2021/103 “US Secretary of Defense Lloyd Austin’s Southeast Asia Tour: Assurances and Dividends” by William Choong, Hoang Thi Ha, Le Hong Hiep and Ian Storey
EXECUTIVE SUMMARY
- US Defense Secretary Lloyd Austin’s visit to three Southeast Asian countries in July 2021 was aimed at reaffirming America’s commitment to regional alliances and partnerships amid concerns of US neglect of the region in the first six months of the Biden administration.
- The choice of Singapore, Vietnam and the Philippines – as well as forthcoming high-level US engagements in these three countries – highlight their importance as “critical Indo-Pacific partners” in the Biden administration’s Indo-Pacific strategy.
- Austin’s trip confirmed the strategic importance of Singapore as a strong supporter of America’s security presence in the region through longstanding and multifaceted bilateral defence ties.
- In Vietnam, Austin addressed legacy issues from the Vietnam War, especially the country’s own Missing in Action issue, which could potentially pave the way for more substantive security relationship.
- During Austin’s visit to the Philippines, President Rodrigo Duterte withdrew his letter of termination for the 1999 Visiting Forces Agreement, which helped put the US-Philippine alliance back on course.
- Austin’s messages during his trip, particularly in his Fullerton Lecture in Singapore, outlined the broad contours of the Biden administration’s Southeast Asia policy that goes beyond the dynamics of US-China strategic rivalry and seeks to provide a more holistic and positive agenda of US engagement with the region.
*William Choong, Le Hong Hiep and Ian Storey are Senior Fellows and Hoang Thi Ha is Fellow and Co-coordinator of the Regional Strategic and Political Studies Programme at the ISEAS – Yusof Ishak Institute.
INTRODUCTION
US Secretary of Defense Lloyd Austin’s swing through Southeast Asia on 26-29 July, during which he visited Singapore, Vietnam and the Philippines, was significant because it was the first trip to the region by a US cabinet-ranking member since President Joseph Biden took office in January.
The first six months of the Biden administration had been largely focused on rebuilding US relationships with high-priority allies and partners in Northeast Asia (Japan and the Republic of Korea), Europe (NATO and the G7) and the Quad (especially India) as well as setting the parameters of engagement with China – America’s key strategic competitor. In contrast, President Biden has not had a single telephone call with any Southeast Asian leader. The administration’s belated outreach to Southeast Asia led to concerns that Washington was neglecting the region at a time when China’s regional influence continued to expand through extended trade and investment ties, vaccine assistance and in-person diplomacy.[1]
Against this backdrop, the significance of Austin’s trip goes beyond issues of defence cooperation. As he highlighted in his Fullerton Lecture in Singapore, the principal objective of his trip was “to reaffirm enduring American commitments” to Southeast Asia.[2] This Perspective examines the outcomes and messages from Austin’s trip, and gauges the broad contours of the Biden administration’s Southeast Asia policy within its broader Indo-Pacific strategy.
AUSTIN’S FULLERTON LECTURE: REVERTING TO FORM
Austin’s Fullerton Lecture in Singapore, organised by the London-based International Institute for Strategic Studies (IISS), can be seen as the first Southeast Asia policy speech by the Biden administration. As indicated in its title – “The Imperative of Partnership” – the lecture reaffirmed the importance of alliances and partnerships, the lodestone of America’s Asia policy, which had been undermined by the Trump administration’s transactional and unilateral approach. Austin’s statement that the US would move in “lockstep” with its allies and partners on a range of issues[3] such as the COVID-19 pandemic, climate change, coercion from rising powers, North Korea’s nuclear arsenal and the Myanmar crisis, reflects the Biden administration’s internationalist approach in addressing common global challenges – a clear departure from the Trump administration.
The Fullerton Lecture went beyond the defence-security domain and offered tangible US deliverables to the region. This message was aptly calibrated for his Southeast Asian audience, many of whom prefer to see America providing a positive agenda of regional cooperation rather than a zero-sum narrative of US-China rivalry. Austin hit the right note in saying that America’s enduring ties in Southeast Asia “are bigger than just geopolitics”.[4]
He emphasised US pandemic assistance, especially the donation of 40 million doses of COVID-19 vaccines throughout the Indo-Pacific, including Indonesia, Laos, the Philippines, Malaysia, Thailand and Vietnam. Taking an indirect swipe at China－whose vaccines are mainly sold and have relatively lower efficacy rates－Austin praised US-developed vaccines as “medical miracles” that are “incredibly effective at saving lives and preventing serious illness” and that were being donated with no conditions or strings attached.[5] Austin’s statement mirrors what Kurt Campbell, the Biden Administration’s Indo-Pacific czar, had said earlier in July. Speaking to the Asia Society, Campbell said that the US needed to “do more” in Southeast Asia and he expected “exciting” and “decisive” announcements on vaccine diplomacy and infrastructure when the Quad leaders meet in Washington in late 2021.[6]
When addressing the challenges posed by China, Austin also sought to strike the right notes with his Southeast Asian audience who are concerned that too strident a push by Washington against China would pressure regional states into making invidious choices between the two powers.[7] While criticising Chinese behaviour on a range of issues from the South China Sea dispute and tensions with Taiwan and India, to actions against Uighur Muslims in Xinjiang, Austin also gave assurances that Washington was “committed to pursuing a constructive, stable relationship with China, including stronger crisis communications” and is “not asking countries in the region to choose between the US and China”. In a post-event roundtable discussion organised by the IISS, many regional analysts thought that this message on China was “about right”.[8] This view, however, was not shared by China. In its remarks on 29 July, the Chinese Embassy in Singapore harshly criticised Austin’s lecture, saying that he had “played up the so-called China threat in an attempt to drive a wedge between China and its neighbors”.[9] Beijing has consistently used this narrative in its contest for influence with the US in the region.
Austin’s lecture reiterated US support for ASEAN’s central role in the region. It is noteworthy that Austin went so far as to “applaud ASEAN for its efforts to end the tragic violence in Myanmar” even though the group has been criticised for its delayed appointment of a special envoy to Myanmar. Arguably, this support is not based on high expectations of what ASEAN can do, and is instead a pragmatic consideration given the lack of better alternatives due to Washington’s limited leverage over, and peripheral interests in, the Myanmar situation.
Austin also stressed that the Quad sought to complement – not replace – ASEAN-led mechanisms, including the ASEAN Defence Ministers’ Meeting-Plus (ADMM-Plus). However, whether Southeast Asians have been reassured by this message remains to be seen. Washington realises the importance of reassuring the region about ASEAN centrality even as the US continues to further its investment in the Quad for the desired strategic-security outcomes which it does not expect ASEAN to be able to provide.
SINGAPORE: CONSOLIDATING STRATEGIC TIES
Austin’s visit to Singapore underscored the strategic importance that the Biden administration attaches to Singapore – a strong supporter of the US security presence in the region, including through logistical support for US military aircraft and vessels, and facilitation of the “regular rotational deployment” of US Littoral Combat Ships and P-8 Poseidon aircraft. As noted in the Joint Statement between Austin and his Singaporean counterpart Dr Ng Eng Hen, “[t]his support is anchored on the shared belief that the US’ presence in the region is vital for its peace, prosperity, and stability”.[10] On its part, the US is a longstanding supporter of Singapore’s overseas training and exercises, and will be hosting Singapore’s future F-35B fighter aircraft detachment.[11]
The longstanding and multi-faceted US-Singapore defence relationship was reaffirmed by the 2019 signing of the Protocol of Amendment which renewed the 1990 Memorandum of Understanding (MOU) regarding America’s use of facilities in Singapore and extended the MOU by 15 years, and another MOU on the establishment of a Republic of Singapore Air Force fighter training detachment in the US-territory of Guam.
During Austin’s visit, both sides highlighted new areas of bilateral defence cooperation, especially in cyber defence and strategic communications.[12] These include Singapore’s establishment of the multilateral Counter-Terrorism Information Facility in which the US is a partner country. Singapore also joined the multi-national Artificial Intelligence Partnership for Defence in May 2021. The partnership seeks to enable multilateral cooperation and exchange of best practices on “responsible AI” in the defence sector.[13]
Apart from Austin’s visit, Washington has injected fresh energy into the bilateral relationship. Before him, the outgoing commander of the US Indo-Pacific Command, Admiral Philip S. Davidson, and his successor, Admiral John Aquilino, visited the city-state in April and July, respectively. On 29 July, the Biden administration announced the nomination of entrepreneur Eric Kaplan as Washington’s new ambassador to Singapore, a post which had been left vacant since January 2017. A day later, the White House announced that US Vice-President Kamala Harris would visit Singapore and Vietnam in August to strengthen relationships and expand economic cooperation with America’s two “critical Indo-Pacific partners”.[14] Washington has good reasons to up its game in Singapore beyond defence matters to win the hearts and minds of Singaporeans, many of whom have cultural and familial bonds with China. A Pew Research Centre report in July 2021 showed that 64 per cent of Singaporeans polled had a favourable view of China – the highest among the 17 countries surveyed.[15]
VIETNAM: ADDRESSING THE PAST, LOOKING TO THE FUTURE
Austin’s visit to Vietnam was the latest in a series of US diplomatic overtures to the country in recent months. In July, Vietnam received a second ex-US Coast Guard cutter donated by the United States. Following a Vietnam-US agreement to address US concerns about Vietnam’s currency practices on 19 July 2021,[16] the Office of the US Trade Representative formally closed a Section 301 investigation into this matter, removing a major source of contention in bilateral relations.[17] By early August, the US had donated five million doses of the Moderna vaccine against COVID-19 to Vietnam through the COVAX Facility, making Vietnam one of the largest beneficiaries of Washington’s “vaccine diplomacy”. Secretary Austin’s visit was part of America’s coordinated efforts to deepen ties with Vietnam to win Hanoi’s support for its regional strategic agenda.
Austin’s meetings with President Nguyen Xuan Phuc and Prime Minister Pham Minh Chinh in Hanoi focused on bilateral cooperation to fight the COVID-19 pandemic, which is currently Vietnam’s most immediate concern. The Vietnamese hosts expressed their appreciation for America’s unconditional vaccine donations. During Austin’s meeting with Vietnamese Defence Minister Phan Van Giang, they discussed measures to further promote cooperation in line with the 2011 MOU on defence cooperation and the 2015 Joint Vision Statement on defence relations. Priority areas of cooperation include addressing legacy issues from the Vietnam War, maritime law enforcement capacity building, military medicine cooperation, training and defence industry collaboration.
A highlight of the visit was the signing of an MOU under which the US, through the participation of Harvard and Texas Tech University, will help Vietnam locate, identify and recover the remains of hundreds of thousands of Vietnamese soldiers killed during the Vietnam War but who are still listed as missing in action (MIA).[18] This move will contribute to the building of mutual trust as the MIA issue still carries great emotional significance for the Vietnamese people. Helping Vietnam solve this legacy issue will remove an obstacle of strong political symbolism to bilateral defence ties, paving the way for stronger and more substantive defence cooperation between the two former foes in the future.
Before Austin left for Southeast Asia, there were rumours that the two sides might also sign a General Security of Military Information Agreement (GSOMIA). GSOMIAs set the legal framework for parties to establish terms for the protection and handling of classified military information exchanged between them. The signing of such an agreement would signify a meaningful step towards more substantive defence cooperation between the US and Vietnam, and facilitate bilateral coordination on issues of mutual concern, including the South China Sea dispute. The two sides are said to have been in talks about the agreement for several years. However, media reports on the outcomes of Austin’s visit did not mention the signing of a GSOMIA. It is unclear if the signing of a GSOMIA has been delayed, or if the agreement has been signed but both sides decided not to publicise it.
As noted earlier, Vice President Kamala Harris is scheduled to visit Vietnam in August, the first sitting US Vice President to do so. Further meetings between the two countries’ leaders, including at the highest level, should also be expected as they seek further measures to strengthen their bilateral relations, including military ties in particular.
Faced with unprecedented security challenges caused by the rise of China and its growing assertiveness, the US and Vietnam have recently found strong incentives to work together to build a more resilient and substantive bilateral relationship. Austin’s visit will strengthen bilateral relations in that direction and facilitate their potential upgrade to the level of strategic partnership in the future.
THE PHILIPPINES: MOVING THE ALLIANCE FORWARD
The third and final leg of Austin’s Southeast Asian trip was arguably the most successful in that it helped put the US-Philippines alliance back on track after more than a year of uncertainty. That uncertainty had arisen from President Rodrigo Duterte’s threat to terminate the 1999 US-Philippines Visiting Forces Agreement (VFA) which provides the legal framework for the US military to undertake training activities in the Philippines with the Armed Forces of the Philippines (AFP). Without the VFA, the 1951 Mutual Defense Treaty (MDT) and the 2014 Enhanced Defense Cooperation Agreement (EDCA) that allows the US to preposition military equipment at various AFP bases, cannot function effectively.
In February 2020, Duterte had served notice that the Philippines would withdraw from the VFA after 180 days. The proximate cause was the US State Department’s denial of a travel visa to one of Duterte’s political associates who had helped execute his “war on drugs”. The move was also in keeping with Duterte’s pledge to “divorce” the US and pursue a more balanced foreign policy. Further, Duterte may have calculated that by threatening to abrogate the VFA, the US would hold off criticism of his administration’s human rights record. Some Philippine politicians had also long grumbled that the VFA prevented the legal prosecution of US service personnel who had committed serious crimes in the Philippines.
However, the Philippines’ national security establishment lobbied hard to keep the VFA. The US-Philippine alliance strengthens Manila’s hand in its maritime territorial and jurisdictional dispute with Beijing in the South China Sea: it provides the AFP with a security guarantee that if they are attacked, US forces would provide support as well as valuable training opportunities and millions of dollars in military assistance every year. Duterte’s threat to abrogate the VFA had made long-term planning for the alliance almost impossible, causing great frustration in both the Trump and Biden administrations.
As a result of this lobbying, Duterte suspended the abrogation of the VFA three times: in June and November 2020 and in June 2021. Between February and May 2021, US and Philippine officials had negotiated an addendum to the VFA. Although the details of that addendum have not been released, Philippine Ambassador to the US, Jose Manuel Romualdez, indicated that it had improved the terms of the VFA, presumably meaning it had addressed Philippine concerns regarding the prosecution of US service personnel.[19] In June, Duterte promised he would study the revised agreement. The third extension would have kept the VFA alive until February 2022, and many observers expected that Duterte would agree to a further postponement early next year and leave the final decision to his successor (constitutionally Philippine presidents are limited to one six-year term and Duterte will leave office in June 2022).
However, in a 75-minute meeting with Austin, Duterte agreed to withdraw the letter of termination. The decision was announced the next day at a joint press conference with Austin and his Philippine counterpart Delfin Lorenzana.[20] Lorenzana said he did not know why Duterte had changed his mind. However, increased tensions with China in the South China Sea – including the presence of hundreds of Chinese fishing boats at Whitsun Reef in the Philippines’ EEZ in March-April[21] – were almost certainly a factor in the President’s calculations. Duterte’s spokesperson, Harry Roque, said the decision was based on “upholding the Philippines’ strategic core interests … and clarity of US position on its obligations and commitments under the MDT”.[22] After Austin had departed Manila, Duterte himself said he had withdrawn his opposition to the VFA as a quid pro quo for America’s donation of more than six million doses of Johnson & Johnson and Moderna COVID-19 vaccines to the Philippines.[23]
Prior to Austin’s visit, there had been some signs of progress in US-Philippine relations. In January, the US had reiterated its commitment to come to the aid of the Philippines if it were attacked in the South China Sea.[24] In April, the annual Balikatan bilateral military exercise took place[25] (the drills in 2020 were cancelled due to the pandemic), and in June, the US State Department approved in principle the sale of F-16 fighter jets to the Philippines.[26] (Manila is nevertheless still looking at alternative options).
But since Duterte took office in 2016, the US-Philippine alliance has been treading water, and given the President’s continued animus towards America, it is still possible that he could reverse his decision on the VFA, or impede negotiations between the two sides on improving military cooperation. As such, real progress on strengthening the US-Philippines alliance – such as negotiating a GSOMIA, designing new combined exercises and implementing EDCA – will have to wait until Duterte’s successor takes office in June 2022.
CONCLUSION
Austin’s swing through Southeast Asia was positively received by the security establishments in the host countries.[27] His trip reflects Washington’s growing cognizance of the need to intensify diplomatic engagement with Southeast Asia – “the fulcrum of the Indo-Pacific region” where the US holds “enduring interests”, as affirmed in the Southeast Asia Strategy Act.[28] The Act, which was passed by the US House of Representatives in April, also requires a comprehensive strategy for engaging Southeast Asia across multiple dimensions, from trade and investment flows to diplomatic and security arrangements. The Biden administration has thus far taken only some initial steps towards this end.
Austin’s Southeast Asia tour is part of the Biden administration’s “charm offensive” towards the region after the first six months of lacklustre interactions. His message of US commitment to “deepen and expand Southeast Asian alliances, partnerships and multilateral engagements”[29] will be echoed by Secretary of State Antony Blinken when he meets ASEAN foreign ministers in early August. US Vice-President Kamala Harris will also visit Singapore and Vietnam this month. Kurt Campbell has hinted that a special ASEAN-US Summit is being considered, and another visit by US Secretary of State Anthony Blinken might be on the cards.[30]
Given the growing significance of Southeast Asia – be it as a key arena of US-China strategic competition or a growing source of US prosperity – it is in America’s interests to build upon this momentum to deepen its engagement with the region in a sustained and comprehensive manner.
ISEAS Perspective 2021/103, 5 August 2021
ENDNNOTES
[1] See Colum Lynch, Jack Detsch, and Robbie Gramer, “The Glitch That Ruined Blinken’s ASEAN Debut”, Foreign Policy, 27 May 2021, https://foreignpolicy.com/2021/05/27/blinken-asean-meeting-pivot-asia-middle-east; James Crabtree, “A Confused Biden Team Risks Losing Southeast Asia”, Foreign Policy, 27 June 2021, https://foreignpolicy.com/2021/06/27/southeast-asia-asean-china-us-biden-blinken-confusion-geopolitics; Hoang Thi Ha, “Beijing’s head start over Biden in South-east Asia”, Straits Times, 31 May 2021, https://www.straitstimes.com/opinion/beijings-head-start-over-biden-in-south-east-asia.
[2] Secretary of Defense Remarks at the 40th International Institute for Strategic Studies Fullerton Lecture (As Prepared), US Secretary of Defense Lloyd J. Austin III, 27 July 2021, https://www.defense.gov/Newsroom/Speeches/Speech/Article/2708192/secretary-of-defense-remarks-at-the-40th-international-institute-for-strategic.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ken Moriyasu, “US does not support Taiwan independence: Kurt Campbell”, Nikkei Asia, 7 July 2021, https://asia.nikkei.com/Politics/International-relations/Biden-s-Asia-policy/US-does-not-support-Taiwan-independence-Kurt-Campbell.
[7] William Choong, “The United States’ ‘Mini’ Shangri-La Dialogue: Stand and Deliver”, Fulcrum, 27 July 2021, https://fulcrum.sg/the-united-states-mini-shangri-la-dialogue-stand-and-deliver.
[8] IISS post-event discussion on Austin’s Fullerton Lecture, 27 July 2021, attended by one of the authors.
[9] Embassy of the People’s Republic of China in the Republic of Singapore, “Remarks of the Spokesperson of the Chinese Embassy in Singapore in Response to U.S. Secretary of Defense Lloyd James Austin III’s China-Related Remarks at the Fullerton Lecture”, 29 July 2021, http://www.chinaembassy.org.sg/eng/sgsd/t1895923.htm.
[10] Joint Statement by United States Secretary of Defense Lloyd J. Austin III and Singapore Minister for Defence Dr Ng Eng Hen, https://www.mindef.gov.sg/web/portal/mindef/news-and-events/latest-releases/article-detail/2021/July/27jul21_fs.
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] Nirmal Ghosh, “US Vice-President Kamala Harris to visit Singapore and Vietnam”, The Straits Times, 30 July 2021, https://www.straitstimes.com/world/united-states/us-vice-president-kamala-harris-to-visit-singapore-and-vietnam.
[15] Laura Silver, “China’s international image remains broadly negative as views of the U.S. rebound”, Pew Research Center, 30 June 20211, https://www.pewresearch.org/fact-tank/2021/06/30/chinas-international-image-remains-broadly-negative-as-views-of-the-u-s-rebound.
[16] US Department of the Treasury, “Joint Statement from the U.S. Department of the Treasury and the State Bank of Vietnam”, 19 July 2021, https://home.treasury.gov/news/press-releases/jy0280.
[17] Office of the US Trade Representative, “USTR Releases Determination on Action and Ongoing Monitoring Following U.S.-Vietnam Agreement on Vietnam’s Currency Practice”, 23 July 2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/july/ustr-releases-determination-action-and-ongoing-monitoring-following-us-vietnam-agreement-vietnams.
[18] For an analysis of the significance of the signing of the MOU, see Le Hong Hiep, “Secretary Austin’s Visit to Vietnam: Building Trust to Strengthen Defence Ties”, Fulcrum, 28 July 2021, https://fulcrum.sg/secretary-austins-visit-to-vietnam-building-trust-to-strengthen-defence-ties.
[19] Karen Lema, “Philippine envoy confident Duterte will back revamped U.S. defence pact”, Reuters, 3 June 2021, https://www.reuters.com/world/asia-pacific/philippine-envoy-confident-duterte-will-back-revamped-us-defence-pact-2021-06-03
[20] Frances Mangosing, “Lorenzana: ‘VFA in full force again’”, Philippine Daily Inquirer, 30 July 2021, https://globalnation.inquirer.net/198126/duterte-recalls-decision-to-junk-vfa-after-meeting-with-top-us-official
[21] Laura Zhou, “South China Sea: Chinese boats keep up steady presence at disputed Whitsun Reef, says US ship tracker”, South China Morning Post, 22 April 2021, https://www.scmp.com/news/china/diplomacy/article/3130676/china-present-whitsun-reef-and-surrounds-2019-says-us-group.
[22] Idrees Ali and Karen Lima, “Philippines’ Duterte fully restores key US troop pact”, Reuters, 30 July 2021, https://www.reuters.com/world/asia-pacific/us-aims-shore-up-philippine-ties-troop-pact-future-lingers-2021-07-29.
[23] Genalyn Kabiling, “‘Give and take’: VFA retention a ‘concession’ after US vaccine donation, Duterte admits”, Manila Bulletin, 3 August 2021, https://mb.com.ph/2021/08/03/give-and-take-vfa-retention-a-concession-after-us-vaccine-donation-duterte-admits
[24] Wendy Wu and Teddy Ng, “China-US tension: Biden administration pledges to back Japan and Philippines in maritime disputes”, South China Morning Post, 28 January 2021, https://www.scmp.com/news/china/diplomacy/article/3119578/south-china-sea-blinken-pledges-us-backing-philippines-event.
[25] “US and Philippine Forces Conclude 36th Balikatan Exercise”, US Embassy in the Philippines, 23 April 2021, https://ph.usembassy.gov/us-and-philippine-forces-conclude-36th-balikatan-exercise.
[26] “US State Dept OKs possible sale of F-16s, missiles to Philippines”, Reuters, 25 June 2021, https://www.reuters.com/business/aerospace-defense/us-state-dept-approves-possible-sale-f-16-fighters-missiles-philippines-pentagon-2021-06-24.
[27] The IISS post-event discussion on Austin’s Fullerton Lecture, 27 July 2021; Authors’ interviews with a number of Southeast Asian states’ officials; and podcast on 49th Fullerton Lecture: US Secretary of Defense Lloyd J. Austin, IISS Sounds Strategic, 29 July 2021, https://www.iiss.org/blogs/podcast/2021/07/40th-fullerton-lecture-us-secretary-of-defense-austin.
[28] H.R.1083 – Southeast Asia Strategy Act, US Congress, https://www.congress.gov/bill/117th-congress/house-bill/1083.
[29] Ibid.
[30] James Crabtree, “What does it mean to be America’s partner?”, Straits Times, 24 July 2021, https://www.straitstimes.com/opinion/what-does-it-mean-to-be-americas-partner-0.
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2021/102 “E-Commerce in Indonesia: Impressive Growth but Facing Serious Challenges” by Siwage Dharma Negara and Endang Sri Soesilowati
EXECUTIVE SUMMARY
- E-commerce has been given a significant boost during the COVID-19 pandemic, with transactions increasing by 23 per cent, and gross merchandise value (GMV) projected at US$32 billion.
- With the recent merger between Gojek and Tokopedia, competition in Indonesia’s e-commerce market is set to intensify.
- At the same time, the e-commerce industry faces serious challenges such as policy and regulation uncertainties, relatively low internet penetration, poor logistics infrastructure, low quality in human resources, and shallow digital payment penetration.
- Relevant authorities have enhanced regulatory efforts to ensure data protection, quality assurance, and protect local industries against unfair competition from imported products. Yet, overprotection by restricting online imports would harm both domestic consumers and micro-retail enterprises.
- Moving forward, the authorities will have to be adaptable and nimble in updating regulations to keep pace with the rapid advancement of digital innovation and technology.
* Siwage Dharma Negara is Senior Fellow at ISEAS – Yusof Ishak Institute. Endang Sri Soesilowati is Senior Researcher at the Indonesian Institute of Sciences (LIPI), Jakarta.
INTRODUCTION
The COVID-19 pandemic has turned out to be a boon for e-commerce in Southeast Asia, including Indonesia. The physical distancing requirement during the pandemic has paved the way for a more home-centric lifestyle. The pandemic has also prompted many micro, small and medium enterprises (MSMEs) to shift to online platforms. According to the Minister of Cooperative and SME, the number of SMEs using online platforms has risen to 10.2 million during the pandemic.[1]
It has been reported that the number of online transactions for groceries and takeaway food has grown significantly, especially during the lockdown period. Some marketplaces reported a significant increase in demand for essential products. For example, Bukalapak, one of five unicorn startup companies in Indonesia, has seen demand for essential food products jump significantly since more consumers now have to stay at home.[2] Moreover, some e-commerce merchants have revealed increased sales of basic food products, cleaners, sanitation, health masks, vitamins, cooking utensils, video games, and sports equipment during the pandemic. Some e-commerce businesses had their gross merchandise value (GMV) increased by at least 50 per cent from March to May 2020, the peak of the lockdown period.[3]
A consulting company, Redseer, reported that online shoppers in Indonesia grew from 75 million pre-COVID-19 to 85 million people during the pandemic.[4] It projected the country’s e-commerce GMV to reach US$ 40 billion in 2021, the third-highest in the world after China and India. Meanwhile, the 2020 e-Conomy SEA report by Google, Temasek, and Bain & Company projects that e-commerce transactions in Indonesia are expected to increase by almost 160% in the next five years, with GMV projected at US$ 83 billion in 2025, up from US$ 32 billion in 2020.[5]
Given this huge prospect, not only small and medium companies but big retailers such as PT Matahari Department Stores, are moving to the online market. The digital platform MatahariStore.com has being launched,[6] and more and more big players are taking advantage of online market platforms to boost their market base.[5] This indicates a heightening competition in the country’s digital economy. The recent merger between Gojek and Tokopedia signal how big startups are strategising to dominate Indonesia’s lucrative but uncertain market. [8] The government, at the same time, is trying to balance between regulating and facilitating the sector’s development.
This paper examines the trends and development of e-commerce in Indonesia. Specifically, it looks at how the COVID-19 crisis has accelerated e-commerce growth and how policymakers have responded to this trend. The next section discusses Indonesia’s e-commerce development in comparison to select countries in ASEAN. The subsequent section examines the implications of the COVID-19 crisis on the e-commerce industry in Indonesia, while the fourth section studies the recent developments in the regulatory framework.
RECENT DEVELOPMENTS
In Southeast Asia, Indonesia has the largest digital economy[9] with approximately 40 per cent of the total regional market share. It is home to five ‘unicorns’, i.e., Gojek (ride hailing), Tokopedia (e-commerce), Bukalapak (e-commerce), Traveloka (ticketing), and OVO (digital payment).[10] These unicorns have been spearheading the country’s digitalisation and have attracted investors from all over the world, specifically large tech companies seeking traction in the region.
In 2020, total online market sales in Indonesia reached US$ 44 billion, while the e-commerce sector accounted for 72 per cent of the total value of the digital economy (Figure 1).
During the COVID-19 pandemic, the online market in Indonesia has continued its expansion to reach US$ 44 billion (Figure 1). A similar trend is also apparent in other ASEAN economies, except for Singapore, which has seen its GMV decline, driven by a massive contraction (-70% YoY in 2019-20) in the online travel sector (Figure 2). Nevertheless, Singapore continues as the regional hub for e-commerce unicorns (Lazada, SEA group) and internet-related industries such as FinTech.
Several factors have contributed to rapid growth in the e-commerce industry in Indonesia. Rising smartphone and internet penetration and growing middle-class consumers, combined with a young, tech-savvy population, are among the key determinants for its e-commerce growth.[11] Moreover, international investors such as Sequoia Capital, SoftBank, East Venture, Alibaba, and Tencent, have been investing in local startups, and supporting their growth. More recently, the e-commerce sector in the country has been further boosted by the rapid development of non-cash payment infrastructures such as Ovo, GoPay, DANA, and ShopeePay.
Figure 3 shows five leading e-commerce companies in Indonesia. Shopee (under SEA Group) and Tokopedia have been competing to dominate the Indonesian market in terms of web traffic. In the second tier, local company Bukalapak competes with Singapore-based Lazada.
Shopee has gained high popularity among Indonesian consumers due to its attractive offers, e.g., cashback, free delivery, and discounts. In Q2-2020, its website saw a significant increase in merchandise transactions of 130% compared to the same quarter the previous year (pre-COVID-19). In that quarter, Shopee posted 260 million transactions, or an average of 2.8 million transactions per day.[12]
Tokopedia, a local marketplace, has seen its market domination being taken over by Shopee during the pandemic.[13] Part of the reason is the massive promotion campaign mounted by Shopee during the lockdown period. [14] In a market where the price level is a critical factor for shoppers, aggressive cashback promo offers for new buyers can easily boost the number of visitors in the respective marketplace. However, a disadvantage to this approach is that customers who are lured by aggressive promotions are unlikely to stay loyal.
It is important to note that the rankings on the marketplace change frequently, depending on several factors, such as capital injection, promotion and marketing strategy, among others.[15] In Q1-2021, Tokopedia regained its number one position as the most popular market platform (Figure 3). This was after it received an injection of funds from Google and Temasek in Q3-2020.[16]
To compete against their main rivals, i.e., Shopee and Grab, Gojek and Tokopedia decided to merge in May 2021 into a new entity called GoTo Group. This new company is now Indonesia’s highest valued startup, at an estimated US$ 18 billion.[17] It remains to be seen if the merger will significantly tilt the market position to the advantage of GoTo. But for sure, there will be heightened competition in the industry.
In addition to Tokopedia and Shopee, there are other second-tier marketplaces, such as Bukalapak and Lazada. Bukalapak was Indonesia’s third most visited e-commerce website behind Tokopedia and Shopee. It started as an e-commerce platform but was one of the first startups to move into the business of digitalising warung, mom-and-pop stores in local parlance, and business-to-business online procurement services. E-warung sells online products and services such as phone credits. Then there is Lazada, another Singapore based e-commerce company that receives financial backing from Chinese-Alibaba, which is another key player in Indonesia’s fast-growing e-commerce market. Like Shopee, Lazada has expanded its networks in various Southeast Asian countries. In Indonesia, this marketplace was ranked fourth in e-commerce in 2020.
Finally, there is Blibli, an e-commerce marketplace owned by Djarum Group. In June 2020, the number of visits to their website decreased to 16.6 million from 21.1 million visits a month earlier.
CHALLENGES
Despite its massive potential, several challenges are facing the industry. First, the internet user penetration in Indonesia remains relatively low compared to neighbouring countries (Table 1). While a 5G commercial network has been launched in a few urban areas,[18] many islands and rural areas have poor or non-existent access to the internet. Based on the Village survey data conducted by Statistics Indonesia (BPS), around 12,000 villages in 2018 had yet to be covered by the internet, and even those already covered by the internet experience frequent connection glitches.[19]
Table 1 also indicates that there is much room for improving access to smartphones. Going forward, as smartphones and internet access become more affordable, more people could join e-commerce. Based on the network readiness index of the World Economic Forum, Indonesia ranks 105 of 139 countries under the infrastructure and digital content pillar. This pillar grades ICT infrastructure (including the mobile network coverage, international internet bandwidth, secure internet servers or electricity production) as well as the availability of digital content. To be on par with its neighbouring countries, such as Thailand (67), Malaysia (71), the Philippines (87), and China (90), constant improvements will be needed.[20]
The government has built the Palapa Ring broadband network, a billion-dollar fibre-optic development programme, for boosting internet-enabled economic opportunities across the archipelago. Moreover, the government has plans for a Rp 21.4 trillion (US$ 1.5 billion) satellite project, which should become operational by 2023; this will bring internet connection to 149,000 locations, most of which are outside of Java.[21]
Second, logistics infrastructure remains problematic in a country with around 17,000 islands and a vast sea area. “Too few roads, berths and systems, too many ships, cars and grasping hands”, as summarised by the Economist (2016), is Indonesia’s infrastructure problem in a nutshell. [22] This bottleneck makes for high logistics costs and slows product delivery. [23] With the continuous growth of e-commerce, the demand for faster and more efficient logistics increases. Startups, such as Gojek, have had to overcome such problems through their motorcycle delivery networks. Some companies, like Lazada and Zalora, have built distribution centres in major cities outside Jakarta to control delivery costs and improve service reliability. But this solution comes with high financial costs to investors and customers.[24]
Third, the quality of Indonesia’s workforce is essentially not in line with the needs of the digital industry. The August 2020 BPS (Statistics Indonesia) survey recorded that of Indonesia’s 138.2 million in the workforce, 77.4 million (around 56 per cent) had only finished junior high school.
Workers with senior secondary education account for about 32 per cent (44.2 million) of the total workforce. Those with academy/university education make up only 13 per cent (18 million). Thus, about 87% of the workforce has only primary and secondary school education. Most of them work in the agricultural and trade sectors, and have limited digital literacy.
The digital economy requires workers with specific skills such as graphic designers, programmers, data analysts, etc., alongside people with multi-dimensional skills, and who possess creativity, analytical thinking and entrepreneurial spirit. However, progress in developing these skills through the education curriculum is slow. As Ministry of Education data reveal, many schools in rural and remote areas do not even have internet access.[25] Given the lack of qualified human resources in the country, many tech companies have had to hire foreign workers to fill the gap. [26]
Another major challenge is the still-nascent online payment system. Indonesia’s non-cash payments are still relatively undeveloped compared with other ASEAN countries (Table 1). According to Bank Indonesia, the number of unbanked population remains high, at 91.3 million as of 2020.[27] As a result, 66 per cent of e-commerce transactions are conducted with cash. Electronic payment systems in the country have however been given a boost during the pandemic as people avoided using cash.[28] The challenge lies in improving broadband infrastructure and digital security related to internet transactions. [29] Finally, the regulatory uncertainty in the country stands as another hurdle in the way of e-commerce development (Table 2). As Moore (2016) has pointed out, “Indonesia’s fickle approach to foreign investment and its ill-developed institutions meant that the country was late to develop an indigenous technology industry” (p. 272). While the government has shown reform intentions, it faces difficulties changing some inward-looking policies. The regulatory regime is therefore expected to remain unpredictable.
CURRENT DEVELOPMENTS OF E-COMMERCE REGULATORY FRAMEWORK AND ECOSYSTEM
Since the e-commerce roadmap was launched in 2017, not many new regulations have been put in place to guide the sector.[30] To some extent, the regulations can barely catch up with the rapid development in the industry. One important government regulation was issued in November 2019, which states general requirements concerning e-commerce activities,[31] covering areas such as business licenses, technical permits, company registration certificates, taxpayer-identification numbers, among others.
Critics argue that the regulation very much favours consumers and can be a disadvantage for traders and market platforms. For instance, domestic and foreign traders and market platforms are required to provide at least two working days to exchange goods and services, or cancellation of purchases, as of the time consumers receive them. It stipulates that if merchants’ activities harm consumers, consumers can report to the Trade Minister. Henceforth, the reported business actor must respond to the report, on the pain of being included in the priority list for supervision by the minister, which is made accessible to the public.
PP 80/2019 also requires all business actors to have an operating licence and tax number. This will be challenging for MSMEs in general as many are in informal set-ups, i.e., without tax numbers and business permits. In addition, MSMEs must obtain a Business Identification Number (NIB). The government claims that this NIB can be easily obtained by filling out the Online Single Submission (OSS) form, free of charge. Yet, in practice, this process is not a simple one; as specific permits require additional prerequisites from various institutions and local governments. Then after getting a permit, there are tax consequences for MSMEs, both in reporting and paying. There is, therefore a need to facilitate MSMEs to cover this additional bureaucratic process and to provide them with tax advice. [32]
Another criticism concerning PP 80/2019 is the requirement for domestic and foreign market platforms to use Indonesian high-level domain names (dot id) for their internet sites. This can be problematic for existing platforms that already have a domain. Currently, the provision is stated as “preferred”; however, this regulation might become a strict requirement in the future.
Another key regulation concerning e-commerce is Minister of Trade Regulation (Permendag) No. 50/2020 concerning provisions for business licensing, advertising, guidance, and supervision of business actors in trading through electronic systems. The regulation requires domestic and foreign market platforms to submit data and information to Statistics Indonesia (BPS). In addition, the government requires foreign market platforms to appoint representatives domiciled in Indonesia and who are under Indonesian jurisdiction. Since the issuance of the Permendag No 50/2020, there have been several complaints about unfair competition due to the flood of cheap imported products through cross-border e-commerce. To protect domestic producers, three ministers (Minister of Cooperatives and Small and Medium Enterprises, Minister of Communication and Information, and Minister of Trade) have decided on new rules for trading imported products on the e-commerce platform. This revised regulation provides indicators related to predatory pricing so that e-commerce players have legal references regarding unfair trading practices, e.g., price subsidy, dumping, etc.[33] In addition, the new rule also aims to level the playing field between offline and online business actors by regulating product legality and requiring the Indonesian National Standard (SNI). While the intention is to create fair competition between foreign and local manufacturers who sell their products through online platforms, the government should avoid overprotection that might harm both domestic consumers and micro-retail enterprises.
CONCLUSION
Indonesia’s e-commerce industry has been growing remarkably during the COVID-19 pandemic. Be that as it may, there are major challenges facing it, including policy uncertainties, low and uneven internet penetration, and lack of skilled workforce. A conducive ecosystem supported by a clear regulatory framework is needed.
The government has been trying to improve regulatory certainty, and currently, there are two critical regulations concerning the legal operation of the e-commerce industry, i.e., the government regulation (PP) No. 80/2019 and Trade Ministerial Regulation (Permendag) No. 50/2020. These aim to provide regulatory certainty, consumer protection, and data security. In addition, there is a plan to revise Permendag No 50/2020 to protect local industries from unfair competition from imported goods. It is reasonable to protect local industries against unfair competition, yet it is also essential to understand the downsides of overprotection.
With a population of 270 million and an internet-savvy youth demographic, Indonesia has the necessary scale to transform startups into unicorns. It is already home to some important technology companies that have attracted major global companies seeking to strengthen their position in the region. In particular, these multinational companies have been investing significantly in local startups. The rapid advancement of digital innovation and technology will require flexibility and adaptability, which means regulations should not become bottlenecks and should be constantly updated.[34]
Finally, it is essential to provide technical support and facilitation measures for MSMEs to adopt digital technology and to improve the quality of their products and services. Many MSMEs do not feel confident about joining e-commerce and prefer to stay in traditional brick and mortar commerce.[35]
ISEAS Perspective 2021/102, 2 August 2021
ENDNOTES
[1] https://www.thejakartapost.com/news/2020/12/21/yearender-2020-the-year-tech-start-ups-bloom-spurred-by-the-pandemic.html. Accessed 25/05/2021.
[2] https://ekonomi.bisnis.com/read/20200417/12/1228750/e-commerce-dorong-perekonomian-indonesia-selama-pandemi-covid-19- . Accessed 04/06/2021.
[3] https://www.scmp.com/week-asia/economics/article/3095585/coronavirus-e-commerce-southeast-asia-rides-high-pandemic-boom. Accessed 8/02/2021.
[4] https://www.thejakartapost.com/news/2020/09/08/indonesias-e-commerce-sales-to-surpass-indias.html. Accessed 05/06/2021.
[5] Google, Temasek and Bain, e-Conomy SEA 2020. https://www.bain.com/insights/e-conomy-sea-2020 .
[6] https://jakartaglobe.id/context/matahari-department-store-launches-its-online-store-mataharistore-com. Accessed 25/05/2021.
[7] Moore, Bede. “14. A recent history of the Indonesian e-commerce industry: an insider’s account”. Digital Indonesia: Connectivity and Divergence, edited by Edwin Jurriëns, Ross Tapsell, Singapore: ISEAS Publishing, 2017, pp. 256-274.
[8] https://www.thejakartapost.com/news/2021/05/17/gojek-tokopedia-merger-to-boost-ris-place-in-regional-digital-economy.html, Accessed 08/06/2021.
[9] The digital economy consists of four main sectors, i.e., e-commerce, transport & food, online travel, and online media.
[10] Unicorn is a startup that reaches a US $1 billion valuation.
[11] Pangestu, M., & Dewi, G. (2017). Indonesia and the digital economy: Creative destruction, opportunities and challenges. In E. Jurriens & R. Tapsell (Eds.), Digital Indonesia: Connectivity and Divergence (pp. 227-255). ISEAS–Yusof Ishak Institute.
[12] https://www.thejakartapost.com/news/2020/09/02/shopee-books-130-percent-transaction-growth-in-q2-as-consumers-go-online.html. Accessed 23/05/2021.
[13] https://www.cnbcindonesia.com/tech/20200824073330-37-181385/tokopedia-tergeser-ini-dia-jawara-e-commerce-indonesia. Accessed 23/05/2021.
[14] https://www.ft.com/content/8454485d-7054-41ae-9f7c-0e81d6e1b21b. Accessed 23/06/2021.
[15] https://iprice.co.id/insights/mapofecommerce/en. Accessed 23/05/2021.
[16] https://asia.nikkei.com/Business/Business-deals/Google-invests-in-Indonesian-unicorn-Tokopedia-joining-Temasek. Accessed 23/05/2021.
[17] https://www.thejakartapost.com/news/2021/05/17/gojek-tokopedia-merger-to-boost-ris-place-in-regional-digital-economy.html. Accessed 25/05/2021.
[18] https://www.thejakartapost.com/news/2021/05/31/telkomsel-launches-first-commercial-5g-in-indonesia.html. Accessed 23/05/2021.
[19] https://www.cnbcindonesia.com/tech/20200820073804-37-180979/cerita-pilu-sri-mulyani-12000-desa-nihil-akses-internet. Accessed 08/06/2021.
[20] https://bit.ly/3rOOydh. Accessed 23/05/2021.
[21] https://www.thejakartapost.com/news/2019/10/15/jokowi-calls-productive-use-internet-palapa-ring-all-set-connect-indonesia.html. Accessed 23/05/2021.
[22] https://www.economist.com/special-report/2016/02/25/the-13466-island-problem. Accessed 23/05/2021.
[23] https://www.thejakartapost.com/academia/2021/01/03/e-commerce-boosts-the-logistics-sector-in-indonesia.html. Accessed 25/05/2021.
[24] Moore, Op cit. p.270.
[25] https://www.cnnindonesia.com/nasional/20201022123707-20-561482/kemendikbud-12-ribu-sekolah-tak-punya-akses-internet. Accessed 24/05/2021.
[26] https://iprice.co.id/trend/insights/e-commerce-indonesia-dan-tren-karir-angkatan-kerja. Accessed 25/05/2021.
[27] https://economy.okezone.com/read/2020/09/14/320/2277595/91-3-juta-penduduk-indonesia-belum-tersentuh-perbankan. Accessed 23/05/2021.
[28] https://money.kompas.com/read/2020/10/21/131700926/bi–sistem-pembayaran-digital-berperan-penting-dalam-pemulihan-ekonomi. Accessed 25/05/2021.
[29] https://www.cnbcindonesia.com/tech/20200824171851-37-181615/ada-tantangan-keamanan-digital-banking-tetap-melesat. Accessed 25/05/2021.
[30] https://kominfo.go.id/content/detail/10309/inilah-road-map-e-commerce-indonesia-2017-2019/0/berita. Accessed 06/06/2021.
[31] The establishment of this Government Regulation has been mandated by the Law Number 7 of 2014 concerning Trade (UU 7/2014). https://siplawfirm.id/analisa-kebijakan-terbaru-e-commerce-berdasarkan-pp-80-tahun-2019 . Accessed 04/06/2021.
[32] http://www.indeksberita.com/dampak-pp-nomor-80-tahun-2019-bagi-umkm Accessed 07/06/2021.
[33] https://bisnis.tempo.co/read/1463465/revisi-permendag-50-tahun-2020-tiga-menteri-bahas-produk-impor-di-e-commerce. Accessed 04/06/2021.
[34] Yose Rizal Damuri, Adinova Fauri, and Dandy Rafitrandi (2020), “E-Commerce Development and Regulation in Indonesia”, CSIS Policy Brief. https://csis.or.id/publications/e-commerce-development-and-regulation-in-indonesia.
[35] https://www.thejakartapost.com/news/2021/06/18/high-e-commerce-commission-fees-squeeze-small-fb-firms-margins.html. Accessed 30/06/2021.
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“Fifty Years of Malaysia’s New Economic Policy: Three Chapters with No Conclusion” by Lee Hwok Aun
2021/101 “A New Climate Policy in the United States: Potential Implications for Southeast Asia” by Paul G. Harris
US President Joe Biden speaks during climate change virtual summit from the East Room of the White House campus on 22 April 2021, in Washington, DC. Putting the United States back at the forefront on climate, Biden told a virtual Earth Day summit that the world’s largest economy will cut emissions blamed for climate change by 50 to 52 percent by 2030 compared with 2005 levels. Photo: Brendan Smialowski, AFP.
EXECUTIVE SUMMARY
- The advent of Joe Biden as US president marked a major shift in US policy on climate change, but major obstacles stand in the way of the realization of the Biden administration’s objectives.
- Even if the Biden administration’s climate policies are implemented, climate change and its many impacts will continue to grow worse, with significant adverse consequences for Southeast Asia.
- The potential implications of Biden’s climate policies for Southeast Asian nations include pressure to reduce reliance on fossil fuels, restrictions on trade, and the tying of development assistance to climate objectives.
* Guest writer, Paul G. Harris (www.paulgharris.net), is the Chair Professor of Global and Environmental Studies at the Education University of Hong Kong. His most recent book is Pathologies of Climate Governance: International Relations, National Politics and Human Nature (Cambridge University Press, 2021).
INTRODUCTION
We may have reached a turning point in history. After decades of warnings from scientists about the dangers of climate change, humanity seems to have finally woken up and started to shift course toward a post-carbon world. I say this despite spending some decades considering the political world’s responses to climate change and coming away feeling quite pessimistic about the likelihood of averting disaster.
The reason for having a little bit of optimism can be found in the emerging climate policies of the United States under President Joe Biden. Those policies may be an important reflection of the change in course globally away from climate change denial and toward climate action. They are certainly a dramatic shift in US policy compared to when President Donald Trump was in the White House.
But before getting too excited about Biden’s new policies, we need to have a realistic perspective on what is happening. The change in course toward climate action has come much too late; the rate of turn, while perceptible and welcome, is far too slow to avoid what governments have for decades sought to avoid: dangerous interference in Earth’s climate system.
THE REALITIES OF CLIMATE CHANGE
To put what is happening into some perspective, it is worth reminding ourselves that climate change is here to stay; its impacts will only get worse. Why do I say that? First, despite the global economic slowdown arising from the Covid-19 pandemic, greenhouse gas emissions are still increasing.[1] The global pollution that is causing climate change has not been stemmed, let alone reduced. It goes without saying that if the source of the problem is growing, the problem will, too.
Second, carbon dioxide concentrations in the atmosphere are at their highest level in 3 million years.[2] In May 2021 they surpassed 420 ppm, compared to 280 at the start of the Industrial Revolution.[3] To put those numbers in perspective, atmospheric concentrations of carbon dioxide were only 315 ppm in 1958 (when measurements began). In other words, they rose by 35 ppm over more than 150 years, which was bad enough, but in the last 50 years they have skyrocketed by more than 100 ppm. This trend continues.
Scientists’ worst-case predictions are turning out to be correct. Indeed, many of the impacts that the more pessimistic climate scientists predicted not long ago would happen toward the end of this century, or even later, are happening right now.
We can fairly predict that 2021 will be one of the hottest years on record, if not the hottest, and that there will be disastrous droughts, wildfires, tropical storms, melting ice and all the rest.[4] Next year is likely to be worse, and so on.
Third, as a consequence of these impacts, human and environmental suffering will inevitably escalate. Countless people and creatures will suffer and perish in coming decades. The human casualties this century will be in the millions, many of them in Southeast Asia.[5]
Fourth, governments have been negotiating for more than three decades precisely to avoid these outcomes. The best they have been able to manage is the 2015 Paris Agreement, which aims to limit global warming to 1.5°-2°C, an objective that is entirely political because even achievement of the ambitious target of 1.5°C will not prevent “dangerous” climate change.[6]
Fifth, global warming has already reached 1.2°C.[7] Incredibly, according to very recent predictions, there is a two-in-five chance that it will exceed 1.5°C sometime in the next five years.[8] The chance of realizing the Paris targets is almost nil, notwithstanding the many technological and other solutions that are already available.
Full implementation of all national pledges (i.e., Nationally Determined Contributions or NDCs) toward the Paris objectives portend at least 3°C of global warming, and possibly very much more.[9] It would be pollyannaish to assume that the Paris pledges will be fully implemented because too many nations have solid track records of not doing what they have promised to do in this context.
President Biden and officials in his administration know all of this. They know that US inaction over the past several decades has made things worse. The first implication for Southeast Asia is that anything that the United States does anytime soon will not change the trajectory of impacts across the region.
THE SHIFT IN US CLIMATE POLICY UNDER JOE BIDEN
Under Donald Trump, there was a US war on climate action, with the appointment of climate deniers throughout the federal government, reversal of existing pro-climate policies, proactive efforts to increase fossil-fuel use and extraction, and persistent diplomacy to slow international action.[10]
The tone has changed dramatically since the advent of Joe Biden, who made climate change a priority from his first day in office. He has issued multiple directives to bring an all-of-government approach to climate change, with cabinet secretaries presumably instructed to bring their departments into line. He created a National Climate Task Force and appointed experienced former officials to new high-level roles in his administration, including an international climate envoy, with a seat on the National Security Council, and a domestic climate policy advisor, who is on the White House staff.[11]
Vitally, the Biden administration has agreed to cut US carbon emissions in half by 2030. That near-term goal is what matters – more than the pledge to have a carbon-neutral economy by 2050 or even the pledge to generate all of the nation’s electricity from non-carbon sources by 2035.
Alas, the administration is using 2005 as the base year for its 2030 objective. If the Biden pledge is realized, this means that by 2030, US emissions will be about where they were around 1960.[12] Depending on your perspective, that may sound wonderful – or it may sound like a recipe for climate disaster. Regardless, US emissions will have to continue falling rapidly after 2030.
Domestically, the Biden administration has made climate change a central part of its legislative proposals, notably in the context of infrastructure development. In the process, they are making the case that a rapid energy transition will increase employment while reducing climate injustices. The administration has taken action to stop new drilling leases on federal land and tried to halt some of those approved by the Trump administration. It has given its approval to the development of offshore wind schemes.
Internationally, the Biden administration has promised to increase financial assistance to help other nations meet the Paris objectives, and the United States is now actively involved in searching for diplomatic solutions to climate change. It is likely to play a positive role during November’s COP26 in Glasgow.
What is the likely impact of the Biden administration’s policies? The answer depends on many factors.
The roles of subnational actors in the United States – i.e., American states, local communities, industries, banks and insurance companies, universities and individuals, and so forth – matter greatly. In many respects, the Biden administration is following those actors more than leading them; because so many communities and businesses have turned the corner in favour of climate action, so too has the Biden administration. Insofar as those subnational actors continue to lead, Biden’s policies on climate change are likely to have staying power well beyond his time in office.
Yet, everything that the Biden administration does will occur in the context of a hostile domestic political environment. We have been here before, more than once. Previous Democratic administrations (those of Bill Clinton and Barack Obama) attempted climate-friendly policies only to see most of them reversed under Republican presidents. Donald Trump was an extreme manifestation of a pre-existing condition.
It is debatable, even doubtful, whether Biden has enough support in Congress to get the legislation and funding that his climate policies require. If the Republicans regain either or both houses of Congress, which is certainly possible following next year’s elections, they will block Biden’s schemes at every opportunity. This will not stop the Biden administration from pressing ahead in many ways, drawing on the authority of the presidency, but it will mean that climate policies will be watered down greatly – as they have been for several decades.
And, as the Trump administration demonstrated, US climate policy can change quickly and radically. At the very least, it seems likely that US action on climate change will be mired in, or at least diminished by, highly partisan domestic politics and the continued influence of sunset industries, not least those dependent on the nation’s (and indeed most of the world’s) continued addiction to fossil fuels.
IMPLICATIONS FOR SOUTHEAST ASIAN NATIONS
The turnabout in US climate policy has implications for the nations of Southeast Asia. It is too soon to know for certain what those will be, but we can make some educated guesses.
First, as noted earlier, whatever happens during the Biden administration, US actions will not be enough to solve the climate crisis. Climate change will become much worse. The nations of Southeast Asia should plan for the worst impacts predicted by scientists, such as more severe weather, which will adversely affect agriculture, infrastructure and human health; higher temperatures, which will threaten water supplies; widespread coral bleaching, which will decimate local fisheries; and sea-level rise, which will affect the wellbeing and livelihoods of millions of people living along and near coastlines of the region.[13]
Second, Biden’s whole-of-government approach to climate change inevitably means that US policies and programmes that affect Southeast Asian nations are likely to be adjusted to comply with the administration’s climate objectives. Affected departments will include Commerce, Treasury, State, Defence, the US Agency for International Development, the US Trade Representative and others. Their counterparts in Southeast will need to be sensitive to policy changes as and when they emerge.
Third, the United States will expect Southeast Asian nations to do more to mitigate their greenhouse gas emissions. In particular, we can expect pressure from the United States for them to reduce their reliance on fossil fuels. This will be especially important for those nations that rely on coal for energy and those that export it (e.g., Indonesia).
The importance of land-use for climate change is also likely to become more important in US foreign policy, meaning that Southeast Asian nations with poor records on forest protection, notably Indonesia and Malaysia, will be in the spotlight.
Fourth, in the context of climate diplomacy, it will become harder for Southeast Asian nations to point to US inaction on climate change as an excuse to drag their feet, something that was especially easy to do during the Trump administration. In the near term, this means increased expectations in the United States that Southeast Asian nations should bolster their NDCs for COP26 and increase the ambition of their NDCs in the future.
Fifth, on the positive side, alongside US pressure to do more to limit emissions will come US support for international assistance to make doing so easier. We should expect more US bilateral assistance (e.g., development assistance, with climate-related strings attached) and more US funding for multilateral agencies (e.g., the Green Climate Fund) – assuming Congress’s assent.
Sixth, if Biden’s policies take hold, there is a very real prospect that climate action and trade will be linked concretely. Those nations that the United States deems to be doing too little may face climate-related tariffs and eventually trade restrictions.
The US government can be expected to implement policies that will encourage imports from the region that can assist its domestic greenhouse gas reductions and, in contrast, to discourage imports from the region when they might adversely affect those domestic efforts. It may do this by, for example, not importing polluting products and (treading the same path as the European Union) adding tariffs to goods and materials that are produced in ways that harm the climate or which compete with US businesses subject to new climate-related regulations and standards. In July 2021, Democrats in the US Congress introduced legislation to do just that.[14]
Seventh, as official pressure grows on US businesses and industries to be more transparent about their environmental credentials, and specifically their carbon footprints, pressure from the US government and US investment community on businesses and industries in Southeast Asia to do the same will also grow. Consequently, pressure on regional governments from major exporting industries to increase and standardize more ambitious climate-related policies may increase (or at least lobbying by such industries to maintain lax environmental standards may diminish).
Finally, there may be implications for the millions of affluent people in Southeast Asia. If the United States acts as Biden wants it to act, it will become increasingly difficult for those people to hide behind the relative poverty of their fellow citizens to avoid the kind of regulations, taxes and changes in lifestyle that will be expected of Americans. If Biden pushes most Americans to change their ways, they will expect him to push affluent people everywhere, including in Southeast Asia, to do likewise.
Alternatively, a Republican – possibly even Donald Trump – could replace Joe Biden in 2025. If that happens, US pressure on Southeast Asian nations to act on climate change could all but evaporate – and global efforts to address climate change effectively will face yet more setbacks originating in the United States.
ISEAS Perspective 2021/101, 30 July 2021
ENDNOTES
[1] Robert Monroe, ‘Coronavirus response barely slows rising carbon dioxide’, Scripps Institution of Oceanography (2021), https://scripps.ucsd.edu/news/coronavirus-response-barely-slows-rising-carbon-dioxide.
[2] World Meteorological Association, State of the Global Climate Report 2020 (Geneva: WMO, 2021), p. 4, https://library.wmo.int/index.php?lvl=notice_display.
[3] National Oceanic and Atmospheric Administration, “Carbon dioxide peaks near 420 parts per million at Mauna Loa observatory,” 7 June 2021, https://research.noaa.gov/article/ArtMID/587/ArticleID/2764/Coronavirus-response-barely-slows-rising-carbon-dioxide.
[4] National Oceanic and Atmospheric Administration, “Global Annual Temperature Rankings Outlook,” Global Climate Report – May 2021, https://www.ncdc.noaa.gov/sotc/global/202105/supplemental/page-2 .
[5] Andy Haines and Kristie Ebi, “The Imperative for Climate Action to Protect Health,” The New England Journal of Medicine, 380 (2019): 263-273, https://www.nejm.org/doi/full/10.1056/NEJMra1807873.
[6] Intergovernmental Panel on Climate Change, Global Warming of 1.5°C (Geneva: IPCC, 2018), https://www.ipcc.ch/sr15/download.
[7] World Meteorological Association, p. 6.
[8] Grahame Madge, “Temporary exceedance of 1.5°C increasingly likely” (Met Office, 27 May 2021), https://www.metoffice.gov.uk/about-us/press-office/news/weather-and-climate/2021/chance-of-temporarily-reaching-1.5-c-in-next-five-years-is-increasing.
[9] United Nations Environment Programme, Emissions Gap Report 2020 (Nairobi: UNEP, 2020), https://www.unep.org/interactive/emissions-gap-report/2020 .
[10] Paul G. Harris, Pathologies of Climate Governance (Cambridge: Cambridge University Press, 2021), pp. 65-73.
[11] White House, “FACT SHEET: President Biden Takes Executive Actions to Tackle the Climate Crisis at Home and Abroad, Create Jobs, and Restore Scientific Integrity Across Federal Government,” 27 January 2021, https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/27/fact-sheet-president-biden-takes-executive-actions-to-tackle-the-climate-crisis-at-home-and-abroad-create-jobs-and-restore-scientific-integrity-across-federal-government.
[12] Hannah Ritchie and Max Roser, “United States: CO2 Country Profile,” Our World in Data (2020), https://ourworldindata.org/co2/country/united-states.
[13] Asian Development Bank, A Region at Risk: The Human Dimensions of Climate Change in Asia and the Pacific (Manila: ADB, 2017), http://dx.doi.org/10.22617/TCS178839-2 .
[14] Naomi Jagoda and Zack Budryk, “Democrats seek to tackle climate change with import tax,” The Hill (18 July 2021), https://thehill.com/policy/equilibrium-sustainability/563472-democrats-seek-to-tackle-climate-change-with-import-tax.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2021/100 “The Pandemic’s Benefits for Indonesia’s Fintech Sector” by Manggi Taruna Habir
EXECUTIVE SUMMARY
- The Covid-19 pandemic has benefited the fintech sector in Indonesia, with more people going online to socialize, work, study and do their shopping. E-payment fintechs have therefore seen their transaction volume rise dramatically, especially among those collaborating with major e-commerce outlets.
- While bank loan growth has been flat, fintech loan growth has been positive, picking up the slack through SME and micro loans during 2H20. But lending in a recession has risks, as seen in the worsening of problem-loan ratios through 2Q20 and 3Q20, before improving by year-end and into 2021.
- Indonesia’s Financial Services Authority (OJK) is drafting tighter regulations, with plans to raise the fintech capital requirements to IDR15 billion from the current IDR2.5 billion, and to set quotas to encourage inclusive and productive lending.
- Fintechs need access to reliable data for their credit assessment algorithms to quickly grow their loans, as well as securing funding to sustain their business.
- The pandemic has depressed certain sectors, allowing more funds to be diverted into fintechs. This has led to some early steps towards fintech consolidation and collaboration, most notably the recent merger of two unicorns, GoJek and Tokopedia.
- To access data and secure funding, fintechs are also deepening their collaboration with other financial institutions, such as banks and insurance companies. It is still early days yet for serious merger and acquisition activity, but regulatory work is underway in anticipation of this trend.
* Manggi Habir is Visiting Fellow with ISEAS – Yusof Ishak Institute. Previously, he served as Independent Commissioner of PT Bank Danamon Indonesia Tbk (2005 -2020) and as Supervisory Board Chairman of Yayasan Danamon Peduli (Danamon’s CSR Foundation), as well as President Commissioner of PT Asuransi Adira Dinamika, (2009-2019), a general insurance subsidiary of Bank Danamon.
INTRODUCTION
It has been a year since the Covid-19 pandemic began ravaging the Indonesian economy. The economy contracted, company activity ceased, and some firms have been forced to close. In the financial industry, banks severely curtailed lending as they tightened their credit criteria and focused on expense control and restructuring their worsening loan portfolio.
It was in this challenging banking environment, that the lending fintechs picked up the slack and grew their SME loan portfolio in the second half of 2020. But growing loans in a recession remains a risky initiative, reflected by a rise in their problem-loan ratios during that year. Another segment that was among the larger pandemic beneficiaries was the e-payment fintechs. Riding on e-commerce growth, there was a sharp transaction volume surge to IDR 266.3 trillion in 2020 and a sizable number of new e-payment users, as people began to buy their daily needs online (Figure 1).
Source: databoks.katadata.co.id and Bank Indonesia January 2021[1]
Fintechs covers a wide range of categories, but this paper will limit its pandemic assessment on the lending and the e-payment fintechs; reviewing their opportunities and challenges; and what trends to expect going forward.
A GROWING AND CONSOLIDATING FINTECH LANDSCAPE
One major impact of Covid-19 has been the early signs of consolidation in Indonesia’s fintech landscape. The pandemic has increased investors’ interest in pandemic-resistant sectors, which for Indonesia have been e-commerce, logistics and fintech.
Indeed, the prospects for fintech, in a country of 270 million people with a significant internet and smart phone penetration (67% for internet and 60% for smart phones); with about half of internet users already using mobile banking and more than 80% using e-commerce; and about a third of the population still unbanked, are alluring.[2]
Indonesia’s unicorns and several leading players in e-commerce and fintech have been obvious beneficiaries. With financial backing and facing increased competition, they have sought acquisitions. This explains recent strategic partnerships and mergers between e-payment fintechs and e-commerce companies. The lending fintechs, like their bank counterparts, were focusing their loans to large diversified business groups, operating in still-growing sectors such as consumer goods, food and beverage and pharmaceuticals. However, trying to differ from banks, fintechs have focused more on smaller SMEs distributing for large companies and which are on the supplier end of the supply chain.
As of early this year, Indonesia had five unicorns (those with valuations above USD1 billion). But just recently, this number shrank to four when GoJek, the ride-hailing, e-payment, courier and food-delivery super app announced its merger with fellow unicorn, Tokopedia, the online-store. The merged entity is now rebranded as GoTo, with an estimated USD18 billion in valuation.[3] This led to speculation that Tokopedia might sell its sizable stake in OVO, another unicorn focusing on e-payments, since GoJek owns GoPay, also a leading e-wallet app. It remains to be seen if OVO ends up with another unicorn, which could bring the number of unicorns down further to three. The third unicorn is another online store called Bukalapak, which closely collaborates with Dana, another e-wallet player. Unlike its fellow unicorns, Traveloka has been more subdued during the pandemic, because of the depressed travel industry it focuses is on.
THE POSITIVE PROSPECTS OF E-PAYMENT FINTECHS
The pandemic has accelerated the ongoing shift from bank transfers and card payments into e-wallet transactions. In 2020, total e-wallet transactions reached Rp201 trillion (USD14 billion), up 38.6% from a year before and is expected to grow to USD18.5 billion in 2021[4]. A 2019 study noted that the country’s e-wallet payments at 20% that year, still lagged traditional credit cards and bank transfers which reached 34% and 26% usage.[5] But e-wallet due to its simplicity and growing usage is expected to match and overtake the two earlier payment models, especially for daily and low-value transactions. This is supported by e-wallet payment usage, which was used for retail purchases (28%), transport (27%), food orders (20%), e-commerce (15%) and bill payments (7%).[6] Concurrently, cash payments have declined to 14% and are expected to decline further. Interestingly, the portion of payments using credit cards and bank transfers has remained roughly stable.
It is not surprising that e-payment fintechs have benefited the most from the pandemic, especially those with ownership of or collaborative linkages with booming e-commerce and online store players. Five e-wallet fintechs dominate this segment, which has 48 licensed players (Figure 2). These are GoPay (part of GoTo), OVO (owned in part by Tokopedia and Grab), Dana (part of Emtek, a broadcast and hospital chain group, which has just recently sold its controlling stake to a third-party), ShopeePay, part of the Shopee online store and LinkAja (owned by state banks, Mandiri, BRI and BNI).[7]
Source: databoks.katadata.co.id and DailySocial.id 22 December 2020[8]
Banks are aware of this trend and have aggressively responded with their own version of e-wallet services, which has helped banks defend their share of the market. Three other bank-owned popular e-wallet platforms are Jenius (BTPN), GoMobile (CIMB Niaga) and Sakuku (BCA).[9]
However, the largest beneficiaries of this trend are the consumer, which now has a wider choice of goods, food and services to buy, without having to leave the safety of their homes. The wide choice extends beyond purchases, as consumers can now also choose the way they pay for their purchases whether it be the familiar funds transfer and credit/debit cards or the newer e-wallets.
CHALLENGING GROWTH PROSPECTS FOR LENDING FINTECHS
The pandemic has resulted in two contrasting prospects for lending fintechs. On one hand, the pandemic has allowed lending fintechs to pick up some of the slack from banks, at least for loans to the SME sector. This was obvious during the second half of 2020 and into 1Q 2021. Bank loan growth contracted in 2Q 2020 and remained flat throughout the year since banks have been focusing on managing their worsening loan quality through loan restructurings. In contrast, the lending fintechs, though experiencing a similar contraction in 2Q 2020, rapidly grew their SME and micro loan volume for the remaining period in 2020.
Still, growing loans during a recessionary period do carry risks, which is reflected in the deterioration of lending fintechs’ 90-day past-due loan ratio in 2Q and 3Q 2020, which reached a 8.3% high, above OJK’s 5% tolerance limit (Table 1). However, loan growth and a drop in problem loan levels, likely due to loan restructuring efforts, helped improve the non-performing loan (NPL) ratio towards year-end and into 1Q 2021. However, even with fintech loans growing and bank loans remaining flat, fintech loans remain a small percentage of bank loans, at 0.3%.
Table 1: Outstanding Bank and Fintech Loan (and NPL) Trend for 31Mar2020-31Mar2021
| (IDR trillion) | 31Mar 2020 | 30Jun 2020 | 31Sep 2020 | 31Dec 2020 | 31Mar 2021 |
| Bank Loan | IDR 5,712.0 Tn | IDR 5,549.2 Tn | IDR 5,530.6 Tn | IDR 5481.6 Tn | IDR 5496.4 Tn |
| NPL | 2.8% | 3.1% | 3.1% | 3.1% | 3.2% |
| Fintech Loan | IDR 14.8 Tn | IDR 11.8 Tn | IDR 12.7 Tn | IDR 15.3 Tn | IDR 19.0 Tn |
| NPL | 4.2% | 6.1% | 8.3% | 4.7% | 1.3% |
Source: OJK Indonesia Banking Statistics March 2021 and Fintech Statistics March 2021
As of 24 May 2021, there are 56 licensed and 75 registered lending fintechs.[10] All fintechs go through a two-stage OJK approval process, with registering in the first stage and, after a year of operations, applying for a fintech license in the second stave. Unfortunately, outside these two categories of fintechs, the government’s Investment Alert Task Force (SWI) has identified an additional 126 illegal fintechs operating in the country.[11] It is this category that has often appeared in the media with reports of them harassing and pressurising delinquent borrowers, including their close contacts (obtained from the borrower’s handphone), to repay their loans.
The fintech lenders cover distinct markets, which banks have yet to tap effectively with their high loan-transaction costs. Some, like Amartha, Mekar and Crowde, focus on channelling smaller micro loans, with an emphasis to rural women-led micro-businesses. Then there are sector-focused fintech lenders such as Granada that focus on the property market for those needing mortgage down payment, rental and residential renovation loans.
However, most fintech lenders, like the major Investree, Modalku, Crowdo and Akseleran fintechs, focus on loans to SMEs and small entrepreneurs in major cities. Fintech loan rates are generally higher than bank loans due to fintech loans’ unsecured nature. With Covid-19, fintech lenders are redirecting their loans towards more pandemic-proof sectors and SMEs within that sector that are preferably part of a larger company’s supplier and distribution network.
CURRENT FINTECH SPEED BUMPS
One pandemic-induced challenge for fintechs is that of having to operate under a changing regulatory environment. As noted earlier, the licensed and registered fintech lenders have to compete with a sizable number of illegal fintechs that are not under OJK’s scrutiny and oversight. Since 2018, the government’s Investment Alert Task Force, through the Communications and Informatics Ministry, has blocked more than 1,350 illegal fintech sites[12] and the government has gone on a social media campaign to warn the public about their activity.
But current fintech regulations[13] have limited enforcement effectiveness and plans are underway for parliament to prepare fintech legislation and also for consumer protection and personal data security. OJK is also drafting new and more stringent fintech regulations. Among the key changes in this draft is a major increase in required capital from the current IDR2.5 billion to IDR15 billion. Also, at any one time, capital levels should not fall below 0.5% of outstanding loans, or a minimum of IDR10 billion. And to ensure that development and financial inclusion goals are met, productive loans need to reach at least 40% of a fintech’s loan portfolio, and loans provided to borrowers located outside of Java needs to reach at least 25%.[14]
Another challenge has to do with data; its availability, consistency and the willingness of institutions to share them. Fintechs need this data to determine a borrower’s credit worthiness. Such data are not easy to obtain, especially in emerging markets. Fintech’s target market of SMEs and small entrepreneurs does not produce regular financial statements, which is why banks have more challenges assessing SME loans than corporate loans. So fintechs often rely on alternative data, such as a borrower’s bank statements or utility and mobile phone bills to assess financial capacity as well as reliable and prompt bill payments.
But the availability and authenticity of the data, even when available, are difficult to verify. There is also the added difficulty of using data to assess a borrower’s willingness as opposed his capacity to repay. Furthermore, there are privacy and personal data security issues involved in obtaining and using these data.
A final challenge is one of getting sufficient funding or lenders to pass on as loans to borrowers. A broader and diversified lender base, with a range of risk profiles is needed to get a reliable and stable funding base. Some fintechs are trying to attain this by insuring a portion of the loan’s principal amount. For example, Akseleran, insures 90% of its lenders loans through Lippo General Insurance.[15]
A MORE COLLABORATIVE FINANCIAL LANDSCAPE AHEAD
Over time, technology adoption in the financial industry has helped bring down transaction and distribution costs sufficiently to make financial services more affordable and accessible to a broader market. A few decades ago, banks used mainframe core banking systems to introduce consumer banking services, and launching ATMs together with credit and debit cards at the customer end. Now this has advanced further to online banking through the use of laptops and mobile phone apps. This trend is expected to continue.
The entry of fintechs both in e-payments and lending has shaken up banks as well as finance and insurance companies. It has spurred them to speed up their digitisation plans and adopt new technologies at a faster pace. Fintechs, in addition to having a first-mover advantage are not burdened with legacy systems, or with strict and costly regulatory requirements. Besides, fintech management being decades younger than those running banks, fintechs are also much more inclined to try out new ideas and connect with younger tech-savvy customers.
CONCLUSION: WHERE IS FINTECH HEADING?
Financial institutions, including fintech lenders, have mostly focused on the asset side of the business; on growing loans, and now on upgrading to more automated and algorithmic ways of assessing credit. But there is growing awareness of the importance of funding, or the liability side of the business.
For fintechs, with their revenue derived from a flat platform fee (ranging between 3% and 5%, depending on the loan risk level), growing their loan portfolio quickly is key. This, in turn, depends on their ability not only to automate credit assessment, but also to get sufficient funding and data access. The risks fintech’s face have some similarities with those banks have to deal with, both on the loan and funding end. Even though the funder in a fintech bears the loan risk, if fintech loans start to deteriorate and experience repayment problems, then funding sources could easily dry up. The difference is more due to regulation, with the banks being heavily regulated and, among others things, needing to maintain high capital levels and set aside costly provisions should their loans deteriorate.
Fintechs, on the other hand, are more lightly regulated and thus are more flexible in their operations and willingness to innovate. This is one reason why there is increasing discussion and collaboration between banks and fintechs, ranging from strategic partnerships to acquiring each other—either fintechs buying into small banks, with a minimal branch network or system legacy issues, or, at the opposite end, large banks buying into fintechs.
For banks, collaborating or owning a stake in fintechs allows them to better service the SME segment, with fintechs taking care of loans and the banks focusing on SME cash management and payment needs. By increasing their transactional banking business, banks aim to increase the share of lower-cost demand deposits in their deposit mix (along with costlier savings and time deposits). This brings down their cost of funds, widening loan margins and ultimately improving profitability.
This melding or collaboration of fintechs, both e-payment and lending fintechs, with banks was illustrated early this year when GoPay, which is part of the GoTo e-commerce group, took a stake in Bank Jago.[16] Anticipating further mergers and acquisitions, OJK is preparing regulations on that as well.[17] Fintechs are disrupting the financial industry by encouraging collaboration among players with different specialisations. But with Indonesia’s large and dispersed market, there appears enough room for everyone to have a role, at least for the moment.
ISEAS Perspective 2021/100, 28 July 2021
ENDNOTES
[2] https://fintechnews.sg/45513/indonesia/indonesia-fintech-report-and-map-2020/
[3] https://fintechnews.sg/51445/fintech/the-alibaba-of-sea-how-goto-is-shaking-up-fintech-in-the-region/ and https://asia.nikkei.com/Business/Business-Spotlight/GoTo-sets-up-three-way-battle-for-Southeast-Asian-tech-dominance
[4] https://www.theasianbanker.com/updates-and-articles/big-tech-platforms-heat-up-competition-in-indonesias-digital-payments-landscape
[5] https://www.jpmorgan.com/merchant-services/insights/reports/indonesia
[8] https://databoks.katadata.co.id/datapublish/2020/12/28/gopay-jadi-dompet-digital-paling-populer-di-indonesia
[9] https://www.trade.gov/market-intelligence/indonesia-e-wallet-market
[10] https://keuangan.kontan.co.id/news/ini-daftar-lengkap-131-pinjol-yang-terdaftar-dan-berizin-dari-ojk
[11] https://scholar.ui.ac.id/en/publications/detection-of-fintech-p2p-lending-issues-in-indonesia
[12] https://scholar.ui.ac.id/en/publications/detection-of-fintech-p2p-lending-issues-in-indonesia
[13] Fintech regulation starts with POJK 77, which covers fintech’s establishment, registration, licensing, lending limits, governance and consumer protection. POJK 13 covers innovation and regulatory sandbox requirements. POJK 37 covers equity crowd funding. POJK 18 covers customer complaints service
[14] https://www.lexology.com/library/detail.aspx?g=c6ddcc1f-bf38-4246-b5e9-d216b14bc73c
[15] (https://www.akseleran.co.id/blog/asuransi-kredit/)
[16] https://www.techinasia.com/gojek-pay-159m-acquire-22-stake-bank-jago
[17] https://keuangan.kontan.co.id/news/ojk-finalisasi-aturan-merger-dan-akuisisi-fintech-lending
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2021/99 “BRI Projects in Cambodia and Laos Roll On Despite Covid-19” by Vannarith Chheang
EXECUTIVE SUMMARY
- The Covid-19 pandemic has affected the implementation of BRI projects. However, China has swiftly taken measures to keep BRI projects going by ensuring financial flow and supply of materials. This has moderated the impact and made the situation manageable.
- The key BRI projects in Cambodia (the Phnom Penh-Sihanoukville expressway, new international airports in Siem Reap and Phnom Penh) and Laos (the high-speed rail project) are not much affected by the pandemic.
- Through BRI, China’s economic presence and influence in Southeast Asia will continue to rise.
- Cambodia and Laos will continue to rely more on China for their economic development, increasing their economic reliance on their northern neighbour.
* Vannarith Chheang is Visiting Fellow at ISEAS – Yusof Ishak Institute, and President of the Asian Vision Institute (AVI), an independent think tank based in Phnom Penh, Cambodia.
INTRODUCTION
Begun in 2013, the Belt and Road Initiative (BRI) has become one of the key international cooperation platforms, mainly focusing on infrastructure development and connectivity. As of June 2021, 140 partner countries had signed on to it, in growing acknowledgement of the BRI being a catalyst for global growth. A World Bank report estimated that if fully implemented, BRI transport infrastructure can reduce travel times for economies along transport corridors by up to 12%, thus reducing trade costs. It is projected that trade would increase up to 9.7% for corridor economies and up to 6.2% for the world at large. International trade is expected to increase global real income up to 2.9%, lifting 7.6 million people from extreme poverty and 32 million people from moderate poverty.[1]
The smaller economies in Southeast Asia, such as Cambodia and Laos, are much attracted to the BRI chiefly because it helps develop their economies, bridge the developmental gaps within and across national boundaries.[2] These two countries are China’s closest strategic partners in Southeast Asia.[3] This paper seeks to shed light on the impact of the Covid-19 pandemic on BRI projects in general and Cambodia and Lao PDR in particular. It argues that despite the ravages and disruptions caused by the pandemic, the BRI projects in Cambodia and Lao PDR have not been much affected, and China’s soft power in these two countries continues to grow.
COVID-19 PANDEMIC AND THE BRI PROJECTS
For China, BRI is at the core of its opening-up strategy. It helps China maintain economic dynamism and a high growth rate by increasing its global value chains and expanding export markets.[4] China has a strong interest in strengthening and developing BRI projects in the post-pandemic era with the hope that its presence, image, and influence will continue to expand. From the Chinese perspective, Covid-19 provides an opportunity for raising China’s economic, cultural, technological, and scientific potential.[5] Remarkably, trade between China and BRI partners has exceeded 9.2 trillion US dollars, and direct investment by Chinese companies in countries along the Belt and Road has surpassed US$130 billion.[6]
BRI provides economic opportunities for the recipient countries, enhancing infrastructure development and connectivity and increasing trade and investment relations with China. But infrastructure investment pays off only when it increases the productivity of the host economy. Most BRI infrastructure projects are debt-financed, and the host country needs to repay the debt to China. Excessive debt is a possibility and challenge for poor host countries with limited capacity to repay the debt. Some countries were already in debt distress before the pandemic,[7] and this will be compounded by the opacity of contracts and the associated corruption in the post-pandemic recovery.[8] It is argued that the pandemic partially leads to a diversification in BRI financing, which in turn reduces overdependence on China and helps host countries limit debt trap impacts, and may improve the transparency and accountability of the BRI projects.[9]
The Covid-19 pandemic has caused certain disruptions to BRI projects, including interruptions of supply lines for raw materials, production of construction components, and the mobility of workers.[10] It needs to be noted that BRI projects are largely dependent on the international transfer of Chinese personnel and managers.
During the pandemic, China added more impetus to soft infrastructure projects such as a “health silk road” and a “digital silk road”.[11] Concerning the health silk road, by mid-June 2021, China had provided more than 290 billion masks, 3.5 billion protective suits and 4.5 billion testing kits to the world and helped many countries build testing labs. It has also donated and exported more than 400 million doses of finished and bulk vaccines to more than 90 countries.[12] As of June 2021, Laos had received 1.4 million doses of Sinopharm from China (donation), and as of 11 July 2021, Cambodia had received 2.2 million doses of Sinopharm (donation) and commercially received 4.35 million doses from Sinovac and Sinopharm.
China’s Ministry of Foreign Affairs stated in June 2020 that 30%–40% of BRI projects had been affected by the outbreak, and a further 20% had been seriously affected.[13] A year later, Foreign Minister Wang Yi said, “despite the sudden outbreak of Covid-19, Belt and Road cooperation did not come to a halt. It braved the headwinds and continued to move forward, showing remarkable resilience and vitality”.[14] He also suggested deepening international cooperation on vaccines, strengthening cooperation on connectivity, promoting collaboration on green development, and advancing free trade.[15] Notably, businesses involved in BRI are being encouraged to fulfil their social responsibilities and improve their environmental, social and governance (ESG) performance. It marks a new beginning in enhancing the quality and accountability of BRI projects. However, implementing these ESG guidelines remain an issue, and the BRI projects in Cambodia and Laos need to improve their ESG standard.
In a survey of 25 central banks from Europe (13), Asia (4), the Middle East, (3), The Americas (2), Africa (2), and Oceania (1) in early 2021, only 18% of them said their projects had been significantly affected by Covid‑19. As many as 30% said the pandemic had no impact on projects. There has been no reduction in funding from China, and Chinese development and state-owned banks continue to offer financial support. Interestingly, 87% of the responses expect BRI projects to contribute to post-Covid recovery, and 75% expect the BRI to support a green recovery and sustainable development. Moreover, nearly 80% believe that BRI projects are economically viable. At the same time, 23% say BRI debt is causing their external debt volume to reach an unsustainable level.[16]
Across Southeast Asia, despite some disruptions, most BRI projects remain in full swing, with ongoing efforts increasing connectivity on the ground and at sea.[17] Some BRI projects have been postponed several times. For instance, the Jakarta-Bandung High-Speed Rail project which started in 2016, has been delayed several times, from 2019 to 2020 then 2021 and now 2023. Notably, trade and investment relations between China and ASEAN continued to increase, even during the pandemic. In 2020, ASEAN became the largest trading partner of China, surpassing the European Union, with the bilateral trade volume hitting US$732 billion. China’s BRI investments in ASEAN increased from US$16.8 billion in 2014 to US$29.3 billion in 2019, accounting for about 27.6% of BRI investments worldwide. Notwithstanding a sudden drop in total BRI investments in 2020, the ASEAN region still received US$16.9 billion, accounting for 36 per cent of total BRI investments.[18]
MAIN BRI PROJECTS IN CAMBODIA
Cambodia has embraced BRI mainly for economic reasons. Infrastructure development is the key national interest of the Kingdom, and China has been the main development partner in this field. As of June 2021, China had built 3287km of road, eight main bridges with a total length of about 7690m. It is the top investor and donor for Cambodia, and cumulative Chinese investment capital from 1994 to 2019 was US$23.43 billion, accounting for 49.84% of total foreign direct investment in Cambodia. China provided grants of about US$280 million from 2013 to 2015, about US$590 million from 2016 to 2018, and about US$560 million from 2019 to 2021.[19]
Speaking at the Asia-Pacific High-Level Conference on the Belt and Road Cooperation in June 2021, Cambodian Foreign Minister Prak Sokhonn said that BRI projects in Cambodia were quite resilient, notwithstanding the disruptions caused by the pandemic.[20] Addressing the world political parties’ meeting organised by the Communist Party of China on July 6, 2021, Prime Minister Hun Sen underlined that BRI was a win-win cooperation mechanism that played a critical role in socio-economic development especially during the pandemic crisis and post-pandemic recovery. He added that China’s support helps enhance Cambodia’s political independence.[21]
Currently, China is constructing a 190km expressway connecting the capital city Phnom Penh to Preah Sihanouk province on the coast. The expressway has a width of 24.5m with two lanes on either side. The road is being developed on a build-operate-transfer (BOT) basis, invested by the China Road and Bridge Corporation through the Cambodian PPSHV Expressway Co Ltd. After completion, it will be the first expressway in Cambodia, costing about US$2 billion. The construction began in March 2020 and was scheduled to be completed by the first half of 2022,[22] but that was later postponed to March 2023. As of June 2021, 51.35 per cent of the project has been completed. On June 21, the Cambodian Minister of Public Works and Transport said the project went well despite the Covid-19 pandemic and will be completed by September 2022, ahead of the March 2023 schedule.
Other ongoing key infrastructure projects are the new Siem Reap international airport and the new Phnom Penh international airport. The new airport in Siem Reap costs US$880 million, and is constructed by the Chinese-owned Angkor International Airport Investment (Cambodia). The new airport can accommodate 7 million passengers. Construction started in March 2020 and is scheduled for completion by 2023. By May 2021, 42 per cent had been completed. The following two phases will see the airport accommodate 10 million passengers by 2030 and 20 million passengers by 2050.[23] Another new Phnom Penh international airport funded by the Overseas Cambodia Investment Corporation (OCIC) has a close connection with China. It is also a BOT project with an investment capital of 1.5 billion, out of which about US$1.1 billion comes from China Development Bank and US$280 million from OCIC. Metallurgical Corporation of China designs and builds the airfield. The construction began in early 2020 and is expected to be completed by 2023.[24]
These main BRI projects were initiated by the Cambodian government before financial support was sought from China. Being Build-Operate-Transfer (BOT) projects, they will not add to Cambodia’s external debt distress. According to the joint World Bank-IMF debt sustainability analysis of Cambodia in 2019, Cambodia’s external debt distress is low, as is the overall risk of debt distress.[25] In 2020, Cambodia’s external public debt stood at US$8.8 billion of which about US$4 billion were with China, i.e. about 44 per cent of the total foreign debt.[26]
Chinese companies in charge of BRI projects have managed to adapt quickly to the pandemic by securing the supply of raw materials and ensuring that their workforce was not exposed to the virus. The key challenge for infrastructure development in Cambodia is the lack of human resources, and in June 2021, the Ministry of Public Works and Transport requested support from China to train Cambodian engineers, especially for road, bridge and other infrastructure projects.[27]
MAIN BRI PROJECTS IN LAOS
Laos has the ambition to transform its geography from a landlocked to a land-linked country. Since the turn of the century, China’s economic presence in Laos has expanded, and in 2013, it emerged as the largest investor in Laos. In 2017, China had become the top donor and investor and second-largest trading partner for Laos. A strong partnership with China is believed to be central to the Lao ruling elite’s development-based performance legitimation and the enhancement of identity-based inner justification.[28]
Lao Foreign Minister Saleumxay Kommasith has stressed the importance of advancing high-quality Belt and Road cooperation, i.e. the Laos-China Railway and the Laos-China Economic Corridor, and the promotion of a Laos-China community with a shared future.[29] Ambassador Khamphao Emthavanh in turn has said that BRI helps Laos connect with the region and that the railway project was the “symbol” or iconic project of BRI in Lao.[30] Scholar Kuik Cheng-Chwee argues that Laos needs to be on board in order to leverage the railway’s operations to diversify growth and expanding business sectors and industries. The rail project promises to bring transformative benefits by strengthening the ecosystem for national development, expanding market access to the region, and transforming Laos into a regional logistic hub.[31]
The US$5.9 billion high-speed rail project connecting Vientiane to Boten town in China is the largest BRI project in Laos, and when ready, the railway will carry both passengers and freight, travelling at a maximum speed of 160km to 200km per hour. The project started in December 2016 and is to be completed and operational by December 2021. The 422km railway is expected to lead to a significant increase in trade, investment, tourism, and industry development.[32] After completion, it is hoped that Lao export to China will increase by 60 per cent and that the country will be able to receive more than 1 million Chinese tourists per year.[33] The Lao ruling elite generally regards the rail project as a “river of iron” that will transform Lao’s geo-economic destiny and strengthen the political relevancy of the Lao People’s Revolutionary Party.[34]
The World Bank is cautiously optimistic about the project, stating that it could provide Laos with a land link to global and regional supply chains. Still, Laos would need to invest much more in streamlining border crossings and building more roads and facilities connecting to the line to help local traders connect with the supply lines.[35] In addition, Laos needs to identify and implement new business opportunities, and enable local companies to take advantage of the project.[36]
Some studies, however, show that Laos risks falling into a vicious debt cycle, closely related to infrastructure lending from Chinese financial institutions.[37] There is a concern that the rail project might lead to a “debt trap” since the project is worth about one-third of the country’s GDP, and China funds 70 per cent of the total costs. As a result, Laos has incurred an estimated US$1.5 billion in external debt to China.[38] It is a considerable amount for a country with a nominal GDP of around US$20 billion and official foreign exchange reserves of around US$1.1 billion.[39] China has reportedly started delaying or writing off some of the debt Laos is building up to pay for the railway and other Chinese-backed projects in exchange for asset transfers.[40]
The rail project will obviously provide better access for China to the raw materials and markets in mainland Southeast Asia. The cost of regional transportation and logistics will drop, reducing reliance on aviation or long shipping routes between southern and south-western China to mainland Southeast Asia. The Sino-Lao and Sino-Thai rail routes, which are expected to extend southwards to Malaysia and Singapore, are parts of the Pan-Asia railway network China seeks to construct, connecting Kunming with Singapore.[41] China’s BRI projects, coupled with robust vaccine diplomacy, are critical sources for Chinese soft power and economic influence in the region.
CONCLUSION
China’s BRI projects have been affected by the Covid-19 pandemic but only to a moderate and manageable level. BRI projects in Southeast Asia, especially in Cambodia and Laos, have been resilient, and the key BRI projects in Cambodia, especially the Phnom Penh-Sihanoukville Expressway, the new international airports in Siem Reap and Phnom Penh and Laos, especially the high-speed rail project are not much affected by the Covid-19 pandemic. The continued inflow of Chinese investments and the growing trade relations between China and Southeast Asian countries will expand China’s economic presence and influence in the region, shaping a new regional economic order with China in the centre.
Cambodia and Laos, China’s two closest strategic partners in Southeast Asia, are relying more on China where their economic and strategic interests are concerned. Infrastructure development is central to the national development strategies of these two small economies, and China will continue to inject more resources and exert more influence in these two countries in order to gain a firm foothold in the Mekong region.
ISEAS Perspective 2021/99, 27 July 2021
ENDNOTES
[1] World Bank (2019) Belt and Road Economics: Opportunities and risks of transport corridors. https://www.worldbank.org/en/topic/regional-integration/publication/belt-and-road-economics-opportunities-and-risks-of-transport-corridors
[2] Kuik, Cheng-Chwee (2021) Irresistible inducement? Assessing China’s Belt and Road Initiative in Southeast Asia. Council on Foreign Relations, https://www.cfr.org/sites/default/files/pdf/kuik_irresistible-inducement-assessing-bri-in-southeast-asia_june-2021.pdf
[3] Shambaugh, David (2021) Where Great Powers meet. America & China in Southeast Asia. New York: Oxford University Press.
[4] Mouritz, Frank (2020) Implications of the Covid-19 pandemic on China’s Belt and Road Initiative. Connections, 19 (2), pp. 115-124.
[5] Gornikiewics, Marcin and Zelkowski, Jaroslaw (2020) Belt and Road Initiative in the age of Covid-19 pandemic: Implications for developing the strategic project of the People’s Republic of China. European Research Studies Journal, xxiii (3), pp. 302-310.
[6] Wang Yi (2021) Keynote speech at Asia and Pacific High-Level Conference on Belt and Road Cooperation, 23 June. 2021. https://www.fmprc.gov.cn/mfa_eng/wjb_663304/wjbz_663308/2461_663310/t1886403.shtml
[7] John Hurley, Scott Morris, and Gailyn Portelance (2019) Examining the debt implications of the Belt and Road Initiative from a policy perspective. Journal of Infrastructure, Policy and Development, 3 (1), pp. 139-175.
[8] Buckley, Peter J. (2020) China’s Belt and Road Initiative and the Covid-19 crisis. Journal of International Business Policy, 3, pp. 311-314.
[9] Mouritz, Frank (2020) Implications of the Covid-19 pandemic on China’s Belt and Road Initiative. Connections, 19 (2), pp. 115-124.
[10] Mouritz, Frank (2020) Implications of the Covid-19 pandemic on China’s Belt and Road Initiative. Connections, 19 (2), pp. 115-124.
[11] Buckley, Peter J. (2020) China’s Belt and Road Initiative and the Covid-19 crisis. Journal of International Business Policy, 3, pp. 311-314.
[12] Wang Yi (2021) Keynote speech at Asia and Pacific High-Level Conference on Belt and Road Cooperation, 24 June 2021. https://www.fmprc.gov.cn/mfa_eng/wjb_663304/wjbz_663308/2461_663310/t1886403.shtml
[13] Central Banking, https://www.centralbanking.com/central-banks/economics/7835241/the-belt-and-road-initiative-2021-survey-the-impact-of-covid-19-on-the-bri
[14] Wang Yi (2021) Keynote speech at Asia and Pacific High-Level Conference on Belt and Road Cooperation, 24 June 2021. https://www.fmprc.gov.cn/mfa_eng/wjb_663304/wjbz_663308/2461_663310/t1886403.shtml
[15] Wang Yi (2021) Keynote speech at Asia and Pacific High-Level Conference on Belt and Road Cooperation, 24 June 2021. https://www.fmprc.gov.cn/mfa_eng/wjb_663304/wjbz_663308/2461_663310/t1886403.shtml
[16] Central Banking, https://www.centralbanking.com/central-banks/economics/7835241/the-belt-and-road-initiative-2021-survey-the-impact-of-covid-19-on-the-bri
[17] Kuik, Cheng-Chwee (2021) Irresistible inducement? Assessing China’s Belt and Road Initiative in Southeast Asia. Council on Foreign Relations, https://www.cfr.org/sites/default/files/pdf/kuik_irresistible-inducement-assessing-bri-in-southeast-asia_june-2021.pdf
[18] Yu, Kaho (2021) The Belt and Road Initiative in Southeast Asia after COVID-19: China’s energy and infrastructure investments in Myanmar. ISEAS Perspective No. 39, 6 April 2021. /wp-content/uploads/2021/03/ISEAS_Perspective_2021_39.pdf
[19] Chheang, Vananrith (2021) Cambodia’s embrace of China’s Belt and Road Initiative: Managing asymmetries, maximising authority. Asian Perspective 45, pp. 375-396.
[20] Prak, Sokhonn (2021) Remarks at the Asia-Pacific High-Level Conference on the Belt and Road Cooperation, 23 June 2021.
[21] Hun Sen (2021) Remarks at the CPC and World Political Parties Summit, 6 July 2021.
[22] Phnom Penh Post, “Phnom Peng-Sihanoukville expressway”, 16 November 2020, https://www.phnompenhpost.com/business/phnom-penh-sihanoukville-expressway-schedule
[23] Khmer Times, “New Siem Reap international airport 42 per cent complete”, 14 May 2021, https://www.khmertimeskh.com/50856711/new-siem-reap-international-airport-42-per-cent-complete/
[24] Khmer Times, “New Phnom Penh International Airport construction now 40 per cent complete”, 24 May 2021, https://www.khmertimeskh.com/50861152/new-phnom-penh-international-airport-construction-now-40-percent-complete/
[25] World Bank (2019), Cambodia-Joint World Bank-IMF Debt Sustainability Analysis, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/297381580755778880/cambodia-joint-world-bank-imf-debt-sustainability-analysis
[26] VOA News, “Chinese Embassy denies debt trap for Cambodia, 12 April 2021, https://www.voacambodia.com/a/chinese-embassy-denies-radio-free-asia-s-debt-trap-claim/5849677.html
[27] Phnom Penh Post, “China asked to train infrastructure engineers”, 24 June 2021. https://www.phnompenhpost.com/national/china-asked-train-infrastructure-engineers
[28] Kuik, Cheng-Chwee (forthcoming) Asian Perspective, 45 (4), 2021.
[29] Ministry of Foreign Affairs of China, Wang Yi meets Lao Foreign Minister Saleumxay Kommasith, 8 June 2021, https://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1882391.shtml
[30] Xinhua News, “BRI projects important milestones of Laos-China cooperation in a new era: Lao ambassador”, 7 March 2021, http://www.china.org.cn/world/2021-03/07/content_77280738.htm
[31] Kuik, Cheng-Chwee (forthcoming) Asian Perspective, 45 (4), 2021.
[32] VOA News, “Laos braces for the promise, peril of China’s high-speed railway”, 4 March 2021, https://www.voanews.com/east-asia-pacific/laos-braces-promise-peril-chinas-high-speed-railway
[33] Vanxay, Sayavong (2019) BRI and SDGs progress in Lao PDR, https://www.unescap.org/sites/default/files/4_Lao%20PDR%20BRI%20and%20SDGs.pdf
[34] David M. Lampton, Selina Ho, and Cheng-Chwee Kuik (2020) Rivers of Iron: Railroads and Chinese Power in Southeast Asia. Oakland, California: University of California Press.
[35] VOA News, “Laos braces for the promise, peril of China’s high-speed railway”, 4 March 2021, https://www.voanews.com/east-asia-pacific/laos-braces-promise-peril-chinas-high-speed-railway
[36] Freeman, Nick (2019) Laos’ high-speed railway coming round the bend. ISEAS Perspective No. 101. /images/pdf/ISEAS_Perspective_2019_101.pdf
[37] Barney, Keith and Souksakoun, Kanya (2021) Credit crunch: Chinese infrastructure lending and Lao sovereign debt. Asia Pacific Policy Studies 8, pp. 94-113.
[38] Guild, James (2020) China’s BRI and its high-speed rail to nowhere. The Diplomat, 10 November 2020. https://thediplomat.com/2020/11/chinas-bri-and-its-high-speed-railways-to-nowhere/
[39] Freeman, Nick (2019) Laos’ high-speed railway coming round the bend. ISEAS Perspective No. 101. /images/pdf/ISEAS_Perspective_2019_101.pdf
[40] VOA News, “Laos braces for promise, peril of China’s high-speed railway”, 4 March 2021, https://www.voanews.com/east-asia-pacific/laos-braces-promise-peril-chinas-high-speed-railway
[41] Kuik, Cheng-Chwee (2021) Irresistible inducement? Assessing China’s Belt and Road Initiative in Southeast Asia. Council on Foreign Relations, https://www.cfr.org/sites/default/files/pdf/kuik_irresistible-inducement-assessing-bri-in-southeast-asia_june-2021.pdf
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2021/98 “Climate-induced Disasters and Indonesian Politics” by Aninda Dewayanti and Neo Hui Yun Rebecca
EXECUTIVE SUMMARY
- Natural disasters in Indonesia have multiplied significantly over the past decade, with tropical storms, landslides and flooding being the top three events that occurred in 2019-2020.
- Global warming has resulted in heavier rainstorms, increased flooding in low-lying coastal areas and more forest fires.
- Human activities have contributed to an increased frequency and intensity of these natural disasters, despite policies introduced to address Indonesia’s vulnerability to climate-induced crises.
- Mismatched priorities between the local and central government in climate governance, the exploitation of natural resources in disaster prone-areas, as well as political corruption, have led to increased environmental degradation and deterioration of climate resilience in the country.
- Indonesian political leaders, both at the local and national levels, therefore need to manage environmental issues and climate-induced disasters with a sustainable, long-term policy framework, focusing more on transition to green energy and increasing public participation.
*Aninda Dewayanti is Research Officer with the Indonesia Studies Programme, ISEAS – Yusof Ishak Institute. Neo Hui Yun Rebecca is Research Officer at the same department. The authors would like to thank Lee Sue-Ann and Melinda Martinus for their helpful insights.
INTRODUCTION
Indonesia, an archipelago of more than 17,000 islands and the fourth most populous nation in the world, has been identified by the World Bank as one of the top 35 countries with the highest risk for natural disasters. Between January and March 1, 2021, the country recorded at least 650 natural disasters that cost 270 lives and socially displaced at least 3 million people.[1] In fact, natural disasters in Indonesia have been on an upward trend in the past few decades, with each disaster having a more severe impact compared to a previous occurrence. This led many to question if the severity of these events is result of human activities being prioritised over the protection of the environment. A key challenge for many disaster-prone developing countries like Indonesia is striking the right balance between economic development needs and environmental protection when these goals are at odds. This paper explores the various factors exacerbating the impact of natural disasters and assesses how the government’s response to this climate crisis could impede Indonesia’s transition to a more sustainable future.
CLIMATE-INDUCED DISASTERS ACROSS THE ARCHIPELAGO
Being located in the vicinity of active tectonic plates[2] and the Pacific Ocean, Indonesia periodically experiences peaks in natural disasters generated by natural processes. This has been reflected throughout Indonesia’s history where geophysical and hydro-meteorological hazards have tended to dominate its disaster profile since the 1900s.[3] However, with global climate change, these events have not only increased in frequency and intensity, it has also generated other types of disasters such as landslides, forest fires and flooding. Between 2008 to 2020, the number of disaster occurrences rose from 928 cases in 2008 to 2,954 cases in 2020, with the highest at 3,814 events in 2019 (Figure 1). Breakdowns of the disasters have shown that tropical storms and their subsequent impacts such as landslides and flooding were the top three events that predominantly took place in the last two years (Figure 2). A quick investigation in the first three months of 2021 also reflected similar trends, with key provinces such as West Java and Central Java seeing higher proportions of these disasters taking place (Figure 3).
Hydro-meteorological hazards such as floods have been occurring more frequently over the last decade, with more than 78% of these types of disasters being recorded from 2005 to 2015.[4] The last two decades, in particular, have seen frequent and devastating floods events in Indonesia, affecting at least 1.5 million people with the majority being the urban poor living in city centre.[5] On top of that, climate change is also generating heavier torrential downpours. The rise in global temperature has generated an overall warming of the atmosphere which carries more water,[6] fuelling increased rainfall formation. Moreover, the change in temperature has also generated sea surface temperature (SST) anomalies which give rise to longer rainy seasons,[7] thus causing major floods and landslides in regions such as Aceh and West Java where SST can be observed. The overflowing of Citarik and Cipeuncit Rivers in West Java last year coincided with this natural phenomenon, leading to inundation of villages and causing 210 families to be displaced from their homes.[8]
Located in West and Central Java are also cities with high population sizes. A higher number of people are thus exposed to both economic and social damages, leading many to believe that floods will become one of the more pressing issues for Indonesia (Figure 4). Thus far, the solutions implemented to address the flooding problem are often focused on hard engineering solutions, which provide immediate respite but do not address longer-term climate adaptation measures. For instance, Central Java Governor Ganjar Pranowo increased the regional budget up to US$905 million in order to build more road infrastructure and water embankments in the coastal areas.[9] However, there does not appear to be much emphasis on long-term solutions such as creating green zones in these areas.
Rising sea level is also a concern. There have been instances of storm surges and land subsidence causing much of the coastline to move inland, resulting in dozens of homes being washed away by the sea.[10] A close look at the northern part of the coastline in Central Java from 2013 to 2020 also reflects an increasingly water-logged coastal region, indicative of the extent to which the sea has moved inland over the years (Figure 5). Three key cities in the region, Pekalongan, Semarang, and Demak, have suffered the effects of flooding due to sea level rise. In particular, Pekalongan has seawater encroaching inland by up to 1.5km, effectively flooding infrastructure and displacing many to shelters. While climate change has indeed brought about more extreme rainfall and strong winds which consequently push more water inland, the severity of floods is worsened by the massive land subsidence that is currently occurring in this city.[11] Triggered by the excess exploitation of groundwater, the city is currently sinking at a rate of 10cm to 15cm per year, increasing the risk of the city being entirely underwater by 2036 if measures are not put in place to counter these effects. All these evidently suggest two foreboding threats – (1) climate change had worsened weather conditions, causing more extreme disasters (2) human activities have accelerated the disaster occurrences. Nonetheless, despite daily occurrences and serious impacts to livelihoods in coastal areas, Indonesian Law No. 24/2007 does not categorise sea level rise as a natural disaster.[12]
The rise in global temperature has also led to widespread occurrence of forest fires and loss of biodiversity; both identified to be among the top few climate change impacts Indonesians are concerned about (Figure 4). These have tended to predominate within the primary forests of Riau and West/Central Kalimantan, with Riau having most forest fires incidents from 2019 to 2020 (Figure 6). More than 2.6 million hectares of forested areas were destroyed during Indonesia’s worst forest fires in 2015,[13] and have also caused more than half a million respiratory infections in Indonesia and greatly affected Indonesia’s economy.[14] Forest fires also generated the transnational haze which affected neighbouring countries such as Malaysia and Singapore, both economically and socially.
For Indonesia, forest fire events naturally demonstrate peaks according to the El Nino Southern Oscillation (ENSO) which cause drier and hotter weather conditions in Indonesia. This arises mainly due to an increase in sea surface temperature anomalies (SSTA) around Indonesia and a delay in monsoon events.[15] With climate change, this increase is projected to become higher, and may spin off a stronger El Nino effect, causing more forest fires. While rising global temperature can be the catalyst behind forest fires occurrences, much of Indonesia’s forest fires are still human-based phenomena where low-cost, traditional methods are frequently used to ignite the fires.[16] Most of the worst forest fires events observed in Indonesia have in fact both natural and anthropogenic factors, with the latter causing more rapid spread of these fires. As such, while we cannot deny that climate change has influenced the natural processes that lead to natural disasters, most of these disasters are exacerbated by anthropogenic factors which in turn accelerated these processes. All these incidences thus reflect the increasing influence of human activities, together with the associated political ecology, in accelerating the impacts of natural disasters on people’s lives.
Recently, Indonesia announced its first Nationally Determined Contribution (NDC) that outlines the country’s strategies to move toward a low-carbon and climate-resilient future.[17] Apart from that, the government has also set an ambitious plan to achieve net zero for carbon emission by 2050.[18] Indeed, Indonesia has come a long way in implementing policies to protect and conserve the environment. Data from the Environment and Forestry Ministry also suggest that Indonesia is moving in the right path in its forest protection policies, with deforestation rate decreasing by 75.03% in 2019-2020, the lowest rate ever recorded by the government.[19] While steps have been made to progress Indonesia toward a more sustainable future, there are still factors that have hindered progress in implementing the higher-impact climate policies, such as establishing green power plants and minimising the operation of extractive industries in disaster prone areas.
ECONOMIC AND POLITICAL FACTORS IN CLIMATE-INDUCED DISASTERS
Like many other developing countries, Indonesia faces the challenge of making tough trade-offs between economic priorities and environmental protection. This is often manifested in the misalignment of priorities between the local and central government in climate governance and dilemmas over the operation of extractive industries in disaster prone-areas.
Local-national dynamics in climate governance
Under the administration of President Joko Widodo, the national and local governments in Indonesia have different attitudes toward climate governance. The national government has transferred a relatively high budget to the local governments for climate mitigation and adaptation, especially to 11 selected local governments for a pilot project on climate budget tagging in 2020. This commitment in maintaining the 2018-2020 climate budget is rather significant, considering the impact COVID-19 would have had on budget allocations.[20] But at the local level, some local governments may have been tempted to divert the allocated money to other priority projects. In some areas, for example, local government agenda in climate planning and financing have mainly been about overcoming poverty while some local leaders could have demonstrated reluctance in utilising the budget allocation due to complex administrative procedures.[21] As a result, instead of allocating resources to address longer-term solutions such as establishing infrastructure for renewable energy transitions or enacting early disaster warning systems, local governments have preferred to focus on short-term infrastructural projects, such as building bridges and dams. Misalignment between central and local government is also reflected in the finding of various studies which have assessed that disaster preparedness is often excluded in local development plans while and the overarching national-based disaster preparation plans are often planned without consideration being given to local contexts.[22]
Despite the risks of being located in disaster-prone areas, the national government’s ambitious economic plan in pushing for massive infrastructural projects in key strategic areas has sometimes been at odds with local climate disaster mitigation considerations. The establishment of the Special Economic Zone (KEK) Mandalika at West Nusa Tenggara groomed to be the “New Bali”, for instance, has been controversial due to known tsunami risk as well as its impact on the people and the environment.[23] Before it was built as planned, in January and April 2021 respectively, muddy floods from the construction sites had affected people in Central Lombok while Cyclone Saroja, caused by extreme weather, had destroyed cities across the province.[24] The current administration is also currently preparing for 14 other special economic zones located in coastal areas. While these projects are expected to bring about massive benefits such as income and job creation, it is a constant dilemma for both the central and local governments to weigh the benefits of such development projects against their risks and impact on the environment and the communities living there.
Environmental risks in extractive industries
Indonesia’s developmental plan still relies on exploiting natural resources, i.e. through extractive mining projects. As transitioning towards renewable energy would require some time to reap its benefits, the vast economic benefits that can be derived from the mining industry would remain attractive for the growing of Indonesia’s economy for some time to come. In 2019 and 2020, the mining industry had contributed a total of Rp44,93 trillion (9% of total state revenue) and Rp34,64 trillion (9,7% of total state revenue) to the country’s total non-tax revenue respectively. Since 2017, the actual revenues obtained have exceeded annual targets of the state’s revenue collection.[25] This productivity is also predicted to remain optimal for the next 70 years, making it a highly profitable industry for Indonesia’s economy.
As such, over 3,000 extractive industry facilities in Indonesia are still located in disaster-prone areas, despite the prohibition of such construction in high-risk areas.[26] Consequently, when a natural disaster hits these areas, people in these regions suffer two-fold impact, firstly from the physical effects of the crisis and secondly from economic damages caused by extractive industrial projects.[27]
Regulating the extent of development for extractive industries within vulnerable land spaces has been challenging for Indonesia, especially in maintaining the fine line between development and protection. For example, the plan to establish a new Indonesian capital at East Kalimantan has generated a land-swap practice between the capital developer and businesspersons in the coal industry. This practice allows the developer to chop down a forest for city establishment in exchange for permits for the extractive industry.[28] As such, this could bring about climate related problems such as exacerbating deforestation and water capacity, loss of biodiversity, as well as forest fires during extreme weather conditions at the new capital and its surrounding areas.[29] Even now, about 85,000 hectares of forests surrounding the new capital were damaged by extractive industries and the government would need to relinquish the concessions given to these industries as well as repair the forest before the launch of new capital in 2024. This reflects the difficult situation Indonesia is currently facing in achieving both economic development and adopting sustainable practices.
Moreover, dirty practices in such industries have resulted in an increased vulnerability of the environment. In January 2019, South Sulawesi was hit by massive floods and landslides due to sand silting which was a consequence of illegal sand mining at Jeneberang river and land-use change.[30] Recently, activists warned that the new government regulation to rename coal waste[31] seemed to serve primarily the interests of the dirty energy industry, and people are worried about the implementation and monitoring of this regulation at the company level. Undeniably, these industries are still essential in fulfilling domestic demand for electricity, maintaining energy security, as well as boosting Indonesia’s state revenues. However, the presence of dirty practices within the industries could further hinder the progression towards sustainable models – models that not only boost the country’s development needs but also minimise their impacts to the environment.
Political corruption
Political corruption has clearly contributed to non-compliance with environmental laws. In 2019, high level officials at the National Energy Company (PLN) were accused of bribery and collusion.[32] In February 2021, the Governor of South Sulawesi Nurdin Abdullah was arrested by the Anti-Corruption Commission (KPK) for receiving bribes from various infrastructural projects.[33] Activists immediately reacted to these cases and demanded justice concerning this dirty energy practice.[34] In the forestry sector, patron-client networks involving businessmen, retired army generals, police personnel, government officials and regional parliamentarians have led to weak law enforcement on forest burning. This has been arguably the major driver of the haze-producing fires in Sumatra and Kalimantan.[35] In addition, in the recent Week of Resistance (28 June-5 July), environmental activists have been protesting against the systemic attempt to weaken KPK, the main anti-corruption body in Indonesia. This suggests the possibility of greater corruption among government officials and the oligarch, especially in deals in the extractive industry and in land acquisition.[36] Corruption, therefore, remains one of the key obstacles to tackle in future environmental protection policies.
TOWARDS A CLIMATE-RESILIENT COMMUNITY
Climate resilience is far more than just having adequate responses once disasters hit. A new framework of economic growth that is more inclusive of all classes is needed. Along with that, investment in green energy transition and a carbon tax will generate climate adaptation in the economic sector. Indonesia should break from its dependency on traditional energy resources by investing more in renewable energy sources. At the regional and local level, political leaders need to treat environmental issues and climate-induced disasters with a sustainable, long-term policy framework. Lastly, people participation should be included to increase climate resiliency. Grassroots innovation on crowdsourced data sites like PetaBencana.id, and youth social movements such as Jeda Untuk Iklim, have helped to draw public participation into an accessible and inclusive channel. As such, adopting an approach that generates community empowerment can greatly ensure the cooperation of local, state and business interests.[37] In the end, climate action should not be a lonely journey undertaken by just a single party.
ISEAS Perspective 2021/98, 26 July 2021
ENDNOTES
[1] Antara News. (2021). Natural disasters bring mitigation, prevention to fore. https://en.antaranews.com/news/169363/daily-disasters-bring-mitigation-prevention-to-fore (Accessed 24 March 2021)
[2] Indonesia is located within active tectonic plates. The tropical cyclones within the region are also fuelled by the Pacific Ocean surrounding the islands. See: Verstappen, H, T. (2010). Indonesian Landforms and Plate Tectonics. Jurnal Geologi Indonesia, 5(3), p.197- 207.
[3] Djalante, Riyanti & Garschagen, Matthias. (2021). A review of disaster trend and disaster risk governance in Indonesia: 1900 – 2015. In: Disaster Risk Reduction in Indonesia. (pp. 21- 56). Switzerland: Springer International Publishing.
[4] Prasetyo, Yudo & Nabilah, Farras. (2017). Pattern Analysis of El Nino and La Nina Phenomenon Based on Sea Surface Temperature (SST) and Rainfall Intensity using Oceanic Nino Index (ONI) in West Java Area. The 5th Geoinformation Science Symposium 2017, IOP Conf. Series: Earth and Environmental Science, 98, pp.1-9.
[5] Djalante, Riyanti & Garschagen, Matthias. (2021). A review of disaster trend and disaster risk governance in Indonesia: 1900 – 2015. In: Disaster Risk Reduction in Indonesia. (pp. 21- 56). Switzerland: Springer International Publishing
[6] Mudelsee, M., Borngen, M., Tetzlaff,G. & Grunewald, U. (2004). Extreme floods in central Europe over the past 500 years: Role of cyclone pathway “Zugstrasse Vb”. Journal of Geophysical Research, 109, p 1-21.
[7]Indonesia possesses a tropical monsoon climate that is sensitive to the El Nino Oscillation (ENSO) climate anomaly. These anomalies occur naturally during both the El Nino and La Nina phenomenon which give rise to drought and rainfall. West Java experiences sea surface temperature anomaly more frequently during the La Nina phenomenon (mainly during December to February) which tends to bring in heavier rainfall, causing flooding events to occur during that period. See: Prasetyo, Yudo & Nabilah, Farras. (2017). Pattern Analysis of El Nino and La Nina Phenomenon Based on Sea Surface Temperature (SST) and Rainfall Intensity using Oceanic Nino Index (ONI) in West Java Area. The 5th Geoinformation Science Symposium 2017, IOP Conf. Series: Earth and Environmental Science, 98, pp.1-9.
[8] The Jakarta Post. (2020). Two killed, hundreds displaced in Sukabumi flash floods, more rain to come. https://www.thejakartapost.com/news/2020/09/22/two-killed-hundreds-displaced-in-sukabumi-flash-flood-more-rain-to-come.html (Accessed on 29 March 2021)
[9] See “Ganjar Soal Banjir di Semarang: Kalau Mau Menyalahkan, Salahkan Saya,” Kompas.com, 25 February 2021, https://regional.kompas.com/read/2021/02/25/06295631/ganjar-soal-banjir-di-semarang-kalau-mau-menyalahkan-salahkan-saya (Accessed on 4 June 2021)
[10] Channel News Asia. (2020). This city in Java could disappear in 15 years, due to land subsidence and coastal flooding. https://www.channelnewsasia.com/news/climatechange/indonesia-pekalongan-land-sinking-coastal-flooding-disappear-14279658 (Accessed on 29 March 2021).
[11] The local government in Pekalongan has been excessively exploiting the use of groundwater for drinking, agriculture, hotel and other industries by constructing boreholes across the city, causing the city to sink due to land subsistence. See https://www.channelnewsasia.com/news/climatechange/indonesia-pekalongan-land-sinking-coastal-flooding-disappear-14279658 (Accessed on 30 March 2021).
[12] For a comprehensive analysis on the issue of sea level rise from a legal perspective, see: Laely Nurhidayah. (2020). In Riyanti Djalante, Joni Jupesta, Edvin Aldrian. (2021). Climate Change Research, Policy and Actions in Indonesia: Science, Adaptation and Mitigation. Switzerland: Springer Climate. https://doi.org/10.1007/978-3-030-55536-8
[13] The areas affected by Indonesia’s 2015 forest fires was rich in biodiversity and endangered species such as orangutan, tigers, rhino and elephants. See: Edwards, R, B., Naylor, R, L., Higgin, M, M. & Falcon, W, P. (2020). Causes of Indonesia’s forest fires. World Development, 127, p 1-13.
[14] An estimated US$16 billion was projected to be the economic loss suffered by Indonesia during the 2015 forest fire season. See: Edwards, R, B., Naylor, R, L., Higgin, M, M. & Falcon, W, P. (2020). Causes of Indonesia’s forest fires. World Development, 127, p 1-13.
[15] A two-degree increase in SSTA in the Central Pacific Ocean was reported to have increased the annual fire hotspot detections by 50% from 2001 to 2015 in Indonesia. See Edwards, R, B., Naylor, R, L., Higgin, M, M. & Falcon, W, P. (2020). Causes of Indonesia’s forest fires. World Development, 127, p 1-13.
[16] Edwards, R, B., Naylor, R, L., Higgin, M, M. & Falcon, W, P. (2020). Causes of Indonesia’s forest fires. World Development, 127, p 1-13.
[17] Indonesia’s First NDC highlights the steps and processes Indonesia would take to tackle climate change. Some strategies include enhancing the REDD+ programme, embarking on mixed energy policies using renewable energy and developing a nationwide climate vulnerability index and data information system to study regional vulnerability to climate change. For details of the strategies, see: Republic of Indonesia, First Nationally Determined Contribution. (2020). https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Indonesia%20First/First%20NDC%20Indonesia_submitted%20to%20UNFCCC%20Set_November%20%202016.pdf (Accessed on 30 March 2021).
[18] Ministry of Environment and Forestry, “Progres Perubahan Iklim Indonesia”, YouTube, 19 March 2021, https://www.youtube.com/watch?v=elF36b_VpCE. (Accessed on 24 March 2021).
[19] Indonesia’s deforestation rate has hit a record low level, illustrating the government’s commitment to halt deforestation and lower carbon emissions. See: “Combating Climate Change: Indonesia’s Deforestation Hits Historic Low,” Jakarta Globe, 11 May 2021, https://jakartaglobe.id/special-updates/combating-climate-change-indonesias-deforestation-hits-historic-low. (Accessed on 24 May 2021).
[20] Fiscal Policy Agency, Indonesian Ministry of Finance. (2021), Laporan Anggaran Mitigasi dan Adaptasi Perubahan Iklim Tahun 2018 – 2020, https://fiskal.kemenkeu.go.id/publikasi/buku (Accessed on 21 June 2021)
[21] For cases where climate financing is used to overcome poverty in East Kalimantan, see: Zahra Zafira Mutiara, Dede Krishnadianty, Budhi Setiawan, Joko Tri Haryanto. (2020). Climate Budget Tagging: Amplifying Sub-National Government’s Role in Climate Planning and Financing in Indonesia. In Riyanti Djalante, Joni Jupesta, Edvin Aldrian. (2021). For local governments’ perception on climate budget, see this old yet good investigative piece by Indra Nugraha & Della Syahni. (2016). “Hadapi Perubahan Iklim, Kesadaran Pemerintah Daerah Terbilang Minim,” Mongabay, https://www.mongabay.co.id/2016/11/25/hadapi-perubahan-iklim-kesadaran-pemerintah-daerah-terbilang-minim/. (Accessed on 21 June 2021)
[22] Under the Regional Autonomy Law No. 23/2014 on decentralisation, the local government at the city/regency level has a capacity to prevent, mitigate and recover from natural disaster crisis, while regional leaders at the provincial level manage the bureaucratic flow of these actions within their geographical area of authority. The 2007 Disaster Mitigation Law also mandated the appointment of National Disaster Agency (BNPB) across the localities (BPBD), though their remit is limited to disaster preparedness instead of disaster mitigation. The research conducted by CSIS Indonesia in 2019 found some flaws on disaster governance in the country, including unsystematic format of relations between national and local disaster authorities and ignorance towards disaster-risk spatial planning in disaster-prone regions. See: https://csis.or.id/project/disaster-management-research-unit (Accessed on 25 March 2021).
[23] Recently, UN Special Rapporteurs had denounced that this mega project “trampled on human rights” due to expulsions of local communities and destruction of houses, fields, water sources, cultural and religious sites. https://news.un.org/en/story/2021/03/1088742 (Accessed on 4 April 2021).
[24] In January 2021, 350 families in three villages in Central Lombok, West Nusa Tenggara were affected by muddy floods coming from the hill where the megaproject was located, causing a blackout in the entire areas as well as drowning hundreds of houses. A few months later, in early April, 11 regencies in East Nusa Tenggara province were hit by Cyclone Saroja, the strongest tropical cyclone Indonesia had seen since 2008, causing 177 fatalities and displacing 16.000 people across the provinces. https://tirto.id/kek-mandalika-ntb-diterjang-banjir-350-keluarga-terdampak-f9NP. (Accessed on 5 April 2021).
[25] Directorate General Mineral and Coal, Ministry of Energy and Mineral Resources, “Laporan Kinerja Tahun 2020” (Annual Report 2020), https://www.esdm.go.id/assets/media/content/content-laporan-kinerja-ditjen-minerba-2020.pdf (Accessed 14 July 2021).
[26] See complete report issued by #BersihkanIndonesia (Cleaning Indonesia), a civil society coalition promoting clean energy, here: https://www.jatam.org/obral-investasi-ekstraktif-di-wilayah-risiko-bencana-jokowi-abaikan-tanda-bahaya/. (Accessed on 5 April 2021).
[27] South Kalimantan, for instance, have suffered from flood mismanagement as the patronage politics are arguably prominent factor in exacerbating climate disasters. Moreover, heavy reliance on inadequate technological solutions in flood mitigation. See: Yogi Setya Permana, “Why politics matters: an insight from Indonesia’s flood management,” New Mandala, 21 May 2021, https://www.newmandala.org/why-politics-matters-an-insight-from-indonesias-flood-management/. (Accessed on 4 June 2021).
[28] Hans Nicholas Jong, “Report identifies tycoons controlling site of new Indonesian capital,“ Mongabay, 6 January 2020, https://news.mongabay.com/2020/01/indonesia-capital-relocation-borneo-kalimantan-tycoons-coal-mining-pulpwood/
[29] A survey by Litbang Kompas also reflected the public’s concerns on the new capital’s move, where 71,9% of 509 respondents across the country were worried about its environmental impacts. https://www.kompas.id/baca/ekonomi/2021/04/05/menanti-di-tengah-pandemi/. (Accessed on 5 April 2021).
[30] The illegal mining industry includes companies whose permits are expired as well as local independent miners. A study had found that from 2002-2016, 49.77% of the forest cover area in Jeneberang river in Gowa regency, South Sulawesi was converted into housing complex, rice field, gardens, and mining areas. See Rifani, 2017, Master’s thesis, Universitas Gadjah Mada, http://etd.repository.ugm.ac.id/penelitian/detail/128642. (Accessed 7 May 2021)
[31] Indonesian government issued a new regulation that named fly ash and bottom ash from the burning coals in power plants and other industrial facilities as non-hazardous waste, despite these containing heavy metal materials. See Indonesian Law No. 22/2021 on Implementation of Environmental Protection and Management, https://peraturan.bpk.go.id/Home/Download/154526/PP%20Nomor%2022%20Tahun%202021.pdf (Accessed 21 May 2021).
[32] “Selain Sofyan Basir, Ini Dirut PLN lainnya yang terjerat korupsi. Tempo.co, 25 April 2019. https://bisnis.tempo.co/read/1198886/selain-sofyan-basir-ini-dirut-pln-lainnya-yang-terjerat-korupsi (accessed 29 May 2021)
[33] KPK found that Nurdin had received around USD$378,000 in total from several contractors to procure several infrastructural projects in the province, including a tourism site project at Bira, Bulukumba. https://majalah.tempo.co/read/hukum/162762/modus-korupsi-gubernur-sulawesi-selatan-nurdin-abdullah-suap-dari-pengusaha-dekat (Accessed on 5 April 2021).
[34] Indonesian Corruption Watch released a report on corruption practices within the electricity industry and supply chain, See: https://antikorupsi.org/sites/default/files/dokumen/Siapa%20di%20Balik%20Pembangkit.pdf; In the case of Nurdin Abdullah, civil society groups, such as Walhi, JATAM, and Indonesian Corruption Watch, also demanded KPK to investigate Nurdin’s involvement in a national strategic project of Makassar New Port (MNP), whereby he was accused of easily passing an environmental assessment permit for two sand mining companies that had supported him during South Sulawesi regional elections in 2018. https://nasional.kompas.com/read/2021/03/01/09374541/icw-minta-kpk-dalami-dugaan-keterlibatan-gubernur-sulsel-dalam-proyek?page=all (Accessed on 7 May 2021).
[35] Varkkey, H. (2013). Patronage politics, plantation fires and transboundary haze, Environmental Hazards, 12:3-4, 200-217, DOI: 10.1080/17477891.2012.759524
[36] A group of civil society organisations named ‘Rebuild Alliance’ protested in front of KPK’s office in Jakarta on 29 June 2021. One of the demands was to #BersihanIndonesia (clean Indonesia), figuratively aiming to clean Indonesia from dirty mining as well as dirty corruption practices. https://www.instagram.com/p/CQr3zrcBKmf/ (Accessed on 29 June 2021).
[37] Douglass, M. (2016). The Urban Transition of Disaster Governance in Asia. In: Miller, M, A. & Douglass, M. (2016). Disaster Governance in Urbanising Asia. Springer Ptd Ltd. London, United Kingdom.
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“Naquib Al-Attas’ Islamization of Knowledge: Its Impact on Malay Religious Life, Literature, Language and Culture” by Mohd Faizal Musa
2021/97 “Min Aung Hlaing and His Generals: Data on the Military Members of Myanmar’s State Administration Council Junta” by Htet Myet Min Tun, Moe Thuzar and Michael Montesano
EXECUTIVE SUMMARY
- Following his 1 February seizure of power in Naypyitaw, Senior General Min Aung Hlaing formed an 11-member junta called the State Administration Council (SAC).
- Eight of the original members of the junta were military officers and the remaining three civilians. While six more civilians were later added to its membership, the line-up of military men on the SAC remains unchanged.
- Six of the eight military members of the SAC held the Tatmadaw’s top posts at the time of the coup, while the remaining two were appointed secretaries to the junta.
- Though biographical data on those officers are in many cases difficult to secure, preliminary analysis of their educational backgrounds, career trajectories, demographic characteristics, economic roles and interests, and prior involvement in Myanmar’s peace process is crucial to any effort to understand the country’s new military regime.
- The purpose of this article and of two forthcoming articles, on the civilian members of the SAC and on the SAC-appointed cabinet, is to stimulate further, more comprehensive, efforts to understand that regime — a necessary complement to the intense focus among analysts on the resistance to the 1 February coup in Myanmar.
*Htet Myet Min Tun is an intern in, Moe Thuzar Co-Coordinator of, and Michael Montesano Coordinator of the Myanmar Studies Programme of the ISEAS-Yusof Ishak Institute.
INTRODUCTION
On 1 February 2021, hours before the newly elected Union Assembly was to convene, Myanmar’s military seized power. Its forces detained President Win Myint, State Counsellor Aung San Suu Kyi, and senior members of the government and of the ruling National League for Democracy (NLD) party. Announcing a state of emergency, state media declared that executive, legislative, and judiciary powers were in the hands of Defence Services Commander-in-Chief Senior General Min Aung Hlaing. The formation of the State Administration Council (SAC) followed the next day. This junta, chaired by Min Aung Hlaing, became the country’s ruling body.[1]
At the time of its formation, the SAC comprised 11 members — eight military officers and three civilians. Six of those officers held the top six posts in the Myanmar military’s or Tatmadaw’s hierarchy on 1 February; the remaining two were appointed to serve as the junta’s secretaries. In contrast to the precedents of the Revolutionary Council that took power in 1962 and the State Law and Order Restoration Council that took power in 1988, no officer appointed to the SAC at the time of its formation was serving as the commander of a Regional Military Command.
In the six weeks following its formation, additional civilians joined the SAC; and at the time of writing, it counts 17 members. The junta thus now includes more civilians than military officers. While power on the SAC surely remains in the hands of soldiers, its composition represents a further divergence from the precedent of the State Law and Order Restoration Council (SLORC)/State Peace and Development Council (SPDC) junta, which ruled the country from 1988 to 2011 and was comprised exclusively of Tatmadaw officers during the entirety of its existence.[2]
Soon after the formation of the SAC, Tin Aung San and Mya Htun Oo left their military posts to join the cabinet appointed by the junta.[3] While remaining members of the SAC, these men now serve as Minister for Transport and Communications and as Minister for Defence, respectively. Vice Admiral Moe Aung has replaced Tin Aung San as Commander-in-Chief of the Navy.[4] The latter officer in fact reached retirement age in 2020; Min Aung Hlaing authorized a one-year extension of his military service.[5] Mya Htun Oo, an officer whose career trajectory resembles that of Min Aung Hlaing himself, had before his transfer to the cabinet appeared to trail only Soe Win in his chances of becoming the next Commander-in-Chief.[6] His replacement as Joint Chief of Staff is Lieutenant General Maung Maung Aye.[7]
This article lays a foundation for understanding Myanmar’s new military regime through a preliminary survey of the personal and educational backgrounds, career trajectories, demographic characteristics, business interests and affiliations, and record of involvement in the country’s peace process of the military members of the SAC. It takes no position on whether this regime will last one year, two years or even longer.[8] It is, however, grounded in a belief that understanding as thoroughly as possible both the composition of the regime and the shared experiences of its leading members is crucial to thinking about its likely internal dynamics. Notwithstanding the difficulty of access to reliable information, this article seeks to present base-line data on the military members of the SAC and to offer tentative analysis of those data.[9]
EDUCATIONAL BACKGROUNDS
Graduates of the Defence Services Academy (DSA) — the Tatmadaw’s elite institution for the formation of officers[10] — dominate the junta. (See Table 2.) Seven of its eight military members are DSA graduates.[11] Only Lieutenant General Ye Win Oo, Joint Secretary of the SAC, is an Officer Training School (OTS) graduate — a member of the seventy-seventh intake of that school.[12]
The senior members of the Tatmadaw hierarchy who now comprise the military members of the SAC come from a range of DSA cohorts; [22] Min Aung Hlaing is a member of DSA intake number 19, while Lieutenant General Moe Myint Htun is a member of intake number 30. Only General Mya Htun Oo and Lieutenant General Aung Lin Dwe are both members of the same DSA intake, the academy’s twenty-fifth. Following formation of the junta, the former officer was, as noted, transferred from the military to the cabinet to serve as Minister for Defence, replaced in the post of Joint Chief of Staff by another member of the same DSA intake.[23]
CAREER TRAJECTORIES
The majority of the military members of the SAC are army officers. As that force is the largest and the most important of the Tatmadaw’s three branches, its officers traditionally hold the top positions in the armed forces. In fact, the Tatmadaw is in large part an army; Myanmar’s navy and air force play small roles in its activities.[24] That each of the officers on the SAC with the exceptions of Tin Aung San from the Navy and Maung Maung Kyaw from the Air Force have army backgrounds is thus unsurprising. [25]
The career trajectories of the officers on the SAC demonstrate a discernible pattern. After graduating from the Defense Services Academy, these officers typically served in light infantry divisions[26] or battalions, rising through the ranks to posts as commanders of Regional Military Commands (RMCs).[27] (See Table 3.) Difficulties in securing data make tracing the early careers of individual officers impossible here. But the take-off point into senior Tatmadaw leadership roles for the military members of the SAC appears to have been their promotion to the post of regional commander. They were then assigned back and forth every year or two among RMCs, the general staff office or military schools. Promotion to lead Bureaus of Special Operations (BSOs) followed.[28] After completing their assignments as regional commanders and BSO chiefs, the officers rose to the top posts in the Tatmadaw.
As regional commanders, most officers who later rose to those top military posts served in ethnic frontier areas where insurgent groups are typically active. Counter-insurgent operations have been the principal activity of the Tatmadaw in the areas of responsibility of the RMCs in ethnic states. As performance in counter-insurgency typically serves as the basis for promotion in Myanmar’s armed forces, officers who have proven their abilities in overseeing such operations appear more likely to rise to top positions.[38] There are, however, exceptions. Lieutenant General Moe Myint Htun’s service as regional commander was at the Naypyitaw Command,[39] for example, and Lieutenant General Ye Win Oo headed the South Western Command, overseeing the Ayeyarwady Region.
After serving in one or two RMCs as commanders, these officers were typically promoted to posts as chiefs of BSOs. (See Table 4.) Three leading military members of the SAC — Soe Win, Mya Htun Oo and Moe Myint Htun — previously helmed BSO-6. The location of the bureau in Naypyitaw and its operational importance suggest that officers appointed to head BSO-6 had not only demonstrated to the Tatmadaw’s leadership their potential for promotion to even more senior posts but had also earned the trust of that leadership.[51]
Between assignments at one RMC or another or before promotion to head BSOs, officers now serving on the SAC assumed positions in the general staff office or at military schools — military intelligence chief, chief of staff of the army, or DSA principal. (See Table 5.) The range of positions that they held gave them staff, command, and instructional experience.
Trajectories through these assignments and positions of responsibility led the military members of the SAC to the top military posts that they held at the time of the 1 February coup. For instance, after heading BSO-2, Min Aung Hlaing became Joint Chief of Staff of the Army, Navy, and Air Force, the third highest position in the military hierarchy, in 2010.[59] He replaced Senior General Than Shwe as Tatmadaw Commander-in-Chief in 2011.[60] In the same year, Soe Win was promoted to Vice Commander-in-Chief from Chief of BSO-6.[61] Following the same trajectory, Mya Htun Oo became Joint Chief of Staff in 2016 after his own stint leading BSO-6.[62] Moe Myint Htun became the chief of BSO-6 and then of BSO-2 in 2019 while still serving as Chief of Staff of the Army.[63]
Mya Htun Oo is also a former chief of Military Security Affairs. Ye Win Oo holds that post now. While Myanmar’s intelligence apparatus may have diminished in political influence since the downfall of General Khin Nyunt in 2004, officers with strong ties to that apparatus do have a clear and obvious presence among the military members of the SAC.[64]
Myanmar Navy and Air Force personnel seem to have relatively straightforward career trajectories, perhaps because of their forces’ small scale and simple command structures. Data indicate that Tin Aung San and Maung Maung Kyaw commanded different naval headquarters and airbases before becoming Chief of Staff of the Navy[65] and the Air Force,[66] respectively, and then the Commanders-in-Chief of their services.
DEMOGRAPHIC CHARACTERISTICS
Locating information on the birthplaces of the SAC’s military members is difficult. An exception relates to Min Aung Hlaing, born in Dawei in the Tanintharyi Region[67] — the southernmost part of the country. The military members of the SAC members are Buddhists, and all are apparently Bamars.[68] In a country in which more than 70 per cent of the population are Bamar Buddhists, the Tatmadaw is highly Burmanized. Further, the SLORC/SPDC years saw the entrenchment of a practice whereby non-Bamar officers rarely, if ever, assumed top military positions.
The Tatmadaw and its leadership portray themselves as defenders and patrons of the country’s Buddhist establishment. This attitude has its roots in ethno-nationalism centred on Bamar Buddhist identity, which has been deeply rooted in the country’s politics since the colonial era. It is likely that the current military leadership shares this ethno-nationalist outlook, while at the same time using Bamar Buddhist ethno-nationalism as a tool to advance its political interests and to rally support from the populace.[69]
ECONOMIC ROLES AND INTERESTS
The Tatmadaw wields economic influence through two military-owned conglomerates —Myanmar Economic Holdings Limited (MEHL) and the Myanmar Economic Corporation (MEC).[70] While the organization and revenues of these conglomerates remain opaque and removed from civilian oversight, understanding the role of the Tatmadaw in the country, its finances, or its efforts to provide welfare for its troops without reference to them is impossible.[71] Taken together, the two conglomerates own at least 106 businesses and are closely associated with a further 27 businesses.[72] They span sectors ranging from mining and other extractive industries to manufacturing, construction, tourism, banking and insurance. MEHL is one of the largest companies in Myanmar, paying the second highest taxes of any entity in 2019.[73]
Any effort to figure out what the SAC— like in fact the Tatmadaw more generally — is must take into account that seven of its military members hold positions in MEHL or the MEC. Min Aung Hlaing and Soe Win serve as the Chairman and Vice Chairman of MEHL’s Patrons Group,[74] which oversees the conglomerate’s board of directors.[75] Mya Htun Oo, Tin Aung San, and Maung Maung Kyaw are also members of the group.[76] SAC member Aung Lin Dwe is a MEHL director, while Moe Myint Htun is a director of both MEHL and the MEC.[77]
While the matter is not a focus of this article, the families of the SAC’s military members also have considerable business stakes — spanning sectors including real estate, construction, entertainment, hotels and tourism, and telecommunications.[78]
INVOLVEMENT IN THE PEACE PROCESS
In his first television address to the public after the 1 February coup, Min Aung Hlaing expressed the military’s interest in bringing a durable and sustainable peace to the country and in advancing Myanmar’s peace process on the basis of the 2015 Nationwide Ceasefire Agreement (NCA) between the Thein Sein government and a number of Myanmar’s ethnic armed organizations (EAOs).[79] He had in fact emphasized the importance of restarting talks with EAOs since November of last year, when he established the military’s permanent Peace Talks Committee a day after Myanmar’s national elections.[80]
Among military members of the SAC, Min Aung Hlaing, Soe Win and Aung Lin Dwe have the most noteworthy records of previous involvement in the peace process. The first two officers negotiated with EAOs starting in the early 2010s, under the Thein Sein administration. Min Aung Hlaing served on the Union Peace Central Committee (UPCC), and Soe Win was a vice chair of the Union Peace Working Committee (UPWC).[81] Later, as Commander-in-Chief and Vice Commander-in-Chief of Defence Services, the two officers were supportive of NCA.[82] For his part, Aung Lin Dwe served on the Joint Ceasefire Monitoring Committee during the NCA process and joined the Peace Talks Committee formed last November.[83]
The SAC has abolished the NLD-led National Reconciliation and Peace Center (NRPC) and set up three committees to continue the peace process: the National Solidarity and Peace-making Central Committee (NSPCC), the National Solidarity and Peace-making Working Committee (NSPWC), and the National Unity and Peace Restoration Coordination Committee (NUPRCC).[84]
How the previous involvement of Min Aung Hlaing and several of the other military members of the SAC in Myanmar’s peace process will shape their approach to achieving the “eternal peace” that the Senior General promised last year remains unknown.[85] Asking whether the SAC views the new committees as means of reducing domestic pressure in the face of nation-wide resistance to its coup or whether it is determined to prove that it can accomplish what a half-decade of NLD efforts could not is, nevertheless, a fair question.[86]
CONCLUSION
The data on the military members of Myanmar’s ruling State Administration Council make possible several tentative and preliminary observations.
Unsurprisingly, the roster of officers on the SAC reflects the character of the Tatmadaw. In appointing those officers to the junta, Senior General Min Aung Hlaing adhered strictly to the military hierarchy that obtained at the time of his coup. The first six members of the SAC held the top six posts in the armed forces on 1 February, now ranked on the junta in the order of their positions in the military leadership. This pattern of appointments may reflect not only Min Aung Hlaing’s adherence to institutional norms but also his pragmatism or even caution. In the uncertain atmosphere immediately following the coup, securing and retaining the support of fellow senior officers by offering them seats on the new junta according with their standing in the armed forces removed a potential source of distraction and even risk.[87] By the time of the coup, too, Min Aung Hlaing had served as Commander-in-Chief of Defence Services for a decade. The roster of senior officers in the Tatmadaw was, not least, a product of his preferences and decisions — reflective perhaps of patterns of loyalty about which the data on which this article draws make it impossible to say as much as one would like.
Min Aung Hlaing was due to retire from his position as Commander-in-Chief and from active military service on turning 65 in July 2021.[88] While after seizing power he quickly moved to postpone his retirement indefinitely,[89] there is nevertheless reason to believe that he sought at the time of the SAC’s formation in February to send reassuring signals to members of the next generation of the Tatmadaw’s leadership. Reshuffles in recent years had seen the rise of officers such as Moe Myint Htun and Maung Maung Kyaw into the military’s higher echelons, in an apparent indication both of the senior general’s intentions to oversee generational transition in the Tatmadaw and of his personal ties to these officers.[90] The noteworthy transfer of Mya Htun Oo from his senior military post to the cabinet may also reveal much about SAC and Tatmadaw dynamics, and about the regime’s future. These important matters merit closer scrutiny than the present article is able to offer.
The military membership of the SAC reflects characteristics of the Tatmadaw in other ways. All of the officers on the junta are Buddhists and apparently Bamars. The majority of them have served in the army, the dominant military branch. Their career trajectories typify those of senior Tatmadaw officers, especially in that they have in most cases included important counter-insurgency roles in ethnic states. All but one of the officers on the SAC have records of close involvement with the military’s two sprawling conglomerates; their ties to Myanmar Economic Holdings Limited are particularly noteworthy.
These multi-stranded, shared ties lead to two observations. One concerns the need to view common experiences not only of ethnicity and religion, professional formation, counter-insurgency and political outlook but also of oversight of business interests as possible sources of SAC cohesion. The second observation concerns the value of understanding the SAC, like the Tatmadaw more generally, as an economic actor — perhaps at least as much as a military or political actor.[91]
Five months after the 1 February coup, Min Aung Hlaing’s SAC regime may still be in its early days, seeking to assert and consolidate a credible level of control of the country that it may never achieve. The military officers who dominate the junta remain the same people who led the Tatmadaw before the coup. However, in the months ahead and perhaps beyond, and as already exemplified by the transfer of two officers on the SAC from senior military posts, dynamics between Min Aung Hlaing and his generals will play no small part in determining Myanmar’s future. Time will tell whether the unity and cohesion of the military members of the SAC, their fear of the consequences of failure, and their willingness to play continuing roles in their Commander-in-Chief’s project will hold up when confronted both by internal tensions and stresses among members of the junta and by pressures from within and beyond Myanmar’s borders.
ISEAS Perspective 2021/97, 23 July 2021
ENDNOTES
[1] “Republic of the Union of Myanmar: Office of the Commander-in-Chief of Defence Services – Order No (9/2021)”, Global New Light of Myanmar, 3 February 2021 (https://www.burmalibrary.org/sites/burmalibrary.org/files/obl/GNLM2021-02-03-red.pdf, downloaded 14 June 2021).
[2] The former junta changed its name from State Law and Order Restoration Council to State Peace and Development Council in 1997. The efforts of the SAC’s leadership to assert the new junta’s control and legitimacy bear strong similarity to the approach of the SLORC and SPDC. Further, the SLORC offered a rationale to justify its 1988 seizure of power similar to that offered at the time of Ne Win’s 1962 coup. While the stated objective of Ne Win’s Revolutionary Council was to prevent disintegration of the country, the SLORC claimed to intervene to re-establish “law and order” in the wake of a nation-wide democracy uprising that had halted the functioning of the state. In contrast to the SAC, however, the 17 founding members of the Revolutionary Council in 1962 were all military officers, though they included two non-Bamar soldiers: Brigadier-General Thomas Cliff and Colonel Tan Yu Sai. Three civilians, including one non-Bamar, would join the junta nine years later. The durability of Myanmar’s earlier junta certainly helps account for popular skepticism about the SAC’s promise to hold elections — whether in one year or in two years; see Allegra Mendelson, “Myanmar’s military may extend emergency rule by up to two years”, Al Jazeera, 7 April 2021 (https://www.aljazeera.com/news/2021/4/7/myanmar-military-may-extend-emergency-rule-by-up-to-two-years, downloaded 24 June 2021).
[3] That cabinet is the subject of a further ISEAS Perspective piece, now in preparation.
[4] Htet Naing Zaw, “ဒုတိယဗိုလ်ချုပ်ကြီး မောင်မောင်အေး ကြည်း ၊ ရေ ၊ လေ ညှိနှိုင်းကွပ်ကဲရေးမှူး ဖြစ်လာ” [Lieutenant General Maung Maung Aye Becomes Joint Chief of Staff of the Army, Navy and Air Force], The Irrawaddy, 4 February 2021 (https://burma.irrawaddy.com/news/2021/02/04/237628.html, 18 June 2021). Moe Aung is the son of Aung Thaung — a leading figure in the Tatmadaw’s electoral vehicle, the Union Solidarity and Development Party; personal communication, former Myanmar civil servant and long-time Tatmadaw observer, 1 July 2021.
[5] Personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[6] Htet Naing Zaw, “NLD Election Win Raises New Questions over Myanmar Military Chief’s Future”, The Irrawaddy, 24 November 2020 (https://www.irrawaddy.com/opinion/analysis/nld-election-win-raises-new-questions-myanmar-military-chiefs-future.html, downloaded 18 June 2021).
[7] Htet Naing Zaw, “ဒုတိယဗိုလ်ချုပ်ကြီး မောင်မောင်အေး ကြည်း”. Maung Maung Aye became the commander of the Naypyitaw Command in 2010 and Chief of Armed Forces Training in 2015. He also previously headed Bureau of Special Operations-6, located in Naypyitaw.
[8] At the same time, implicit in the article’s approach is a belief in the heuristic value of taking seriously the SAC as a regime. While few observers of the Indonesian scene in the late 1960s could, for example, have predicted that General Soeharto’s nascent New Order regime would last a further three decades, attention to the formative period of that regime certainly paid rich dividends to Indonesia-watchers over the long term.
[9] The authors thank five long-time observers of the Tatmadaw for their enlightening and valuable comments on, and corrections to, a draft version of this article. Those observers will find many of their ideas reflected in the present version. All errors of fact and interpretation remain the authors’ own, and they look forward to work on the part of others to develop a more detailed and better-informed understanding of the SAC and its dynamics. Two further articles, presenting data on civilian members of the SAC and on the cabinet appointed by the junta, will follow the publication of this one. The general inspiration for the approach taken in these articles is a series of pieces prepared by scholars associated with the Cornell Modern Indonesia Project and published in the journal Indonesia between 1969 and 2014 — under the title, first, of “Current Data on the Indonesian Army Elite” and then of “Current Data on the Indonesian Military Elite”; see https://ecommons.cornell.edu/handle/1813/52499/discover?query=“current+data”&submit= (downloaded 22 June 2021). The original purpose of these pieces was to give readers a means of understanding General Soeharto’s emerging New Order regime in Indonesia and some of the dynamics that shaped it — a purpose to which the present article also aspires in the case of Myanmar’s emergent State Administration Council regime. The authors thank Douglas Kammen, a veteran analyst of the Indonesian armed forces, for his guidance as they designed the research on which this article draws. The specific inspiration for the title of the present piece is, of course, David Jenkins, Suharto and His Generals: Indonesian Military Politics, 1975-1983 (Ithaca, New York: Cornell University, Modern Indonesia Project, Southeast Asia Program, 1984).
[10] Wei Yan Aung, “The Day Japan Founded a Military Training School in Wartime Myanmar”, The Irrawaddy, 20 August 2020 (https://www.irrawaddy.com/specials/on-this-day/day-japan-founded-military-training-school-wartime-myanmar.html, downloaded 16 June 2021).
[11] This is unsurprising as the DSA, a four-year degree-granting programme, is regarded as the most prestigious military school in the country, one whose curriculum aims to mold its officer cadets into soldier-intellectuals. The DSA usually recruits fresh secondary-school graduates who are directly commissioned into the military after their graduation from the academy. Its graduates are generally considered to be those in the Tadmadaw with the highest academic qualifications. Personnel who start their military careers as non-commissioned officers are recruited by the OTS, where they follow six- to nine-month training programmes to become commissioned officers. In fact, the latter school was the country’s first military training school. Its notable alumni include NLD patron U Tin Oo, who rose through the ranks to serve as Tatmadaw Commander-in-Chief before being forced to retire on trumped up corruption charges in 1976, as well as 17 of the 19 founding members of the SLORC in 1988 — among them Generals Saw Maung and Than Shwe and then Brigadier General Khin Nyunt. On the DSA and the OTS, see ibid. and Maung Aung Myoe, Building the Tatmadaw: Myanmar Armed Forces since 1948 (Singapore: ISEAS Publishing, 2009).
[12] The Tatmadaw established other distinguished military schools, such as the Defence Services Technological Academy (DSTA), or upgraded existing institutions, such as the National Defence College (NDC, later elevated to university level), in the 1990s and the early 2000s; ibid, pp. 148, 157. Nevertheless, graduates of these institutions have not yet risen to the top of the military hierarchy, which DSA graduates continue to dominate. In this regard, even in a notoriously closed force, the shared educational background of the military members of the SAC makes them an in-group within an in-group.
[13] Htet Naing Zaw, “NLD Election Win Raises New Questions”.
[14] Htet Naing Zaw, “တပ်ချုပ်ဖြစ်လာနိုင်သူ စစ်သားကောင်း ဒုတိယ ဗိုလ်ချုပ်ကြီးစိုးဝင်း” [Vice Senior General Soe Win: A Good Soldier Who Could Become the Next Commander-in-Chief], The Irrawaddy, 5 December, 2020 (https://burma.irrawaddy.com/article/2020/12/05/234398.html, downloaded 18 June 2021).
[15] “Lt-Gen Mya Tun Oo Appointed Burmese Military’s Chief of General Staff”, The Irrawaddy, 29 August 2016 (https://www.irrawaddy.com/news/burma/lt-gen-mya-tun-oo-appointed-burmese-militarys-chief-of-general-staff.html, downloaded 18 June 2021).
[16] Personal communication, former Tatmadaw officer and DSA graduate, 17 June 2021.
[17] “Min Aung Hlaing Makes Himself Military Supremo for Life”, Myanmar Now, 22 May 2021 (https://myanmar-now.org/en/news/min-aung-hlaing-makes-himself-military-supremo-for-life, downloaded 18 June 2021), and personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021. Note that Sai Wanna, “ကာကွယ်ရေးဦးစီးချုပ်(လေ)တာဝန်အားဗိုလ်ချုပ်ကြီးမောင်မောင်ကျော်ခန့်အပ်” [General Maung Maung Kyaw Appointed as Commander-in-Chief of the Air Force], Myanmar Times, 3 January 2018 (https://myanmar.mmtimes.com/news/105533.html, downloaded 2 July 2021), states that Maung Muang Kyaw is a member of DSA intake 23, but, as the officer was born in 1964, that datum is hard to credit.
[18] Htet Naing Zaw, “NLD Election Win Raises New Questions”.
[19] Personal communication, former Tatmadaw officer and DSA graduate, 17 June 2021. As a captain, Aung Lin Dwe was personal staff officer to Major General Nyan Lynn, a member of the SLORC and commander of the South Eastern Command.
[20] “Myanmar Military Chief Expected to Appoint Loyalists as Reshuffle Looms”, The Irrawaddy, 13 February 2020 (https://www.irrawaddy.com/opinion/analysis/myanmar-military-chief-expected-appoint-loyalists-reshuffle-looms.html, downloaded 18 June 2021).
[21] Personal communications, academic expert on the Tatmadaw-a, 30 June 2021, and regional military analyst, 1 July 2021.
[22] As the cases of other Southeast Asian armed forces demonstrate, officers’ shared experiences as cadets, with the hierarchies and bonds resulting from those experiences, can prove a ready basis for military factionalism. Parcelling senior posts out among officers from different military-academy classes thus offers one means of preventing its emergence among members of the military leadership. One leading student of the 1962-1988 Ne Win regime and of the Tatmadaw’s history cites “an informal rule that came into effect from the end of the 1970s of not having officers from the same [DSA] graduating class occupy important posts at the same time”; see Nakanishi Yoshihiro, Strong Soldiers, Failed Revolution: The State and Military in Burma, 1962‒88 (Singapore: NUS Press, 2013), p. 264.
[23] Htet Naing Zaw, “ဒုတိယဗိုလ်ချုပ်ကြီး မောင်မောင်အေး ကြည်း”.
[24] Generally accepted figures put the strength of Myanmar’s military in 2002 at about 400,000 soldiers — some 370,000 soldiers in the Army, 16,000 in the Navy and 15,000 in the Air Force. The three forces’ relative shares in the total are believed to have remained basically unchanged; see Andrew Selth, “Known Knowns and Known Unknowns: Measuring Myanmar’s Military Capabilities”, Contemporary Southeast Asia 31, 2 (August 2009): 272-295. Access to trustworthy data on total force levels in 2021 remains a challenge, but one careful estimate puts them at 300-350,000 troops; academic expert on the Tatmadaw-b, 30 June 2021.
[25] Maung Maung Kyaw rose rapidly to the top ranks of the Tatmadaw in recent years, and he is seen as close to the senior general. His military pedigree also appears unimpeachable; his father General Thura Kyaw Htin, a close aide to Ne Win, served as Tatmadaw Commander-in-Chief in 1976-1985 following the ouster of U Tin Oo from that post, as Deputy Prime Minister, and subsequently as Minister for Defence. For a discussion of the history of generational change in the Tatmadaw, see Nay Yan Oo, “A New Tatmadaw with Old Characteristics”, pp. 30-69 in Montesano, Chong and Prajak, Praetorians, Profiteers or Professionals?, pp. 32-35. Maung Maung Kyaw also has links to diplomatic circles, as his elder brother Thant Kyaw was Deputy Minister for Foreign Affairs during the 2011-2016 Thein Sein administration; see “New Air Force Chief Has Risen Rapidly Through the Ranks”, The Irrawaddy, 19 March 2018 (https://www.irrawaddy.com/news/new-air-force-chief-risen-rapidly-ranks.html, downloaded 18 June 2021).
[26] Myanmar’s light infantry divisions (ခြေမြန်တပ်မ) are mobile units trained for counter-insurgency and jungle warfare that proved effective in countering Communist insurgents in the 1970s. The Tatmadaw has ten such divisions, each composed of ten light infantry battalions.
[27] The Tatmadaw currently operates 14 Regional Military Commands (RMCs, တိုင်း စစ်ဌာနချုပ်): the Northern Command, the North Eastern Command, the Eastern Command, the South Eastern Command, the Southern Command, the Western Command, the South Western Command, the North Western Command, the Yangon Command, the Coastal Region Command, the Triangle Region Command, the Central Command, the Naypyitaw Command, and the Eastern Central Command.
[28] Bureaus of Special Operations (BSOs, စစ်ဆင်ရေး အထူးအဖွဲ့ ) are high-level field units in the Army formed with the original purpose of coordinating regional military commands in counter-insurgency operations. There are currently six bureaus: BSO-1 (formed in 1978), BSO-2 (1979), BSO-3 (2002), BSO-4 (2002), BSO-5 (2005), and BSO-6 (2007).
[29] “Senior General Min Aung Hlaing, Tatmadaw Commander-in-Chief”, ALTSEAN-Burma, n.d. (https://web.archive.org/web/20180112154939/http://www.altsean.org/Research/Regime%20Watch/Executive/CIC.php, downloaded 18 June 2021).
[30] Htet Naing Zaw, “NLD Election Win Raises New Questions”. Note that this command is responsible for military operations in Rakhine State; Wa Lone, “Command Structure of the Myanmar Army’s Operation in Rakhine”, Reuters, 25 April 2017 (www.reuters.com/article/us-myanmar-rohingya-crisis-army-idUSKBN17R18F, downloaded 1 July 2021).
[31] Htet Naing Zaw, “တပ်ချုပ်ဖြစ်လာနိုင်သူ စစ်သားကောင်း ဒုတိယ ဗိုလ်ချုပ်ကြီးစိုးဝင်း”.
[32] “Lt-Gen Mya Tun Oo Appointed Burmese Military’s Chief of General Staff”.
[33] Aung Zaw, “What the Recent Military Shake-Ups Really Mean”, The Irrawaddy, 15July 2019 (https://www.irrawaddy.com/opinion/commentary/recent-military-shake-ups-really-mean.html, downloaded 14 June 2021).
[34] Personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[35] United Nations Human Rights Council, “The Economic Interests of the Myanmar Military (16 September 2019)” (https://www.ohchr.org/EN/HRBodies/HRC/MyanmarFFM/Pages/EconomicInterestsMyanmarMilitary.aspx, downloaded 14 June 2021), p. 70.
[36] “Myanmar Military Chief Expected to Appoint Loyalists as Reshuffle Looms”.
[37] Personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[38] On the centrality of counter-insurgency to the history and identity of the Tatmadaw, see the brief discussion in Michael J. Montesano, Terence Chong and Prajak Kongkirati, “Introduction: Two Mainland Southeast Asian Militaries in Comparative Perspective”, pp. 1-29 in Michael J. Montesano, Terence Chong and Prajak Kongkirati, eds., Praetorians, Profiteers or Professionals? Studies on the Militaries of Myanmar and Thailand (Singapore: ISEAS Publishing, 2020), pp. 18-20.
[39] It is also important to note that, while holding the rank of captain and serving under Myanmar’s previous junta during the 1990s, Moe Myint Htun was a personal staff officer to Vice Senior General Maung Aye; see Nanda, “Min Aung Hlaing Reshuffles Senior Military Ranks Ahead of Election”, Frontier Myanmar, 19 May 2020 (https://www.frontiermyanmar.net/en/min-aung-hlaing-reshuffles-senior-military-ranks-ahead-of-election, downloaded 23 June 2020).
[40] “Myanmar Coup: Min Aung Hlaing, the General Who Seized Power”, BBC News, 1February 2021 (https://www.bbc.com/news/world-asia-55892489 , downloaded 14 June 2021).
[41] Htet Naing Zaw, “NLD Election Win Raises New Questions”.
[42] “Lt-Gen Mya Tun Oo Appointed Burmese Military’s Chief of General Staff”.
[43] Ibid.
[44] Personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[45] “New Air Force Chief Has Risen Rapidly Through the Ranks”.
[46] Htet Naing Zaw, “NLD Election Win Raises New Questions”.
[47] “အငယ်ဆုံးတိုင်းမှူး စစ်ဦးစီးအရာရှိချုပ်ဖြစ်လာ”[Youngest Regional Commander Becomes Army Chief of Staff], BBC Burmese, 9 January 2017 (https://www.bbc.com/burmese/burma-38562418, downloaded 5 July 2021), and “Burma Army Reshuffles Senior Positions”, The Irrawaddy, 11 May 2017 (www.irrawaddy.com/news/burma/burma-army-reshuffles-senior-positions.html, downloaded 1 July 2021).
[48] Personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[49] Htet Naing Zaw, “Younger Myanmar Military Officers Promoted to Key Roles in Reshuffle”, The Irrawaddy, 11 May 2020 (www.irrawaddy.com/news/burma/younger-myanmar-military-officers-promoted-key-roles-reshuffle.html, downloaded 1 July 2021).
[50] Personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[51] Demonstrating that potential and earning that trust come not least by way of performance in ethnic-state regional commands. For his part, Senior General Min Aung Hlaing served as the chief of BSO-2, during which he gained credentials in counter-insurgent operations against the Myanmar National Democratic Alliance Army (MNDAA) in the Kokang region bordering China’s Yunnan province in 2009; Dominic Faulder, “Who is Myanmar Junta Chief Min Aung Hlaing? 5 Things to Know”, Nikkei Asia, 6 February 2021 (https://asia.nikkei.com/Spotlight/Myanmar-Coup/Who-is-Myanmar-junta-chief-Min-Aung-Hlaing-5-things-to-know, downloaded 14 June 2021).
[52] Htet Naing Zaw, “NLD Election Win Raises New Questions”.
[53] Htet Naing Zaw, “တပ်ချုပ်ဖြစ်လာနိုင်သူ စစ်သားကောင်း ဒုတိယ ဗိုလ်ချုပ်ကြီးစိုးဝင်း”.
[54] Data on Mya Htun Oo’s career trajectory come from “Lt-Gen Mya Tun Oo Appointed Burmese Military’s Chief of General Staff” and Yan Pai, “Burmese Military Reshuffle Sees New Security Chief Appointed”, The Irrawaddy, 9 September 2014 (www.irrawaddy.com/news/burma/burmese-military-reshuffle-sees-new-security-chief-appointed.html, downloaded 1 July 2021), corroborated by personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[55] Htet Naing Zaw, “NLD Election Win Raises New Questions”.
[56] Personal communication, former Tatmadaw officer and DSA graduate, 29 June 2021.
[57] Ibid.
[58] Ibid.
[59] “Myanmar Coup: Min Aung Hlaing, the General Who Seized Power”.
[60] Ibid.
[61] Htet Naing Zaw, “တပ်ချုပ်ဖြစ်လာနိုင်သူ စစ်သားကောင်း ဒုတိယ ဗိုလ်ချုပ်ကြီးစိုးဝင်း”.
[62] “Lt-Gen Mya Tun Oo Appointed Burmese Military’s Chief of General Staff”.
[63] Htet Naing Zaw, “NLD Election Win Raises New Questions”. Having become BSO-6 chief at the age of 51, Moe Myint Htun is believed to have very good career prospects; also see note 90 below.
[64] During the SPDC era, Khin Nyunt’s access to information and the political ambitions that he demonstrated while serving as the Tadmadaw’s intelligence chief led to tensions within the military’s leadership. Khin Nyunt had assumed control of the intelligence apparatus in 1983, when it was known as the Directorate of Defence Services Intelligence (DDSI). In 2001, it became the Office of the Chief of Military Intelligence (OCMI) and remained under Khin Nyunt’s leadership until the time of his fall in 2004. He had been a founding member of the SLORC as its Secretary-1, relinquishing that post to become prime minister in 2003. Following Khin Nyunt’s downfall, the OCMI was restructured as the Office of the Chief of Military Security Affairs (OCMSA), with greater oversight from military leaders. Further, regional commanders took control of military intelligence battalions in their areas of responsibility; see Andrew Selth, Secrets and Power in Myanmar: Intelligence and the Fall of General Khin Nyunt (Singapore: ISEAS Publishing, 2019), p. 91. In a further indication of the place of figures with military intelligence backgrounds in the SAC regime, Lieutenant General (ret.) Myint Swe — who now serves as the regime’s acting president and was vice president under the toppled NLD government — shares with Mya Htun Oo and Ye Win Oo a history of helming the OCMSA.
[65] “45 Senior Military Officers Retire to Contest Nov. 8 Poll”, The Irrawaddy, 11 August 2015
(https://www.irrawaddy.com/news/burma/45-senior-military-officers-retire-to-contest-nov-8-poll.html, downloaded 14 June 2021).
[66] “လေတပ်ဦးစီးချုပ်သစ် ဗိုလ်ချုပ်ကြီး မောင်မောင်ကျော်” [The New Commander-in-Chief of the Air Force General Maung Maung Kyaw], BBC Burmese, 2 January 2018 (https://www.bbc.com/burmese/burma-42544888 , downloaded 14 June 2021).
[67] “Council implementing Regulation (EU) 2021/480 of 22 March 2021 implementing Regulation (EU) No 401/2013 concerning restrictive measures in respect of Myanmar/Burma”, Official Journal of the European Union, 22 March 2021 (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2021:099I:FULL, downloaded 14 June 2021).
[68] Confirmation awaits further research on such aspects of the biographies of SAC members as their family backgrounds, their pre-DSA educations, the early stages of their military careers and their webs of connections within the armed forces.
[69] On Bamar Buddhist ethno-nationalism and its relationship to Myanmar’s current crisis, see Thant Myint-U, “Myanmar’s Coming Revolution: What Will Emerge from Collapse?”, Foreign Affairs (July/August 2021) (https://www.foreignaffairs.com/articles/burma-myanmar/2021-06-11/myanmars-coming-revolution, downloaded 14 June 2021).
[70] MEHL was the first private company established in Myanmar after the 1988 military coup that toppled the country’s socialist regime. Its official aim was to ensure the welfare of military personnel, their dependents, and war veterans. A third of MEHL’s share are owned by military units — including regional commands, light infantry divisions, battalions and also war veterans associations. Another two thirds are owned by individual serving or retired military personnel. The MEC was established in 1997. These two conglomerates generate significant revenue not only for individual soldiers but also for the military itself; see United Nations Human Rights Council, “The Economic Interests of the Myanmar Military (16 September 2019)”, p. 19, and Maung Aung Myoe, “The Defence Expenditures and Commercial Interests of the Tatmadaw”, pp. 97-131 in Montesano, Chong and Prajak, Praetorians, Profiteers or Professionals?
[71] See Maung Aung Myoe, ibid.
[72] Ibid., p. 18.
[73] “Myanmar: Military Ltd: The Company Financing Human Rights Abuses in Myanmar”, Amnesty International, 10September 2020, p. 23 (https://www.amnesty.org/en/documents/asa16/2969/2020/en/ , downloaded 14 June 2021).
[74] In Myanmar, နာယကအဖွဲ့ .
[75] United Nations Human Rights Council, “The Economic Interests of the Myanmar Military (16 September 2019)”, p. 70.
[76] Ibid. Even though the precise functions and purposes of the Patrons Group are unclear, observers believe that the senior military leaders among its members have considerable influence and control over MEHL; ibid., p. 19.
[77] Ibid., p. 70. All of these officers are believed to have derived significant income from shareholdings in the Tatmadaw conglomerates. In 2010-2011, the year that he became Commander-in-Chief, Min Aung Hlaing owned 5,000 shares in MEHL and received an annual dividend of 1.5 million kyats (US$250,000). Likewise, Soe Win owned 10,000 shares in MEHL and received dividends of 500,000 kyats (US$83,333) in the same year, 2010-2011; see “Myanmar: Military Ltd: The Company Financing Human Rights Abuses in Myanmar”, p. 44.
[78] The following table offers what is likely to be only a partial list of the most apparent such stakes.
The data in this table come from “Myanmar Military SAC Members, Their Businesses and Associates that Require Targeted Sanctions”, Justice for Myanmar, 9April 2021
(https://justiceformyanmar.github.io/justiceformyanmar.org/stories/myanmar-military-sac-members-their-businesses-and-associates-that-require-targeted-sanctions.html, downloaded 14 June 2021).
[79] Joe Kumbun, “Do the Myanmar Junta’s New ‘Peace-Making Committees’ Stand Any Chance of Success?”, The Diplomat, 4 March 2021 (https://thediplomat.com/2021/03/do-the-myanmar-juntas-new-peace-making-committees-stand-any-chance-of-success, downloaded 14 June 2021). Eight EAOs signed the NCA in 2015, while two more joined the process in 2018, all under the NLD government; see Yuichi Nitta and Thurein Hlahtway, “Two Ethnic Groups in Myanmar Sign Ceasefire”, Nikkei Asia, 13 February 2018 (https://asia.nikkei.com/Politics/Two-ethnic-groups-in-Myanmar-sign-ceasefire, downloaded 16 June 2021).
[80] Nay Myo Win, “Military Calls for Prompt Continuation of Peace Talks”, Eleven, 10November 2020 (https://elevenmyanmar.com/news/military-calls-for-prompt-continuation-of-peace-talks, downloaded 14 June 2021).
[81] “Peace Process under Thein Sein Government”, Myanmar Peace Monitor (https://www.mmpeacemonitor.org/government-peace-plan, downloaded 14 June 2021).
[82] Dominic Faulder, “Who is Myanmar Junta Chief Min Aung Hlaing? 5 Things to Know”.
[83] Nyein Nyein, “Myanmar Military Sets Up New Committee for Peace Talks”, The Irrawaddy, 10November 2020 (https://web.archive.org/web/20201111073521/https://www.irrawaddy.com/news/burma/myanmar-military-sets-new-committee-peace-talks.html, downloaded 14 June 2021).
[84] Joe Kumbun, “Do the Myanmar Junta’s New ‘Peace-Making Committees’ Stand Any Chance of Success?” Min Aung Hlaing chairs the 17-member NSPCC, on which Soe Win serves as vice chair. Additional SAC members sit alongside these officers on that committee; ibid. Soe Win chairs the NSPWC, whose 33 members include Union ministers in the SAC-appointed cabinet, regional commanders, and chairmen of junta-installed state and regional administrative councils, ibid. While not an SAC member, Lieutenant General Yar Pyae chairs the 14-member NURPRCC. He was also selected last November to head the Tatmadaw’s Peace Talks Committee, to which Aung Lin Dwe was appointed to serve as secretary; Nyein Nyein, “Myanmar Military Sets Up New Committee for Peace Talks”.
[85] Roseanne Gerin, “Myanmar Military Launches Body for Talks With Ethnic Armies as Vote Count Goes On”, Radio Free Asia, 10 November 2020 (https://www.rfa.org/english/news/myanmar/peace-talks-committee-11102020202224.html, downloaded 16 June 2021).
[86] While recent months have seen intense combat between Tatmadaw forces and EAOs in many parts of the country, peace committees formed by the military have nonetheless been in talks with several ethnic organizations and armed groups, such as the Democratic Karen Buddhist Army (DKBA), the Karen National Union/Karen National Liberation Army (Peace Council) – KNU/KNLA (PC), and the Arakan Liberation Party (ALP); see “National Unity and Peace Coordination Committee Meets Officials of DKBA, KNU/KNLA-PC Separately”, Global New Light of Myanmar, 27 April 2021
(https://www.burmalibrary.org/sites/burmalibrary.org/files/obl/GNLM2021-04-27-red.pdf, downloaded 14 June 2021), and “NSPNC Meets ALP Officials”, Global New Light of Myanmar, 14May 2021 (https://www.burmalibrary.org/sites/burmalibrary.org/files/obl/GNLM2021-05-14-red.pdf, downloaded 14 June 2021).
[87] For some parallels in Soeharto’s approach in the early years of the long-lasting New Order regime in Indonesia, see Jenkins, Suharto and His Generals, pp. 41 – 42. Jenkins’s ongoing work on Indonesia’s durable dictator has most recently resulted in David Jenkins, Young Soeharto: The Making of a Soldier, 1921 – 1945 (Singapore: ISEAS Publishing, 2021) — the first volume in a planned trilogy on Soeharto’s life up to 1966.
[88] On 4 February, just three days after the coup, Min Aung Hlaing extended his term as Commander-in-Chief of the Defence Services indefinitely; see “Min Aung Hlaing Makes Himself Military Supremo for Life”.
[89] Ibid. “Myanmar Junta Scraps Retirement Age for Its Leaders”, The Irrawaddy, 20 May 2021 (https://www.irrawaddy.com/news/burma/myanmar-junta-scraps-retirement-age-for-its-leaders.html, downloaded 6 July 2017), notes that this postponement also applies to Vice Commander in Chief Soe Win.
[90] On Maung Maung Kyaw, see note 25 above. As for the relatively young and junior Moe Myint Htun, the belief in well-informed circles in Yangon is that his prior service under Min Aung Hlaing has created a strong bond of loyalty between the two officers; personal communication, former Myanmar civil servant and long-time Tatmadaw observer, 1 July 2021; also see note 63 above.
[91] See Maung Aung Myoe, “The Defence Expenditures and Commercial Interests of the Tatmadaw”, pp. 108 ff. Complementing these considerations is what the business ties of SAC members’ families may suggest about the revival of the “crony capitalism” of the SLORC/SPDC era — not least in a Myanmar facing international economic sanctions. A further ISEAS Perspective piece in this three-instalment series on the SAC, focused on the junta-appointed cabinet, will address the place of Tatmadaw business interests in the SAC’s apparent vision for the Myanmar economy.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |
2021/96 “Why is Vietnam’s Military Modernisation Slowing?” by Nguyen The Phuong
EXECUTIVE SUMMARY
- Security challenges presented by the South China Sea dispute led to Vietnam’s efforts to modernise its armed forces over the past two decades. However, after the fall of Prime Minister Nguyen Tan Dung in 2016, the procurement of major military assets has virtually ground to a halt.
- Apart from budget constraints, another important reason that has impeded Vietnam’s military modernisation is the deep-rooted mindset of the Vietnam People’s Army (VPA) that considers political action more important than military action, and propaganda more important than fighting.
- The high-profile anti-corruption campaign led by General Secretary Nguyen Phu Trong since 2016 has also weakened the network of military officers who engaged in rent-seeking activities, directly affecting the military procurement process.
- Vietnam aims to fully modernise its military by 2030. However, more still needs to be done in essential areas such as strategy making, organisational restructuring and defense industry upgrading. In particular, the VPA’s mindset of prioritising political action over military action needs to be changed.
* Nguyen The Phuong is Lecturer at the Faculty of International Relations, Ho Chi Minh City University of Economics and Finance (UEF). He is also Visiting Fellow at the Saigon Center for International Studies (SCIS), University of Social Sciences and Humanities – Vietnam National University-HCMC, and a member of the South China Sea Chronicle Initiative (SCSCI).
INTRODUCTION
Vietnam’s approach to building and modernising the Vietnam People’s Army (VPA) has evolved over time. In the early 2000s, when the country’s top priority was economic development, Vietnam focused on maintaining armed forces that were “strong enough with a reasonably numerical strength and high degree of training proficiency”.[1] In the 2019 Defense White Paper, however, Vietnam set the target of developing a “revolutionary, regular, highly-skilled, gradually modernized VPA with some forces advancing straight to modernity […] meeting requirements of safeguarding the Homeland and responding to hi-tech wars”.[2] This was also the first time the country had officially and publicly set the target for its military modernisation endeavours, aiming to “build the VPA into a modern military” from 2030 onward.[3]
The pace of Vietnam’s military modernisation, however, has slowed down over the past five years despite the country’s increasingly complex and unpredictable external security environment. This article examines the factors underlying this trend. Apart from budget constraints, the paper argues that the VPA’s mindset of considering political action more important than military action and propaganda more important than fighting is constraining its modernisation efforts. At the same time, Vietnam’s anti-corruption campaign since 2016 has also weakened the rent-seeking networks within the VPA which used to play an important role in promoting the VPA’s modernisation programmes as a rent-seeking measure. With these programmes facing major setbacks, the power gap between Vietnam and China, its main rival in the South China Sea, will likely continue to widen.
MILITARY MODERNISATION GRINDING TO A HALT
From a “strong enough” military to a “gradually modernised” to a fully “modern” military, this 30-year military modernisation trajectory of Vietnam converges with the increasingly complex and asymmetrical nature of the South China Sea dispute. With Vietnam’s defence budget increasing year by year, it is expected that more and more sophisticated assets will be procured and put into service. According to official sources, the country’s defence budget is set to increase from US$5 billion in 2018 to US$7 billion by 2022, of which 20 per cent will be spent to “replace older equipment and introduce new and modern capabilities” annually.[4]
However, the results have been underwhelming. While the VPA has continued to invest in the production and procurement of small and medium assets such as assault rifles, radars, anti-air missile systems, main-battle tanks or training jets, the procurement of big and significant systems for the air force and the navy has virually ground to a halt after the fall of then-Prime Minister Nguyen Tan Dung in 2016. The last big-ticket purchase for the air force was made in 2013 (12 Sukhoi Su-30MK2 costing US$600 million), and for the navy in 2011 (two Gepard-class frigates costing US$700 million).[5] China, meanwhile, launched two dozen large warships – from destroyers to huge amphibious landing docks and corvettes – in 2019 alone. Similarly, over the past five years, the Vietnamese navy has commissioned only six major naval assets (two Kilo-class submarines in 2017, two Gepard-class frigates in 2018 and two second-hand Pohang-class corvettes in 2019). As such, the pace of Vietnam’s military modernisation in the past five years has been too slow for the country to deal with the increasing complexity of its external security environment. This is a legitimate cause for concern, given the country’s stated goal of having the navy and the air force advance “straight to modernity”.
The most common reason cited by many in explaining this failure is Vietnam’s budget constraints. Former Minister of Defense Phung Quang Thanh stressed in 2014 that the country’s overall budget was limited, and that money had to be allocated to other important areas of national development such as infrastructure, education or healthcare.[6] However, budget constraints do not seem to be the only reason behind this worrying trend.
THE OLD MINDSET
The launch of the Doi Moi (renovation) policy in 1986 was aimed at pulling Vietnam out of severe poverty and international isolation following a series of socio-economic crises in the 1980s. Policy makers in the early reform period largely perceived security challenges through the question of “security by what” instead of “security for whom”. The reformist and globalist “new thinkers” of this period argued that security should be ensured mainly through economic rather than military means.[7] They have since been locked in endless debates with anti-imperialist, conservative “old thinkers” over the shaping of Vietnam’s security policies.
Memories and experiences of the economic and social crises of the 1980s fuel enduring security concerns which shape the conflicting visions of the two camps. The new thinkers, in response to the economic crisis which preceded Doi Moi, felt that market-oriented reforms and international economic integration were needed to overhaul the country’s frail economy. Witnessing the socio-economic crises in the first half of the 1980s, the old thinkers also shared the concern that the legitimacy of the CPV would be challenged if the Party could not improve the economic well-being of the country and its people. However, pointing to the demise of communist regimes in the Soviet Union and Eastern Europe in the early 1990s, the old thinkers maintained a suspicious attitude towards the liberal ideas embraced by the new thinkers. As such, Vietnam’s post-Doi Moi economic liberalisation and international integration have always been challenged by hardcore ideological conservatives who prioritise regime survival over economic liberalisation.
Despite these differences, the two camps agree on at least one thing – the need to sustain the legitimacy of the Party. Doi Moi was, to this end, a pragmatic compromise between the two camps.[8] As the international order changed, so did the formula to generate legitimacy. Legitimacy could no longer be solely based on memories of the Party’s leadership during Vietnam’s military struggle for national unification and independence, or on the collective socialist economy. This led the Party to switch to performance-based legitimacy, namely its ability to maintain continuous economic growth and to improve the social and economic well-being of the people.[9]
The new thinkers therefore argue that the country’s security approach should “no longer [give] priority to military affairs but [allow] the conduct of a new foreign policy to play a bigger role in ensuring national security and supporting the economic development of Vietnam”.[10] While the new thinkers seek to strengthen the country’s ties with the West as fast as possible in order to reap the benefits of trade and globalisation, the old thinkers, on the other hand, are suspicious of “Western values” and perceive them as a threat to the Party’s revolutionary values and its monopoly of power.
Party-military relations have also evolved alongside the aforementioned political debate. This relationship is characterised by the highly visible political role of the VPA in ensuring the legitimacy and survival of the Party, officially enshrined in its famous slogan “building and protecting the socialist motherland”.[11] Alexander Vuving recently described this relationship as “mutual embeddedness”, which he deemed “the single most important thing that withstood all changes in the external and internal environment”.[12] The military “is the guardian and saviour of the Party; it fights for the Party’s supremacy, not for its own supremacy”.[13] The Party exerts its control over the military through a number of tools, from ideological indoctrination via the political commissar networks to a “dual elite” system where all military officers are simultaneously members of the Party, ensuring their loyalty and subjecting them to the Party’s control. And when the military intervenes in politics, “it intervenes on behalf of the party”.[14]
Nevertheless, due to the symbiotic nature of the relationship between the VPA and the Party, the VPA remains one of the most influential factions within the state apparatus when it comes to defence and security matters, alongside the Ministry of Public Security and the Ministry of Foreign Affairs. The military’s influence in the country’s top echelons trended upwards between 1989 and 2001, led by the late General Le Duc Anh, who was then minister of defence (1987-1992) and state president (1992-1997). The military’s influence during this period was also facilitated by the CPV’s deepened concerns about regime security following the collapse of the Soviet Union.[15] Power competition among different factions within the Party and within the military itself has seen a decrease in the military’s influence since 2001.[16] Regardless of the faction that dominates the leadership, however, the military tends to align with the conservatives because this party-military symbiosis “gives military leaders more say and more privileges than they would have” under a more open and progressive type of regime.[17] Against this backdrop, the VPA adopted the slogan “political action is more important than military action; propaganda is more important than fighting” as its main approach to strategic tasks.[18] The VPA’s top priority as mentioned in the Strategy to Safeguard the Homeland has always been “to secure the leading role of the Party”, while “protecting the Party, State, and the people” is promoted as an essential part of the National Defense Strategy.[19]
The dominance of the old thinkers in both the Party and the military has led to a conservative and cautious approach towards military modernisation, especially regarding “professionalisation”. The conservatives tend to prefer security partners which are not critical of the CPV regime and its human rights record, as regime security is considered their top priority. Due to their anti-Western sentiments, conservatives also favour traditional partners, mostly from the post-Soviet world, in terms of military procurement. Beside practical reasons such as the more affordable prices and maintenance costs that these partners offer, they also prefer the old-fashioned way of making acquisition deals behind closed doors through state monopolies, which Western partners normally avoid. Meanwhile, in their view, professionalisation is an alien concept infested with anti-regime notions, especially the implied idea of “separating the military from the Party”. They believe that there is no such thing as “a neutral military” or “a military without politics”. This conservative mindset causes the VPA to adopt a half-hearted approach to force modernisation and professionalisation.
A RENT-SEEKING MILITARY
Another factor that has contributed to the slowing of Vietnam’s military modernisation over the past five years is the weakening of the rent-seeking networks within the VPA which used to facilitate major defence acquisition programmes under the Nguyen Tan Dung administration. It is no coincidence that Vietnam’s most well-known military modernisation projects so far were implemented under Dung and his defense minister Phung Quang Thanh, whose web of influence had been characterised as “the biggest rent-seeking networks in the country”.[20] These networks took advantage of Vietnam’s economic reforms as well as its need to deal with emerging security threats in order to gain personal benefits, including through military modernisation programmes and unauthorised land deals. Since 2016, for example, dozens of high-ranking military officers, including then-Deputy Minister of Defence Nguyen Van Hien, have been prosecuted for mismanagement, mostly related to military-owned land.[21] The power struggle between Nguyen Tan Dung and General Secretary Nguyen Phu Trong, who since 2016 has led a high-profile anti-corruption campaign that targets many of Dung’s allies and associates, characterises the rivalry between a liberal-turned-rent-seeking camp on one hand versus a conservative one seeking to “clean up the system” on the other.[22] An unintended consequence of the campaign happens to be the military modernisation process, with purchases of big-ticket military assets slowing down significantly since 2016. Despite China’s increasing assertiveness in the South China Sea, the Party seems to prioritise domestic stability and maintaining its legitimacy over a “hard balancing” approach to maritime disputes.
Over the past five years, the VPA has made no major defence acquisitions, although there have been some sporadic small-scale contracts for the ground force (e.g., the T-90 main battle tank project) and the air force (e.g., the trainers project and some anti-air missile and radar systems). The navy, the most essential service in defending the country’s maritime sovereignty, has to share its limited budget with the coast guard. The navy’s main surface force still consists of just four 1.500-ton Gepard 3.9 frigates and several second-hand and Soviet-era frigates that have been refitted several times to prolong their service. Even for constabulary missions, the combined number of vessels from both the navy and the coast guard is insufficient for covering Vietnam’s sovereign waters in the South China Sea.
The slowing military modernisation drive has given rise to public concerns about its consequences. On the one hand, without strong and capable armed forces, especially the navy, Vietnam would not be able to deploy a comprehensive hedging strategy against China in which “hard balancing” plays an essential role.[23] The capacity gap between China and Vietnam is steadily widening. If China can establish an unchallenged presence in the South China Sea, not only Vietnam’s sovereignty but also its ruling Party’s legitimacy will be at risk. At the same time, the conservative mindset of the VPA has significantly limited the potential of many defense and security partnerships between Vietnam and Western countries, especially the United States. The cautious and suspicious attitude towards the West has deprived the VPA of the opportunity to learn from these advanced partners, especially in such areas as organisation, command and control, and how to modernise Vietnam’s defense industry.
CONCLUSION
The VPA has been undergoing four phases of modernisation since 1986, with the fourth one currently being shaped. The 2019 Defense White Paper may have set ambitious objectives for the country’s military modernisation programme, but given its current slow progress, it remains to be seen whether all these objectives can be met on time, and if so, whether or not a modernised VPA will have the necessary capabilities and proper mindset to deal with a fast-changing regional security environment.
The VPA will face significant challenges in getting “fully modernised” if it does not change the old mindset, which puts political affairs above modernisation and regime sercurity above external security. At the same time, more also needs to be done to improve defence strategy, restructure the VPA’s organisation, and upgrade the country’s Soviet-style defence industry. Without such reforms, Vietnam’s military modernisation programme will risk losing momentum, putting the country and the VPA in a more precarious position, given the backdrop of an increasingly complex and unpredictable regional strategic environment.
ISEAS Perspective 2021/96, 22 July 2021
ENDNOTES
[1] Ministry of Defense, Vietnam’s National Defense in the Early Years of the 21st Century (Hanoi, 2004),pp. 59-60.
[2] Ministry of Defense, 2019 Vietnam National Defense (Hanoi, 2019) p. 95.
[3] Ibid, pp. 95-96.
[4] Official brochure of the first Vietnam International Defense & Security Exhibition (VIDSE). The exhibition was initially planned for September 2020 in Hanoi, but was postponed due to the COVID-19 pandemic.
[5] Vietnam purchased 12 Yakolev Yak-130 trainers from Russsia (worth US$350 million) in 2019 and 12 Aero L-39NG trainers from the Czech Republic in 2021. These trainers are expected to be delivered from 2021 to 2024.
[6] Việt Hoàng, “Bộ trưởng Phùng Quang Thanh: Xây dựng một số quân binh chủng tiến thẳng lên hiện đại” [Minister Phùng Quang Thanh: Building some services straight into modernity], Dân Trí, 3 December 2014, https://dantri.com.vn/chinh-tri/bo-truong-phung-quang-thanh-xay-dung-mot-so-quan-binh-chung-tien-thang-len-hien-dai-1418233 230.htm.
[7] Alexander Vuving, “Vietnamese Perspective on Transnational Security Challenges”, in Issues for Engagement: Asian Perspectives on Transnational Security Challenges, edited by David Fouse (Hawaii: Daniel K. Inouye Asia-Pacific Center for Security Studies, 2012), p. 168.
[8] Ibid.
[9] Le Hong Hiep, “Performance-based Legitimacy: The Case of the Communist Party of Vietnam and ‘Doi Moi’”, Contemporary Southeast Asia 34, No. 2 (2012), pp. 145-172.
[10] Nguyen Vu Tung, “Vietnam’s Security Challenges: Hanoi’s New Approach to National Security and Implications to Defense and Foreign Policies”, in Asia Pacific Countries’ Security Outlook and Its Implications for the Defense Sector, NIDS Joint Research Series No.5 (Tokyo: The National Institute for Defense Studies, 2010), pp. 107-120.
[11] Carlyle A. Thayer, “Military politics in contemporary Vietnam: Political engagement, corporate interests, and professionalism”, in The Political Resurgence of the Military in Southeast Asia, edited byMarcus Mietzner (New York: Routledge, 2011), p. 81.
[12] Alexander Vuving, “Mutual Embeddedness: The Architecture of Civil-military Relations in Vietnam”, SocArXiv Papers, draft as of 31 January 2021, https://osf.io/preprints/socarxiv/4a9z7/.
[13] Ibid, p. 4.
[14] Amos Perlmutter & William M. LeoGrande, “The Party in Uniform: Toward a Theory of Civil-Military Relations in Communist Political Systems,” American Political Science Review 76, no. 4 (1982), p. 788.
[15] Vuving, “Mutual Embeddedness”, pp. 8-12. For more information about the power struggle between the different CPV factions, see Alexander Vuving, “How Experience and Identity Shape Vietnam’s Relations with China and the United States,” in Asia’s Middle Powers? The Identity and Regional Policy of South Korea and Vietnam,edited by Joon-Woo Park, Gi-Wook Shin and Donald W. Keyser (Stanford: Walter H. Shorenstein Asia-Pacific Research Center Books, 2013), pp. 53-71.
[16] For an analysis of the rise and fall in the VPA’s political influence in Vietnam, see Le Hong Hiep, “The Military’s Resurging Influence in Vietnam”, ISEAS Perspective, No. 54/2021, /wp-content/uploads/2021/03/ISEAS_Perspective_2021_54.pdf.
[17] Vuving, “Mutual Embeddedness”, p. 16.
[18] Nguyen Tan Tuan, “Bài 2: Chính trị trọng hơn quân sự” [Part 2: Politics is important than military], Quân đội Nhân dân online, 10 November 2014, https://www.qdnd.vn/chinh-tri/tin-tuc-su-kien/bai-2-chinh-tri-trong-hon-quan-su-425345.
[19] Ministry of Defense, 2019 Vietnam National Defense, pp. 21-22.
[20] Alexander Vuving, “Vietnam in 2018: A Rent-Seeking State on Correction Course,” in Southeast Asian Affairs 2019, edited by Daljit Singh and Malcolm Cook (Singapore: ISEAS – Yusof Ishak Institute, 2019), pp. 375-394.
[21] There have been discussions in Vietnam about the level of corruption within the military, especially in the areas of land management, research and development (R&D), and acquisition. The public, however, has had almost no access to evidence regarding corruption in R&D or procurement due to the sensitivity of the information, and the attempt of the regime to maintain the image of a clean and invincible military. Recently, however, there have been international media reports about possible corruption related to VPA’s defense deals worth billions of dollars. See, for example, Intelligence Online, “Corruption suspicions in Hanoi freeze defense deals”, 21 October 2020, https://www.intelligenceonline.com/international-dealmaking/2020/10/21/corruption-suspicions-in-hanoi-freeze-defence-deals,109615408-art.
[22] Le Hong Hiep, “Vietnam’s Anti-corruption Campaign: How much is it about Political Infighting”, ISEAS Commentaries, 5 July 2018, /media/commentaries/vietnams-anticorruption-campaign-how-much-is-it-about-political-infighting-by-le-hong-hiep/.
[23] For an analysis of Vietnam’s “rebalancing” strategy in the South China Sea, see Tran Truong Thuy, “Rebalancing: Vietnam’s South China Sea Challenges and Responses”, Maritime Issues, 27 December 2016, http://www.maritimeissues.com/working-papers/rebalancing-vietnams-south-china-sea-challenges-and-responses.html.
| ISEAS Perspective is published electronically by: ISEAS – Yusof Ishak Institute 30 Heng Mui Keng Terrace Singapore 119614 Main Tel: (65) 6778 0955 Main Fax: (65) 6778 1735 Get Involved with ISEAS. Please click here: /support | ISEAS – Yusof Ishak Institute accepts no responsibility for facts presented and views expressed. Responsibility rests exclusively with the individual author or authors. No part of this publication may be reproduced in any form without permission. © Copyright is held by the author or authors of each article. | Editorial Chairman: Choi Shing Kwok Editorial Advisor: Tan Chin Tiong Managing Editor: Ooi Kee Beng Editors: William Choong, Lee Poh Onn, Lee Sue-Ann, and Ng Kah Meng Comments are welcome and may be sent to the author(s). |