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The impact of EU crisis on EU-ASEAN Relations

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The Association of Southeast Asian Nations (ASEAN) countries have watched the crisis in Euro zone closely. Southeast Asia countries experience similar crisis towards the end of 1990s which shattered ‘the Asian micracle’ and, arguably, shifted EU interests away from the region.

Nowadays, peoples and governments in ASEAN countries perceived the EU crisis differently. These mixed responses reflect how Asian countries have assessed suspected sources and impacts of the crisis on the European integration. From those mixed responses, one may analyse some possible directions of EU-ASEAN relations.

This article addresses the impacts of EU financial crisis to inter-regional cooperation between EU and ASEAN such as EU-ASEAN dialogue, ASEAN Regional Forum, and Asia-Europe Meeting (ASEM). It is built around the argument that ASEAN countries would keep EU as an important partner but the character of the inter-regional relations is likely to change Despite EU financial difficulties and integration problems, people in ASEAN countries still believe that historically-proven European endurance would bring EU survive the crisis. The financial crisis, however, make the Southeast Asians not only perceive  EU less powerful than before but also  find out that  the global power has shifted to Asia. The study is based on primary and secondary data gathered from document study, Focus Group Discussion (FGD), interview with key actors, and observation of EU activities in ASEAN countries

The organization of the article is as follow: a short explanation on the importance and significance of the study is succeeded by an elaboration on the existing inter-regional relations between ASEAN and EU. It is continued with a description on economic and diplomatic relations  based on quantitative and qualitative data. Finally, the article analyses the impacts of the crisis on ASEAN-EU relations.

 

A. EU crisis and the need to study ASEAN-EU inter-regionalism
Crisis in Euro zone unfolded since 2009 has halted EU’s efforts to maintain a high standard welfare to peoples in its member countries. Indeed, the austerity packages in the crisis-thorned countries –the PIGS- to save their economies and the Euro have driven some people to question the objective of EU integration. The crisis in Euro zone started in Greece in 2009. A year later, Ireland, Italy, Portugal and Spain  experienced similar troubles.  This crisis has brough EU to continuing financial problems.

In Southeast Asia in which severe financial crisis rampaged toward the end of 1990s, bringing down some of the strongest regimes and collapsed what so-called ‘Asian economic tigers’, the EU crisis has been perceived with a mixed response.  Some are surprised given the fact that Euro was stronger than the US dollars for many years. Others see the crisis as the consequence of EU strange economic arrangement – having a single currency but maintaining independent fiscal policies. Some other are more positive toward the European strength, thinking crisis is natural in Europe and the people would overcome the crisis with their resilience that they would re-emerge stronger after the crisis. Nevertheless, a few people believe that the crisis is a ‘karma’ to the Europeans because of what they did to Asian people during the Asian financial crisis. These mixed responses reflect how Asian countries have assessed suspected sources and impacts of the crisis on the European integration. From those mixed response, one may analyse some possible directions of EU-ASEAN relations.

Within the context of Euro zone crisis and the mixed responses from people in Southeast Asia, the question on the future of EU-ASEAN inter-regionalism deserves a careful study. The question is important as the two regional institutions represent almost one third of world’s population and can form an alternative axis of global trade. ASEAN and EU key figures can be seen below:

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The significance of the study lies in three aspects. Firstly, ASEAN-EU inter-regionalis excludes the US, creating an alternative international relations from politico-strategic as well as economic and cultural perspectives. Secondly, the region-to-region, rather than country-to-country relations are a distinctive and new practice in international relations that requires an understanding of its merit and limitations.  This inter-regional pattern of interactions in international relations has arisen in the last two decades, so it is reasonable to investigate what can work or not work and what can be expected from such relations. Thirdly, the relations between Europe and  Southeast Asia date back to more than five centuries ago when the first European fleet when through the Straits of Malacca and started establishing colonialism. The centuries European occupation and trade monopoly have left various colonial legacies –positive and negative- in Southeast Asian countries. Any contemporary interactions between the two regions can not be made immune from the colonial experience and the feeling of anti-colonialism sometime emerge from the Asian side. The feeling sometimes stronger as the Southeast Asian countries shared common historica legacy vis-a-vis their European counterparts in the inter-regional relations.

The term ‘inter-regionalism’ refers to region-to-region relations, defining as a group of countries that become the member of regional institutuions, which in this study focus on ASEAN and EU. ASEAN countries consist of ten countries in Southeast, ie. Indonesia, Malaysia, Singapore, Thailand, the Philippines, Brunei, Vietnam, Cambodia, Laos and  Myanmar.  The EU consists of 27 member states namely  Austria, Belgium, Bulgaria, Czech Pepublic, Crovatia, Cyprus, Denmark, Estonia, Findland, French, Hungary, Ireland, Italy, Germany, Greece, Malta, Netherlands, Latvia, Lithuvania, Luxemburg, Poland, Portugal, Romania, Sweden, Slovakia Republic, Slovenia, Spain, United Kingdom. ‘Regionalism’ refers to the design and implementation of a set of preferential policies among countries within the same geographical area in order to build harmonious relations in any or all aspects such as politic-security, economy or socio-culture. Regionalization is defined as ‘the grow of societal integration within a region and to the often undirected process of social and economic interaction’ (Hurrell 1995). Thus, what differentiates regionalism from regionalization is the design; while the former is directed by governmental agreements the latter is officially undirected and grows more naturally among non-state actors. This study is focused on the inter-regionalism.

Previous scholars have written on the inter-regionalism between ASEAN and EU. The inter-regionalism of ASEAN and EU were observed within the Asia-Europe Meeting (ASEM), as an exercise ground for a new pattern of global relationship ASEM has been observed as an exercise ground for a new pattern of global relationship (Dent 1997/1998; Cammak and Richards 1999; Gilson 2002, 2005). Nevertheless, there are two contrasting views of the application of the interregional framework. The earlier studies of ASEM treat the inter-regional relations between Asia and Europe in ASEM as the consequence of the failure of ASEAN-EU relations in 1980s  and as an alternative axis in the regional-based world order (Dent 1997/1998; Hanggi 1999; Cammak and Richards 1999; Dent 2001; Yeo 2007). Later studies on the inter-regional level of analysis and suggest that the inter-regionalism should be examined with a focus on the relations of the two regions, that is the social interactions between them, rather than as the consequence of some outside phenomenon (Gilson 2002, 2005).  

The focus on the importance of the inter-regional framework between Asia and European countries is particularly relevant when accepting the notion that the post-Cold War era is the time for the emergence of regional order, substituting the strategic competition of a bipolar world with cooperation and discord in the regional framework).  ASEAN-EU has also posed challenges in its mission to connect the Asian and European countries as they have different approaches to cooperation and international relations. Despite the rhetoric in ASEM’s summit statements that call for a deeper understanding towards each other, the Asian and European countries brought their own cooperation culture and approaches to international relations, thereby creating divertgent of interest. At the end, inter-regional relationships such as ASEM  and ASEAN-EU may work in both functional and cognitive ways (Gilson 2005, p. 310).

The inter-regionalism can also be approached with constructivist framework. In their analysis on inter-regionalism, Hettne and Soderbaum (2002), and Fawcett (2004) emphasize that regionalism is socially constructed through cognitive processes as actors respond to each other and to their environmental pressures. The framework helps identify the emergence of a defensive identity vis-à-vis external actors (Lee and Park 2001; Yeo 2003). It was also applied by Gilson (2002) in investigating the cognitive process of ASEM inter-regionalism  which reveals the social construction of regional identity for both ASEAN countries and their partners in Northeast Asia vis-a-vis EU countries through communication and interpretation of ‘us’ and ‘other’.

Study the inter-regionalism between EU and ASEAN as the consequences of the financial crisis in Euro zone area, thus, could provide insights into not only the competences of ASEAN and EU as regional actors but also recent perceptions of ASEAN and EU towards ecah other.

 

B. History of EU-ASEAN inter-regionalism
ASEAN and EU have been linked since 1970s when the European Economic Community (EEC) became the first institution that built a linkage for dialogue and cooperation with countries in the Southeast Asia. This linkage was formalized in 1977 in the 10th ASEAN Ministerial Meeting which followed by the first forum in Brussels.  Despite the creation of  EU-ASEAN Cooperation Agreement in 1980, however, the inter-regional framework could not develop further to enhance the relations of the two regions. Geographical distance between the two regions is a problem to strengthen economic and socio-cultural relations, nevertheless the difference of political values and agenda of cooperation seem to be the main reason for the deadlock. The most disagreement is on political issues, especially on human rights and democratization (Palmujoki 1997; Wisela 2007). Autoritarian governments in ASEAN countries were irritated with criticism from EU countries while the Europeans thought they should participate actively in global politics as the champion of human rights and democratization. Therefore, the contacts in 1970s and 1980s were more rhetorical than substantial in nature (Leifer and Djiwandono1998, p. 203; Stockhof and van der Velde 1999).  
It was the rapid and high economic development in East and Southeast Asia during the 1980s that drew the Europeans’ attention to what was perceived as ‘the world’s most dynamic region in the 21st century’ (Edwards and Regelsberger, 1990, p. 5; see also Richards and Kirkpatrick, 1999; Forster 1999). Consequently, EU launched ‘the New Asia Strategy’ in 1994 that underpinned the need of European countries to resume close ties with the Asian countries whose economic growth had been seen as a world phenomenon (European Commission, 1994).  

The inauguration of the Asia-Europe Meeting (ASEM) in Bangkok in 1996 was celebrated with enthusiasm and hopes in the two regions because this region-to-region forum represented a breakthrough in Asia-Europe relations and a unique arrangement: it did not include the United States (US) and was the first forum to which Asian countries have been summoned as a group to sit vis-à-vis their Europeans counterparts.  For Southeast Asian countries, the region-to-region relations between Asian and European countries in ASEM have some characteristics that are unusual in terms of their engagements in regional and global affairs. ASEM does not include the United States (US) and it was initially expected to balance the US-EU-Asia triangle. In addition, ASEM is the first forum in which Southeast Asian countries have been able to meet and coordinate collectively with countries in Northeast Asia, namely Japan, China and South Korea vis-à-visanother partner.  However, the enthusiasm soon shifted toward pessimism and criticism after the Asian financial crisis in 1997/1998 and following the war against terrorism after 9/11. Nevertheless, ASEM –now has 51 members- has survived despite the many criticisms about its ineffectiveness (Fitriani 2010).

The climate for inter-regional discourse has also been changing. Despite some downturns at the end of the 1990s and early 2000s, the inter-regional relations between Asia and Europe in ASEM have been constructed during a critical period of world history when East Asia has been developing as an economic powerhouse, while Europe has been seeking an identity as a global actor under EU. In January 2003 EU and ASEAN sigh joint declaration on Cooperation to Combat Terrorism. In July of the same year, EU commission launced its policy paper ‘A new partnership with Southeast Asia’.  This inter-regional cooperation was expanded in 2007 with the Nurenberg Declaration on the enhancement of EU-ASEAN Partnership followed by the Plan of Action which is adopted in the first ASEAN-EU Commemorative Summit in Singapore.   A year later, the inter-regional cooperation was planned for a free trade as the two regional entities agreed to negotiate a free trade agreement (FTA). This plan has been suspended in 2010 and EU started negotiating bilateral FTA with several ASEAN member states such as Singapore (concluded), Malaysia, and Thailand.

The development of the inter-regional relations between EU and ASEAN has been revivalized  since 2012. In April the two adopted Bandar Seri Begawan Plan of Action 2013-2017 to define to rout map of cooperation in the next five year. In July, EU also signed the ASEAN Treaty of Amity and Cooperation (TAC).     EU delegation in ASEAN countries has also been busy with various approaches and events to speed up the cooperation, not only between Government-to-Government but also between Business-to-Business.

 

C.  Impact of the Euro crisis on ASEAN-EU economic relation

The crisis in Euro zone and the continuing problems of settlement process have put a stress on Euro value.  The exchange rate on this currently has decreased significantly since 2008 the when first hit of global financial crises took place. Chart1 shows the drecreasing trend of the Euro value against the US Dollars.

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The Euro crisis and the financial crisis in the US have caused a shard declined of global trade experienced (see Chart 2 below). The collapsed of the rate of global trade in the period of 2008 to 2010 was believed as badly as the financial crisis during the great recession in 1930s.

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The declined global trade seems to bring no impact on EU-ASEAN trade relations as the trade between the two regions has kept growing after a sudden drop in 2009. The following chart show the development of EU-ASEAN trade from 1995 to  2011.

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Despite the increasing trend of EU-ASEAN trade in term of value, the place of EU among ASEAN trading partners decresed. The main trading partners of ASEAN countries are their Southeast Asian neighbours.   Chart 4 below implies that ASEA’s intra-regional trade remains the highest.

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In term of investment, EU countries has maintained their collective position as the second biggest source of FDI to ASEAN countries. The value of EU investment increased in 2011, however its proportion to the total investment in ASEAN fell.  The table below shows the figures from 2009 to 2011 gatherred by the ASEAN Secretariat.

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Notes: Details may not add up to totals due to rounding off errors.
1/ Ranked according to FDI inflows in 2011; covers countries on which data is available.
2/ Includes inflow from all other countries, as well as total reinvested earnings and inter-company loans in the Philippines.
3/Singapore’s data for 2011 excludes inter-company loans as geographical and industry breakdown are presently not available. Inter-company loans with intra-/extra-ASEAN breakdown for 2011 shown are estimated by the ASEAN Secretariat.
Source: ASEAN Secretariat FDI Statistic

 

The gap left by EU investors was quickly filled by intra-regional ones. The data in the following table reveals that capital inflows inform of FDI to ASEAN countries has increased drastically –threefold- since 2009.

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The above data also bring about the fact that for the first time, intra-ASEAN investment has grown significantly, jumping from 6,000 million US$ to almost 26,000 million US$ in three years. Economic integration among ASEAN economies, besides the worsening investment conditions in other parts of the world, may have encouraged ASEAN countries to send FDI to each other.

The financial crisis in the Eurozone also hit official development assistant from EU to ASEAN countries. The figures are fluctuated with a decreasing trend. While reached the highest in 2008, the annual growth of EU ODA to the Southeast Asian countries decreased in 2009 before hiked again in 2010 and followed with a drastic drop in 2011.

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The data shows that the financial crisi in Euro zone has brought some negative impacts on EU economic engagements in ASEAN countries. The conclusion of FTA negotiation between EU with Singapore and negotiation with Thailand and Malaysia seems to contribute to the rise of the trade value between EU and ASEAN countries. The EU position among ASEAN trading partners, however, decreased in 2011. Trading with China and intra-ASEAN continue to dominate ASEAN trade.  Similar trend –increasing in value but decreasing in proportion againts other ASEAN partners- also took place in regard to EU investment in ASEAN countries. It is unavoidably the result of EU financial difficulties. In addition, the shortage of EU financial resource also hit the flow of development assistant from EU to ASEAN countries  that have been fluctuated since 2006.  The total amount of FDI flow from EU to ASEAN countries has decreased since 2010 despite the fact that EU maintains a position as the second biggest source of FDI for Southeast Asia. Similarly, the annual growth of ODA from EU to ASEAN countries has slowed down to 20% in 2011 compared with 80% in 2008. In short, in economic relations, EU is an important partner of the ASEAN countries; the European countries, however, are not the most important one.

 

D. Impact of the Euro crisis on ASEAN-EU

Previous section has shown briefly the economic impacts of the Euro crisis on EU-ASEAN relations. This section analysis further impacts of prolonged crisis on the European and Southeast Asian countries political and diplomatic interactions.

Toward the end of the first decade of the 21st century, whereas the Euro zone experienced financial crisis, the ASEAN countries enjoyed an economic growth accelerated by the rise of China economy. Indeed, the East Asia became the engine of the global growth when the EU and the US suffered from the financial problems. The Southeast Asian region that was overlooked by the EU due to the financial crisis a decade before was transformed to a lucratic market of 600 million population with growing middle classes and increasing purchasing power. Consequently, there is an increasing trend in which EU pays more attention to ASEAN countries. As a global trading actor, EU naturally turns to see ASEAN countries as it main interests. Since 2009, there has been more enthusiasm from the EU side to approach to ASEAN.  In the same year, EU started appointing Ambassadors as representative to ASEAN after the Southeast Asian countries launched the ASEAN Charter that transform the regional institution as a legal entity.

In the subsequent years, EU launched an active economic diplomacy toward ASEAN. In 2011 the ASEAN-EU Business Summit (AEBS) was conducted in Jakarta to be followed by the second Summit in Phnom Penh a year after. EU Delegation in Southeast Asia and member states also exercised an active diplomacy to attract ASEAN investors. The regional FTA, which had been negotiated since 2007, was aborted in 2010. Subsequently, EU changed its strategy to approach ASEAN countries through bilateral FTA with the most advanced countries in Southeast Asia. The shift of efforts to establish regional FTA (EU-ASEAN) to bilateral FTA with several ASEAN countries shows EU short term strategy to accelerate trade relations with the most convenient partners while accepting the fact that ASEAN countries so vary in term of economic development and the readiness to wage effective trade relations. Despite the change of FTA strategy, EU trade deficit against the ASEAN countries prevailed.

Nevertheless, EU is keen to support the ASEAN integration. Provide funds for ASEAN integration projects. Since 2007, EU has actively assisted ASEAN integration.  The amount of official development assistants that EU provided for projects towards ASEAN integration to 70 million Euro for the period of 2007-2012.  It was used for various initiative in supporting ASEAN three communities.

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Table 3 shows that EU supports for the regional integration of ASEAN vary from establishing trust to trade liberalization and climate change. On one hand, those various supports reflect EU competence to play its role as a partner in regional development. On other hand, however, the supports were likely to be ineffective since they were operated through the project-based cycles in which sustainability is problematic. EU officials frequently stated that a more integrated ASEAN is better for the EU. This opinion perhaps derived from their frustration in negotiating with ASEAN member states. With the decreased of EU development assistant to ASEAN as showed in Chart 6, the European support for the regional integration in ASEAN is also under questions.

Under the active economic diplomacy, leaders of EU institutions as well as EU member states have frequently visited ASEAN countries. All top leaders from EU biggest member states took the difficulties of long haul flights from Europe to meet their counterparts in the capital cities of ASEAN member states. This trend – so many high profile figures from EU and EU member states to visit ASEAN countries- is never seen before. This phenomenon is in contrast with the frequent absence of EU leaders in the ASEM summits, especially those after the Asian financial crisis.

EU active economic diplomacy and the frequent visit of U top leaders have created a better atmosphere in EU-ASEAN relations. EU criticism on social or political practices in ASEAN countries continues but with a less frequency and intensity. This change on EU diplomatic style may derive from several factors. The first is EU leaders and official realized that they had a higher priority to pursue economic interests vis-à-vis the ASEAN countries. Secondly, the changes that took place in Southeast Asian countries have addressed different perspectives between EU and ASEAN countries, especially in political issues and human rights. The political openness and transformation in Myanmar, that used to be the problems in EU-ASEAN relations, seem to contribute indispensably in this improvement of political atmosphere. Thirdly, perhaps by paying more attention to ASEAN countries and by realizing their interest in the region, the Europeans are able to build a more culturally, socially, and politically sensitive approach in their diplomacy with ASEAN.  With this kind of approach, the EU officials as well as officials of EU member states  seem to be more open mind and more ‘appreciate’ to  what have been considered as Asian values and ‘ASEAN way’. The approach is reflected in more prudent comments on political issues in ASEAN countries and more restrain in putting forward criticism towards the ‘ASEAN way’. One of strategic steps taken by the EU is to accede to the ASEAN Treaty of Amity and Cooperation (TAC) in July 2012.

The crisis in the Euro zone and its impacts on EU active diplomacy in Southeast Asia has created mixed perceptions in ASEAN. An optimist view sees EU as a crisis fighter and believe that, as those in the past, the European countries would reemerge from the crisis stronger. However, the financial crisis has also spread skeptical views on regional integration and strengthened the refusal of ASEAN Economic Community. Those who adopt the latter perspective believe that the European integration and the common currency are very risky experiments that could create social, political and economic disaster if not chaos. The crisis in the Euro zone is a valuable lesson learn for regional integration in other parts of the world including in Southeast Asia. In addition, what has happened in Europe encourage perceptions that EU’s power is decreasing.

Despite the financial crisis and challenges to EU’s role as a global player, EU has shown an intention to deepen its relations with ASEAN. In April 2012, the two regional entities adopted the Bandar Seri Begawan Plan of Action which states to strengthen EU-ASEAN enhanced partnership for 2013-2017. The plan to enhance the inter-regional relations includes cooperation in policy and security. In 2012 and 2013, EU Representatives and high level officials from member states frequently stated that they expect EU could play a bigger role in the regional security.  However, it is not clear the reason behind this intention and what kind of role that EU could play in the Asian security. For ASEAN countries, China’s rise, its increasing assertiveness and the US’ pivot have increased tension in the regional politics and security. It would be a question whether EU needs a pivot to Southeast Asia too.  

 

E. Conclude
Inter-regional relations between ASEAN and EU have been established since 1970s.  This region-to-region engagement has gone through three crises that shape not only the nature of the relations but also the perceptions of each side towards each other.  The first is the strained relations during 1980s due to different political values that can be categorized as the crisis of common values between ASEAN and EU. This crisis hampered the development of the inter-regional relations; EU however preceded by enhancing bilateral relations with individual ASEAN countries namely Singapore and Thailand. The second is the Asian financial crisis that cracked some ASEAN countries towards the end of 1990s; the crisis that switched European previous interests and hopes on what so called ‘Asian economic miracle’. In the context of EU-ASEAN relations, this crisis loomed the relations and created a substantial negative feeling among affected ASEAN countries as the EU economies failed to respond as sincere partners that could be relied on for real supports and needed assistance. This crisis halted the development of not only ASEAN-EU relations but also their relations in the ASEM process. EU countries seem lost their interests in ASEAN and switched their attention to newly integrated countries in Central and Eastern Europe. The third and most recent event is the financial crisis in the Euro zone that has been responded variously by people and key persons from ASEAN, creating a momentum to re-address the inter-regional relations. This period is concomitantly with continuously high economic growth in East Asia, including main countries in ASEAN, encouraging the EU countries to realize on the importance of ASEAN economies for their own. The relations mirror those in early 2000s when enthusiasm in at side was met by cautiousness and restrained at the other side.

The data collected for this study show that economic relations between the two regions have been influenced by the crisis in the Euro zone since 2009. In term of trade, export and import of goods between the two regions has increased steadily after a drop in 2009. The data implies that the Euro crisis has boasted trade between the two regions, indicated by more active governments and business from EU countries to approach their partners in Asia. The trade, nevertheless, booked a surplus for the ASEAN countries. The increased trend of an active engagement in the inter-regional trade did not take place in investment and official development assistant.

The Euro crisis has created a more balanced enthusiasm in EU-ASEAN relations. Whereas EU seems to lost interests in Southeast Asia after the Asian financial crisis, the European countries return their attention to the lucratic market of ASEAN countries when they experience the crisis.  It may not ideal relations but economic interests continue to be the primary motive of the relations between the two regions.

The financial crisis in Euro zone makes the Southeast Asians not only perceive EU less powerful than before but also find out that the global power has shifted to Asia. It seems that ASEAN countries would keep EU as an important partner either in ASEAN-EU Dialogue Forum, ARF or ASEM; however, the character of the inter-regional relations is likely to change.

 

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Economy

Restructuring Libya’s finance and economy

Giancarlo Elia Valori

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Last August the Libyan Investment Authority (LIA) moved its Tripoli’s offices to the now famous Tripoli Tower.

The traditional financial institution of Gaddafi’s regime currently manages approximately 67 billion US dollars, most of which are frozen due to the UN sanctions.

Said sanctions shall be gradually removed and replaced with a system of market controls, as the Libyan economy finds its way.

Right now that, after intimidation and serious and often armed threats, LIA has moved to the safer Tripoli Tower.

However, how was LIA established and, above all, what is it today? The Fund, which has some characteristics typical of the oil countries’ sovereign funds, was created in 2006, just as the EU and US economic and trade sanctions against Gaddafi’s regime were slowly being lifted.

The idea underlying the operation was simple and rational, just like the one that had long pushed Norway to create the Government Pension Fund Global, i.e. using the oil profits to avoid the post-energy crisis in Libya and preserve the living standards of the good times.

Hence investing in its post-oil future using the huge surplus generated by the crude oil sales.

From the beginning, LIA had to manage a portfolio of over 65 billion US dollars, but with three policy lines: firstly, 30 billion dollars to be invested in bonds and hedge funds; secondly, business finance and thirdly, the temporary liquidity secured in the Central Bank of Libya and in the Libyan Foreign Bank.

The funds of those two banks soon acquired a value equal to 60% of all LIA assets.

All the companies having relations with foreign markets, from Libya, fell within the scope of the Libyan Investment Fund.

Currently LIA has over 552 subsidiaries.

Nevertheless, there are no documents proving it with certainty. To date there are not even archives that credibly corroborate the LIA budgets and statistics.

Since 2012 it has not even undergone any auditing activity.

There were and there are no strategies for allocating investments nor a plan. The only criterion followed by the Fund managers – now as in the past – is to invest the maximum sums of money in the shortest lapse of time.

The first serious audit was finally carried out by KPMG in June 2011, in the heat of the battle for the survival of Gaddafi’s regime.

At the time, high-risk derivatives transactions were worth as much as 35% of LIA’s total investments – which was incredible for the other global funds.

According to the most secret but reliable sources, however, in 2009 the losses of the Libyan Fund exceeded 2.4 billion US dollars.

What happened, however, in 2011, after the collapse of Gaddafi’s regime? How did LIA and the Libyan African Investment Portfolio (LAIP) act?

In fact, neither company could carry out any operations.

In 2014 alone, LIA’s losses were at least 721 million US dollars.

Moreover, LAIP still holds in its portfolio the Libyan Arab African Investment Company (LAICO), which manages investments –  particularly in the real estate sector – in 19 African countries, with specific related companies in Guinea Bissau, Chad and Liberia.

Furthermore, Oil-Libya still operates as a network manager and extractor in at least 18 African countries.

On top of it, the Libyan Fund still owns Rascom Star, a satellite and telephone network connecting much of rural Africa.

Within LAIP there is also FM Capital Partners LTD, another real estate Fund.

Nevertheless, as early as the collapse of Gaddafi’s regime, the internal policy lines of LIA and of the other companies separated: 50% of managers wanted to continue the activity according to the classic rules of the Company’s Management, while the others thought they should mainly follow the new political equilibria within Libya.

The last audit carried out by Deloitte also demonstrated that the over 550 subsidiaries were the real problem of the Fund.

Deloitte also assessed that at least 40% of those companies were completely uneconomic and had to be sold quickly.

In this bunch of lame ducks there were, for example, the eight refineries – one of which managed by Oil invest in Switzerland – which also paid penalties to the Swiss government for obvious environmental reasons.

Allegedly the refinery in Switzerland stopped its activities in 2017.

The traditional investment line of the Libyan Arab Foreign Investment Company (LAFICO) has always been linked to LIA, which currently has over 160 billion US dollars avaialble, including oil, personal income and old foreign investment of Colonel Gaddafi, once again only partially reported to international authorities.

Moreover, according to the LIA managers of the time, the various companies within the Fund did not communicate one another and hence their strategies overlapped.

And the same held true for the interests of their different political offspring.

Moreover, in 2011 an old independent audit showed that the losses before the sanctions that preceded the uprisings amounted to approximately 3.1 billion US dollars.

Gaddafi’s regime started to collapse – a regime which, according to the international narrative, had allegedly accumulated all the money taken by LIA and its subsidiaries.

Obviously this is not true – exactly as it is not true that the “deficit” in Italy’s public finances before the “Bribesville” scandal was caused only by the greed and voracity of the ruling class.

In the countries where there is a destructive psywar and an offensive economic war, these are now the usual models.

It is not by chance that on December 16, 2011 the UN Security Council lifted the specific sanctions against the  Central Bank of Libya and the Libyan Foreign Bank (which is not LAFICO) because they had supported the uprisings against Colonel Gaddafi.

In 2014 LIA initiated legal proceedings against Goldman Sachs, which cost it 1.2 billion US dollars, with a bonus for the intermediary bank of 350 million dollars.

The proceedings ended in 2016 and the British judges decided in favour of Goldman Sachs that was entitled to a compensation amounting to one million US dollars.

There was also another legal action brought against Société Générale, which had started in 2014 and later ended with LIA’s partial defeat.

As to the 2018 national budget, for example, the Central Bank of Libya has envisaged the amount of 42,511 billion dinars, broken down as follows: 24.5 for salaries and wages; 6.5 billion dollars for petrol subsidies and 6.7 billion dollars for “other expenses”.

On average the dinar exchange rate is 1.3 as against the dollar, but it is much lower on the black market.

And public spending is all for subsidies and salaries. Very little is spent for welfare – that was Colonel Gaddafi’s asset for gaining consensus. Social wellbeing can be achieved with good stability of oil prices and revenues, which is certainly not the case now.

Moreover, General Haftar militarily conquered the oil sites of the Libyan “oil crescent” on June 14, 2018, after having held back the attacks of the Petroleum Defence Guards of Ibrahim Jadhran, the commander of the force protecting the oil wells and facilities.

According to General Haftar, the condition for reopening wells, as well as storage and transport sites, was the replacement of the Governor of the Central Bank of Libya, Siddiq al-Kabir, with his candidate, namely Mohammad al-Shukri.

Siddiq al-Kabir stated that the Central Bank of Libya has lost 48 billion dinars over the last 4 years and rejected the appointment – formally made by the Tobruk-based Parliament – of his successor, al-Shukri.

Moreover, Siddiq al-Kabirhas also been accused of having pocketed a series of Libyan public funds abroad.

Later General Haftar attacked the Central Bank of Libya in Benghazi to collect funds for the salaries of his soldiers.

Hence the current Libyan financial tension lies in the link between banks and oil revenues – two highly problematic situations, both in al-Serraj’s and in the Benghazi governments, as well as in General Khalifa Haftar’s ranks.

It is certainly no coincidence that the Presidential Council decided to impose a 183% tax on currency transactions with banks.

In addition, taxation was introduced on the goods imported by companies before the current tax reform, which is linked to the reform of the allocation of basic commodities to the Libyan population.

The idea is to stabilize prices and hence make the exchange rate between the dinar and the dollar acceptable, which is another root cause of the economic crisis.

The Libyan citizens often demonstrate in front of bank branches, which are constantly undergoing a liquidity crisis. Prices are out of control and the instability of exchange rates harms also oil transactions, as can be easily imagined.

Nevertheless, even the area controlled by the Tobruk-based Parliament and General Haftar’s Forces is not in a better situation.

In fact, Eastern Libya’s banking authorities have already put their banknotes and coins into circulation, which are already partly used and were printed and minted in Russia.

Pursuant to al-Serraj’s decision of May 2016, said banknotes are accepted in the Tripoli area.

Four billion dinars, with the face of Colonel Gaddafi portrayed on them, and of the same dark colour as copper.

According to the most reliable sources, the reserves of the Central Bank of Libya in Bayda – the city hosting the Central Bank of Eastern Libya – are still substantial: 800 million dinars, 60 million euros and 80 million dollars.

Not bad for an area destroyed by war.

Obviously the simple division into two of the Central Bank – of which only the Tripoli branch is internationally recognized – is the root cause of the terrible Weimar-style devaluation of the Libyan dinar, which, as always happens, they try to patch up with the artificial scarcity of the money in circulation.

As Schumpeter taught us, this does not solve the problem, but shifts it to real goods and services, thus increasing their artificial scarcity and hence their cost.

Meanwhile, the economic situation shows some signs of improvement, considering that the 2017 data and statistics point to total revenues (again only for Tripoli’s government) equal to  22.23 billion dinars, of which 19.2 billion dinars of oil exports; 845 million dinars of taxes; 164 million dinars of customs duties, above all on oil, and 2.1 billion dinars of remaining revenue.

At geopolitical level, however, the tendency to Libya’s partition – which would be a disaster also for oil consumers and, above all, for the Libyan economy, considering that the oil crescent is halfway between the two opposing States – is de facto the prevailing one.

Egypt openly supports General Khalifa Haftar and the tribes helping him.

The Gharyan tribe and many other major ones, totalling 140, now support the Benghazi Government, since at the beginning of clashes, they had often been affiliated to Tripoli and its Government of National Accord.

Tunisia has always tried to reach a very difficult neutral position.

Algeria strongly fears the intrusion of the Emirates’ and Qatar’s Turkish intelligence services into the Libyan economic, oil and political context, but it endeavours above all to limit the Egyptian pressure to the East.

The European powers support General Haftar- with France that, as early as the first inter-Libyan fights, sent him the  Brigade Action of its intelligence services. Conversely, Italy is rebuilding its special relationship with al-Serraj’s government – like the one it had with Gaddafi – but with recent openings to General Haftar.

If we want to reach absolute equivalence between the parties, we must avoid doing foreign policy.

Great Britain and the United States tend to quickly withdraw from the Libyan region, thus avoiding to make choices and not tackling the economic and social crisis that could trigger again a war, with the jihad still playing the lion’s share and precisely in the oil crescent.

The United States should not believe that its great oil autonomy, which also pushes it to sell its natural gas abroad, can exempt it from developing a policy putting an end to the unfortunate phase of the “Arab Springs” it had started – of which Gaddafi’s fall is an essential part.

Currently the Libyan production share is around 1% of the total OPEC production.

Everyone is preparing for the significant increase of the oil barrel price, which is expected to reach almost 100 US dollars in the coming months.

If this happened – and it will certainly happen – the Libyan economy could be even safe, but certainly corruption and the overlapping of two financial administrations and two central banks, as well as political insecurity, could still stop Libya’s economic growth.

Hence, for the next international conference scheduled in Palermo for November 12-13, we would need a common economic and financial policy line of all non-Libyan participants to be submitted to both local governments.

Probably General Haftar will not participate – as stated by a member of the Tobruk-based Parliament – but certainly Putin will not participate.

The presence of Mike Pompeo is taken for granted, but probably also the Russian Foreign Minister, Sergey Lavrov, will participate.

Certainly the Italian diplomacy focused only on “Europe” has lost much of the sheen that has characterized it in Africa and the Middle East.

Meanwhile, we could start with a working proposal on the Libyan economy.

For example, a) a European audit for all Libyan state-run companies of both sides.

Later b) the definition of a New Dinar, of which the margin of fluctuation with the dollar, the Euro and the other major international currencies should be established.

Some observers should also be involved, such as China.

Furthermore, an independent authority should be created, which should be accountable to the Libyan governments, but also to the EU, on the public finances of the two Libyan governments.

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Economy

Khashoggi crisis highlights why investment in Asia is more productive than in the Middle East

Dr. James M. Dorsey

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Growing Western political and corporate reluctance to be associated with Saudi Arabia in the wake of the suspected killing of journalist Jamal Khashoggi spotlights fundamentally different investment strategies and environments in the bulk of Asia and the oil-rich Gulf states, the continent’s most western flank.

The Khashoggi crisis highlighted the fact that much of investment in the Gulf, irrespective of whether it is domestic, Western or Chinese, comes from financial, technology and other service industries, the arms industry or Gulf governments. It is focused on services, infrastructure or enhancing the state’s capacities rather than on manufacturing, industrial development, and the nurturing of an independent private sector.

The crisis has put on display the risks Gulf governments run by adopting policies that significantly tarnish their international reputations. Technology, media, financial and other services industries as well as various European ministers and the US Treasury Secretary have cancelled, in the wake of Mr. Khashoggi’s disappearance and likely killing while visiting the Saudi consulate in Istanbul, their participation in Davos in the Desert, a high-profile investors’ conference in Riyadh later this month.

By contrast, the military industry, with US President Donald J. Trump’s encouragement, has proven so far less worried about reputational damage.

Sponsored by Saudi Crown Prince Mohammed bin Salman, who is suspected of being responsible for Mr. Khashoggi’s likely murder, the conference was intended to attract investment in his Vision 2030 plan to reform and diversify the Saudi economy.

In highlighting differences in investment strategies in the Middle East and the rest of Asia, the fallout of Mr. Khashoggi’s disappearance goes beyond the parameters of a single incident. It suggests that foreign investment must be embedded in broader social and economic policies as well as an environment that promises stability to ensure that it is productive, contributes to sustainable growth, and benefits broad segments of the population.

In contrast to the Gulf where, with the exception of state-run airlines and DP World, Dubai’s global port operator, the bulk of investment is portfolios managed by sovereign wealth funds, trophies or investment designed to enhance a country’s international prestige and soft power, major Asian nations like China and India have used investment to lift hundreds of millions of people out of poverty, foster a substantial middle class, and create an industrial base.

To be sure, with small populations, Gulf states are more likely to ensure sustainability in services and oil and gas derivatives rather than in manufacturing and industry. Nonetheless, that too requires enabling policies and an education system that encourages critical thinking and the freedom to question, allow one’s mind to roam without fear of repercussion, and grants free, unfettered access to information – categories that are becoming increasingly rare in a part of the world in which freedoms are severely curtailed.

China’s US$1 trillion, infrastructure-driven Belt and Road initiative may be the Asian exception that would come closest to some of the Gulf’s soft power investments. Yet, even so, the Belt and Road initiative, designed to alleviate domestic over capacity by state-owned companies that are not beholden to shareholders’ short term demands and/or geo-political gain, contributes to productive economic growth in the People’s Republic itself.

Asian nations, moreover, have been able to manage investors’ expectations in an environment of relative political stability. By contrast, Saudi Arabia damaged confidence in its ability to reform and diversify its oil-based economy when after repeated delays it suspended indefinitely plans to list five percent of its national oil company, Saudi Arabian Oil Company or Aramco, in what would have been the world’s largest ever initial public offering.

The Khashoggi crisis and the Aramco delay followed a series of political initiatives for which there was little equivalent in the rest of Asia. These included the Saudi-United Arab Emirates military campaign in Yemen causing the world’s worst post-World War Two humanitarian crisis; the 16-month-old diplomatic and economic embargo of Qatar by Saudi Arabia, the UAE, Bahrain and Egypt; the detention and failed effort to force Lebanese Prime Minister Saad Hariri to resign; and the diplomatic Saudi spat with Canada in response to a tweet criticizing the kingdom’s human rights record. As a result, foreign direct investment in Saudi Arabia last year plunged to a 14-year low.

All of this is not to say that the rest of Asia does not have its own questionable policies such as Chinese claims in the South China Sea or the Pakistani-Indian feud, and questionable business practices such as China’s alleged industrial espionage. However, with the exception of China’s massive repression of Turkic Muslims in its north-western province of Xinjiang, none of these are likely to fundamentally undermine investor confidence, derail existing social and economic polices that have produced results or produce situations in which avoidance of reputational damage becomes a priority.

At the bottom line, China is no less autocratic than the Gulf states, while Hindu nationalism in India fits a global trend towards populism and illiberal democracy. Nevertheless, what differentiates much of Asia from the Gulf and accounts for its economic success are policies that ensure a relatively stable environment and are focused on social and economic enhancement rather than primarily on regime survival. That may be the lesson for Gulf rulers.

A version of this story was first published by Syndication Bureau

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Economy

Regional Comprehensive Economic Partnership (RCEP) and India

Prof. Pankaj Jha

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Regional or bilateral free trade agreements between India and other countries/institutions have always faced local resistance because of intrinsic anxiety that low cost imported goods would stifle the growth of domestic industry. Commentators have justified this apprehension advocating that domestic industry in India is still unprepared for international competition, and there are no state subsidies that the government provides to the industry for reducing costs and facilitating unfair cost advantage with regard to exports. Within India, sector specific associations are powerful and a result of which many items such as tea, palm oil, coffee and pepper were enlisted as highly sensitive list items (very less reduction in tariffs) when India-ASEAN Free Trade Agreement was signed in 2009. India is witnessing a very high percentage of growth in services sector (contributes nearly two-thirds of India’s GDP)and therefore has always sought to offset the negative balance of merchandise trade with promotion of services sector and investment as an integral component of bilateral or multilateral trade talks.

RCEP is proposed to be one free trade area which will include 3.4 billion people across the East Asian and Oceania region, with a GDP of more than US $22 trillion and the intra RCEP trade would account for more than 30 percent of global trade, as it would integrate the three largest economies of Asia-China, Japan and India. For India, accession to this economic trading bloc would mean opening its large market of 1.25 billion people for the products from 15 countries including 10 ASEAN members and the five dialogue partner countries -China, Australia, New Zealand, Japan, and Korea. During the last few meetings of RCEP negotiations, India has made it very clear that it would not compromise on issues related to trade in services and also addressing concerns related to the small and medium enterprises in the negotiations.

As discussed, RCEP is expected to bring the ASEAN countries and its six dialogue partners under one large geographic and economic landmass which would be one of the largest economic blocs in the world. India has Free Trade agreements or Comprehensive Economic Cooperation/ Partnership Agreements (CECA/CEPA) with Thailand, Singapore, Malaysia, and Korea while it is negotiating terms of bilateral free trade along with services agreement with Australia, and New Zealand. India has proposed to include services sector into the larger negotiation process while many countries do not want to open their market for highly talented and qualified professionals from India. The bone of contention in this regard is Mode IV which ‘deals with movement of natural persons who are service providers or independent professionals’ to another WTO member country. India has pressed for the Mode IV negotiations while negotiating with Malaysia and Singapore. However, both the countries have only opened Mode IV for select individuals such as consultants, accountants, nurses and financial experts. The limited access to the emerging markets have annoyed Indian negotiators to such an extent that at one time India decided not to enter into any free trade negotiations without including services and investment in the negotiation blueprint.

India started economic liberalization process in early 1992, it is yet to integrate with the global economy given the intrinsic problems with regard to tariff structures, customs procedures and the inherent red tape which was a legacy of the license regime. However, putting onus on India for failed attempts with regard to free trade and better terms of trade with other countries across Asia would be unfair. India has not gained the promised advantage while trading with the price competitive economies of the Asian region. On the contrary, the low cost production centres, particularly China, which thrives on state subsidized production has easy access to the India market while it has not bestowed the same privileges to Indian exports. The tariff and non-tariff barriers in China are still not conducive to Indian exports leading to skewed balance of trade. Taking cue from China’s re-routing of its products through ASEAN nations, India has stressed on the stringently following the Rules of Origin (ROO) template with 35 percent of local value addition as a necessary prerequisite.

This year, in the post Wuhan summit bonhomie, Chinese government has opened its pharmaceutical market to select Indian drugs such as anti-cancer, and other lifesaving drugs which are relatively cheaper than Western imports. Overall China has removed import duties on 28 medicines imported from India. The trade frictions between India and China still exists as India has registered a number of anti-dumping and unfair trade practices case in WTO against China. Indian industry particularly Small and Medium Enterprises(SMEs) however accept the fact that cheap Chinese input material in sectors such as steel, pharma and other related industries have brought down the costs, and have also indirectly helped in real estate, automobile spares, and textile sectors. Nonetheless, larger industrial houses are not in favour of such opening up of market as they feel their future endeavors would be jeopardized if Chinese cheap products both in terms of raw materials and semi-finished products would curtail their market expansion plans through new products. These large industrial houses do control the Indian politics through their corporate funds given to various political parties to fight elections and have a sizeable influence among the country’s parliamentarians and legislators. SME sector in India is relatively unorganized, both in terms of associations and political clout.

In order to increase its trade with countries in East Asia and Oceania, India has been trying to adopt international production methods, and be a part of the Regional Value Chain(RVC). However, India’s incremental approach for market liberalization and other market facilitation efforts have not met with active engagement from the regional community. India has not yet been inducted into the Asia-Pacific Economic Cooperation (APEC) which could have prepared the country for business standardization and harmonization of tariffs as per the APEC provisions. This would have created the base for effective implementation of the RCEP trade provisions with necessary structural support. Indian economists have made it very clear that only market access to merchandise trade without any quid pro quo would not be acceptable to the Indian entrepreneurs. It might also create social problems given the fact that Chinese cheap products have already decimated electronics, mobile, toys and silk industry in India. The cascading effect has left very large number of both skilled and unskilled labour jobless. Given the fact that select sectors in India are still labour intensive, retrenchment of workers has a political cost. There are apprehensions projected by industry associations that cheap imports would adversely impact the steel, chemicals, textiles, copper, aluminum, and pharma industry. India is has a sizeable share of global trade in automotive parts, pharma and textile industry, and so negotiations would be a long drawn affair.  Further, strategic experts feel that India must not become an ancillary industry to Chinese production network as it would jeopardize India’s rise in future as a production and skill center in Asia. Also, it will put China as the benefactor of India’s industrial change which might not be palatable to the political class.

Indian negotiators still believe that until and unless the demands with regard to trade in services, investment and also concerns related to SMEs is addressed, the RCEP would be facing an invisible deadlock. Opening up services sector would help the Indian economy and partly offset the effect that would be felt from the cheap products from relatively cheaper production and export centres. Indian economy still faces stiff competition from China and as a result of this the negotiations with China, would be long drawn affairs. However, there is still a silver lining that RCEP would be concluded in 2019 but the deadline from the Indian side would be after the general elections in 2019 when the current Prime Minister Narendra Modi would be looking for a second term to bring about comprehensive set of economic and financial reforms. In case a coalition government comes into power, it would seriously jeopardize the RCEP negotiations because then the different associations and lobbies would be playing the political game to protect their economic interests.

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