seems that the operative watchword for all foreign investors in Iran is continuity: continuity of the progression towards innovation, development and growth, and continuity of the participation of foreign interests in that process, bolstered by intelligent structuring solutions, both legal and financial, for dealing with the complicated reality of international economic sanctions.  With a measure of foresight, and a functional, flexible contractual framework, all participants in long-term, large-scale project joint ventures can move closer to the ideal of mitigating most, if not all, of the adverse consequences of sanctions regulations on investment decisions and risk management.

First published in our partner Tehran Times

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Economy

Creating Quality Jobs Crucial to Boost Productivity, Growth in Indonesia

MD Staff

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Indonesia must create good and quality jobs to help increase the country’s productivity and competitiveness for sustained and inclusive growth, says a new Asian Development Bank (ADB) study.

The study, titled Indonesia: Enhancing Productivity through Quality Jobs, takes an in-depth look at the challenges in creating better jobs and raising the country’s labor productivity, as well as the necessary skills needed for a youthful and increasingly better educated workforce to meet the demands of the digital age. The publication was launched today at an event in Jakarta hosted by ADB and the Coordinating Ministry for Economic Affairs.

“Indonesia has a tremendous potential to capitalize on its youthful workforce by addressing the country’s long-term challenges to job creation and inclusive growth,” said Rudy Salahuddin, Deputy Minister for Creative Economy, Entrepreneurship, and SME Competitiveness, Coordinating Ministry for Economic Affairs.

“Not only does the country need to create a more skilled workforce, but it also needs to adjust to new global patterns of technology and the demand for new skills,” said Bambang Susantono, ADB Vice-President for Knowledge Management and Sustainable Development.

The study provides three key messages on how to create good and quality jobs for Indonesia’s large workforce. First, improved education and skills development are necessary to create enough quality jobs to raise productivity. Second, as urban jobs are expanding faster, supportive public policies for sustainable cities are fundamental in generating quality jobs. Lastly, there should be continued efforts to improve labor market institutions and regulations that promote a wider range of employment options and better income security for workers.

The study identifies policy initiatives focused on creating better jobs in the labor market, raising labor productivity, and facilitating worker adjustment to the challenges of the digital age. These issues are addressed both from the supply side and from the demand side of the labor market. Policymakers should ensure that initiatives aimed at increasing productivity also target the poor, women, older people, and other disadvantaged groups.

Labor market institutions like private businesses, small-scale enterprises, and community groups also play a critical role in helping improve the employability of Indonesians. Combining new work opportunities with new technology, ideas, and organization will raise productivity and contribute to improved living standards.

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Economy

Agriculture Is Creating Higher Income Jobs in Half of EU Member States but Others Are Struggling

MD Staff

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Half of EU member states have leveraged the Common Agricultural Policy (CAP) to significantly reduce poverty and drive higher incomes in farming, while other countries are still lagging, according to the latest World Bank study.

The ‘Thinking CAP’ report details how new investments and services in farming, reinforced by the EU’s flagship agriculture policy, can drive down poverty and transform agriculture into a sector which can provide higher paying jobs for those who farm.

Hungary, Slovakia, Estonia, Denmark and the Netherlands are all examples of member states that have successfully modernized their agricultural sectors by providing advisory services, roads, secure property rights and access to education and health services in rural areas. Others, such as Bulgaria, Portugal, Romania, Slovenia and Greece, still have some way to go in reducing poverty and ensuring that agricultural work pays. They can do so by improving the basic conditions for a successful agricultural sector, which would improve the results of the financial investments available under the CAP. Other remaining member states fall in between these two categories – achieving a successful transformation or lagging behind.

“Agriculture and poverty in half of the member states of the EU no longer go hand-in-hand. It’s clear that the income gap between agriculture and other sectors is narrowing and in some countries, such as the Netherlands, agricultural work can pay more than jobs in other sectors,” says Arup Banerji, Regional Director for the European Union Countries at the World Bank. “Today, about half of EU member states recognize that farming can boost shared prosperity, while the other half still has some work to do to provide the basic conditions to bring about necessary structural changes.”

The World Bank report shows that the EU CAP is associated with improving employment conditions in farming. Decoupled payments – annual payments based on how much land a farmer uses – and the co-financing of on-farm investments do show clear links with improvements in agriculture. For instance, in the newer member states agricultural labor productivity growth increases from 3.1 percent to 4.7 percent per year with a 10 percent increase in this type of CAP spending. However, there are certain categories of subsidy – known as coupled payments, which reward farmers for producing a particular crop or livestock— for which the report could find no such association. In the past, these coupled payments also led to extreme overproduction and price distortion on global markets.

“Some countries are running before they can walk by issuing payments to farmers who don’t have the necessary infrastructure to effectively bring their products to market or to make the best use of their investment,” said Rogier van den Brink, Lead Economist at the World Bank. “However, the processes the CAP has put in place are impressive. The CAP casts a very wide net and reaches farmers in every far-flung corner of the EU. Because of this, improvements in the CAP along the lines of the recommendations outlined in our report will further strengthen its role as a powerful instrument of structural transformation.”

Going forward, the report says the monitoring of CAP funds should focus on delivering tangible results rather than confusing bureaucratic processes. This would also encourage the co-financing of private investment into CAP-supported projects which are in the public interest such as environmentally sound practices, organic farming and animal welfare.

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