Markets (Page 197)

JAKARTA – As the first and only Indonesian leader with a commercial background, albeit from the heartland of rural Java, President Joko Widodo’s preoccupation with the economy and attracting foreign investment always dominates his agenda on trips abroad.

So it was with his latest visit to Australia, but with an important difference. Buoyed by the rapid growth of the electric vehicle (EV) industry, there are signs the two giant neighbors may have finally found the basis for a stronger and more sustainable relationship.

“I think this will be a massive transformation of the bilateral economic space because it has bigger implications,” former Australian diplomat Kevin Evans, director of the Australia-Indonesia Centre, told the Australian Broadcasting Corp (ABC).

“It’s not just about the Australia-Indonesian corridor,” he said. “It’s actually about doing things together that allows a move into much bigger markets around the region and the world.”

It will also depend on the active involvement of the Indonesian private sector and willingness of Indonesia-based companies to take a stake in West Australian lithium mines to shore up their supply chains.

“It will depend on Indonesia understanding that things are done here on a commercial basis,” says one Australian official, noting the Indonesian government’s interventionist role in making things happen in its economy. “It will still take time and a lot of effort.”

Prime Minister Anthony Albanese, who scored points with Widodo by making Jakarta his first port of call after he was sworn in last year, spoke of the often-turbulent relationship as “shifting up a gear.” 

Central to that is the potential symbiotic partnership that could develop around EV batteries and Indonesia’s interest in importing Australian lithium, which along with some rare earth minerals is the one significant component it lacks. 

Shortly before the leaders met, the Indonesian Chamber of Commerce and Industry (Kadin), signed a so-called Action Plan with the state government of West Australia, to bring both parties closer together in the critical minerals sector.

“The signing of the action plan is essential to seize opportunities and gather all parties involved in the critical mineral sector with those parties who will support them financially to realize more concrete cooperation,” said Indonesian Economic Coordinating Minister Airlangga Hartarto.

Australia is the world’s largest lithium producer, with last year’s output totaling 61,000 tonnes, or nearly half of global production, as trade in all EV battery ingredients – and their prices – rises significantly.

About 96% of Australia’s lithium exports last year went to China, which accounts for 58% of global lithium processing capacity and nearly 80% of global lithium battery manufacturing capacity, a dominance that worries the US.

Analysts say the lithium trade provides an opportunity to take full advantage of the 2020 Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), which aims to unlock the trade and investment potential of both countries.

Under one of four side agreements, A-CEPA provides Indonesian companies with preferential access to the Australian market by lowering the level of Australian content required in EV battery manufacturing.

Indonesian firms are understood to have had initial discussions with the owners of several West Australian lithium mines, but the only signed deal so far is an MOU between state-owned holding company MIND ID and Australian salt and potash supplier BCI Minerals.

In Indonesia, United Tractors, a subsidiary of car-maker Astra International, is taking a 19.99% interest in Australian-owned Nickel Industries Ltd, which supplies nickel ore to the Morawali and Weda Bay smelters in Central Sulawesi and Maluku.

Despite their proximity, Indonesia counts Australia as its 15^TH top trading partner with imports last year of just US$3.5 billion, lagging Bangladesh ($3.9 billion) and Pakistan ($4.3 billion).

Australia, on the other hand, puts last year’s figure of Australian exports to Indonesia at $12.4 billion and Indonesian imports at $5.9 billion, a trade deficit in goods that Jakarta regularly complains about to Canberra’s bemusement.

The discrepancy is explained by the fact that Indonesia doesn’t take services into account, including money spent by the 1.2 million Australian tourists who are now flocking back to Bali after the Covid hiatus.

More than that, Indonesia ranked 27^th as a destination for sluggish Australian foreign investment, much of it in the mining sector, and a lowly 38^th place as a source of investment to Australia.

Australian officials say one significant impediment is the Indonesian mindset that it is unpatriotic to invest in other countries, one of many factors that expose over-regulated Indonesia’s failure to sell itself on the world stage. 

Former ambassador to Jakarta John McCarthy has noted the absence of any real diplomatic crisis in recent years in a relationship once marred by heated disputes over East Timor and Papua and also by the execution of two Australian drug traffickers in 2015, the year after Widodo came to power.

“If this lack of fireworks continues, we should be diverted even less by the need for crisis management and be able to focus more on what we want from the relationship,” McCarthy wrote in the Australian Financial Review.

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To deal with indications that China’s growing youth unemployment and weakening domestic demand may have formed a vicious cycle, the country plans to promote “new consumption,” which refers to a retail model emphasizing online sales and mobile payment.

The government made that call following a slowdown in the growth of China’s services activity in the second quarter of this year. The Caixin China services purchasing managers’ index (PMI) decreased from 57.1 in May to 53.9 in June, the slowest growth rate since January this year, according to a statement published on Wednesday.

An official argued that by promoting “new consumption,” which refers to the use of online and offline shopping and mobile payments to upgrade sales channels, China can create new space for domestic demand and stabilize the job market.

“In order to form a strong domestic market, it is necessary for our country to firmly implement the strategy of expanding domestic demand,” the official, Zheng Shanjie, chairman of the National Development and Reform Commission, said in an article published by the Qiushi Journal on Tuesday. Specifically, he said, it’s necessary to “comprehensively promote consumption, accelerate the upgrading of consumption quality, expand investment space and support the innovation of new products.” 

Zheng’s remarks follow a June 29 decision by China’s State Council to enact a program that is aimed at encouraging people to buy furniture and home appliances. Under the program, the government will support private companies’ efforts to develop new innovative home-use products to upgrade people’s homes and in the process support China’s economic recovery. 

‘Slow employment’

Many young people who cannot find satisfactory jobs and prefer to stay home or go traveling rather than take what’s available now describe their status as having “slow employment,” instead of being jobless. About 18.9% of graduates will choose to have “slow employment” this year, up from 15.9% last year, according to a survey conducted by Zhilian Recruitment, a Chinese human resource agency.

On June 15, the National Bureau of Statistics (NBS) said the jobless rate in China’s urban areas remained unchanged at 5.2% in May from April. The unemployment rate of people aged between 16 and 24 was 20.8% while that of those aged between 25 and 59 was 4.1% last month.

NBS spokesperson Fu Linghui said only about six million young people in China were still searching for jobs – but he did not count the 11.6 million graduates about to enter the job markets. June is graduation season in China as it is in many countries around the world.

A commentary published by the state-owned Economic Daily said the society should find out why young people choose to have “slow employment,” which has so far remained a neutral term but can become another form of “lying flat” over the long run. 

“Lying flat” is used in China to describe young people’s rejection of societal pressures to overwork and over-achieve.

The opinion piece said local governments should hold more job-matching activities for those who don’t want to have “slow employment” and more apprenticeship programs for those who want to enter the advanced manufacturing sector.

It said local governments should also regulate and improve working conditions in the private sector so that young people will no longer want to wait and see but take jobs.

On June 25, the Ministry of Human Resources and Social Security launched a nationwide program to create new jobs and push promote job matching in the country. It said that between July and December, each fresh graduate will be given the opportunity to receive at least one vocational guidance session, three job recommendations, one skill training program and one internship opportunity. It said the government may subsidize private firms to increase headcount.  

Targeted measures

The 53.9 June growth in the PMI was below the market forecast of 56.2 as consumers scaled back spending on services such as travel and restaurants. Any reading over the 50-point mark indicates a month-on-month expansion while a number below that suggests contraction.

“Both supply and demand of services expanded further in June, but at a slower pace,” Wang Zhe, senior economist at Caixin Insight Group, says in the statement published by Caixin and S&P Global. “The gauges for business activity and total new orders both stayed above 50 for the sixth consecutive month, but logged their lowest readings since January and December, respectively, as the services market saw a weaker-than-expected recovery.”

“A slew of recent economic data suggests that China’s recovery has yet to find a stable footing, as prominent issues including a lack of internal growth drivers, weak demand and dimming prospects remain,” Wang says.

The newly-announced Caixin China services PMI matched with the official non-manufacturing PMI, which fell from 54.4 in May to 53.2 in June. 

“It has been the non-manufacturing sector, buoyed by consumer spending, that has been keeping China’s economy growing in the first half of this year,” Robert Carnell, regional head of research, Asia-Pacific, ING, says in a research report published June 30. “But what this data confirms is that the initial surge contained a lot of pent-up demand.”

“Domestic tourism, and dining out have been making up for lost time in the early part of the year. But there is only so long that this can go on,” he says. “Other indicators of retail sales suggest that it remains well above historical trends, and suggests some further moderation over the second half of this year.”

He adds that although the government has already offered companies some tax exemptions, lowered financing costs and stimulated domestic demand during the pandemic, it should continue to monitor the business environment and launch more targeted and effective measures.

Read: China retail sales growth slow, job markets shaky

Follow Jeff Pao on Twitter at @jeffpao3

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On the surface, sanctions seem to have had little impact on North Korea’s behavior. At the time of writing, the world is waiting for the launch of a new North Korean military spy satellite that Supreme Leader Kim Jong Un announced on April 19, 2023.

North Korea is under one of the harshest multilateral sanctions regimes of any country in the world. But the country still circumvents sanctions regularly through complex smuggling operations at which it is by now very adept. This situation raises questions about whether sanctions on North Korea have failed.

It is true that sanctions have not reached the stated political goal of inducing North Korea to give up its nuclear weapons. The country has made impressive advances in missile technology and is evidently capable of acquiring the necessary technology despite sanctions. 

The “spy satellite” launch would be one of around 30 missiles tested in 2023. Though North Korea has ways to evade sanctions, this does not mean sanctions have no impact. 

Sanctions interplay with domestic governance and economic systems in ways that are complex and often hard to fully evaluate. The alternative to sanctions is not an open, liberal and free-trading North Korea, but likely a slightly more well-off version of its current state.

The issue of evasion illustrates why the impact of sanctions is so hard to evaluate. Sanctions-evading actions are not rare events but are institutionalized within North Korea’s economy. 

Since the 1970s, North Korea has systematically smuggled alcohol, tobacco, drugs and other contraband through its diplomatic networks abroad. These activities continue today and with North Korean capabilities expanding into the cyber realm, sources of illicit income will likely continue to constitute an underestimated part of the regime’s hard-currency revenue flows.

But sanctions evasion and smuggling are very expensive activities. For Chinese, Taiwanese and Singaporean trading companies and entities to risk smuggling oil to North Korea, Pyongyang must pay a massive risk premium on its purchases. North Korea has to pay well above market prices to give sellers a reason to take the risk of arrest and prosecution for sanctions violations.

The same is true for illicit North Korean exports. Sanctions do not stop coal exports entirely, but they slash the prices that North Korea can charge. Any buyer — almost always China — will only risk importing from North Korea if prices are cheap enough to outweigh the risks. 

Even prior to the harsher sanctions levied in 2016 and 2017, China, through its position as a virtual monopoly buyer, consistently paid below-market prices for North Korean coal. This dynamic is likely even stronger today, as Chinese imports of coal and other sanctioned North Korean goods continue but go mostly unrecorded.

Despite North Korea’s evasion tactics, sanctions are indisputably hurting the North Korean economy. The country’s exports are estimated to be worth only a few hundred million dollars per year – much smaller than its trade losses. 

The UN Panel of Experts estimated, for example, that North Korea earned around US$370 million from sanctions-violating coal exports in 2019. This is only a fraction of the $1.19 billion it earned from such exports in 2016, before the harsher sanctions.

The civilian impact of sanctions is unclear. On one hand, sanctions have likely dealt a harsh blow to labor-intensive industries like textiles, where a high proportion of workers are women, resulting in increased unemployment and lower wages. 

The falling incomes of North Koreans working in sanctioned industries substantially dampen the wider economy. On the other hand, there is no evidence that sanctions have driven up the price of food or other essential goods.

Sanctions have undoubtedly worsened North Korea’s food shortage by hindering imports of fertilizer and spare parts for agricultural equipment. North Korea’s own border closure, though, likely also provided an obstacle to foreign trade. 

But the impact of sanctions on North Korea’s food system is minimal compared with the regime’s refusal to undertake basic reforms in agriculture. The government bristles at dismantling collective farms or letting farmers sell their products on open markets.

Trade by evasion should logically become easier and cheaper. For sanctions to be effective against North Korea, China – which constitutes more than 90% of North Korea’s foreign trade – would have to implement them. As US-China tensions continue to grow, reasons for China to implement sanctions on North Korea are diminishing.

Reports of North Korean trade deals in weapons and labor with Russia in the wake of Russia’s invasion of Ukraine are already circulating. Very little is confirmed about these transactions, but there is evidence to support increased economic exchange between the countries. 

Earlier this year, satellite imagery from the border area indicated that Russia was increasing oil exports to North Korea while exporting unknown goods that could be arms destined for the Wagner Group.

But this does not change North Korea’s situation. Combined with its poor global reputation, sanctions will continue to make North Korea dependent on a very small number of trade partners – mainly China and Russia – who can charge highly unfavorable prices.

None of this is to say that the current thinking on North Korea sanctions is without serious flaws. The demand that denuclearisation should come before any relief on sanctions, for example, is unrealistic. 

But many also exaggerate the possible gains of abolishing sanctions. A common misperception is that, were sanctions to be lifted, North Korea would open its doors to foreign investors who would flock to the country for its strategic geographic location and cheap labor.

Removing sanctions would not change the basics of North Korea’s economic system. Despite a permissive attitude towards markets during former Supreme leader Kim Jong Il’s reign and the first few years of Kim Jong Un’s, harsh state control over the economy best serves the regime’s political and social goals by allowing it to control the distribution of resources. 

Sanctions hurt, but removing them is no silver bullet for political or economic progress.

Benjamin Katzeff Silberstein is Associate Fellow at the Swedish Institute for Foreign Affairs and a Postdoctoral Fellow at the Safra Center for Ethics at Tel Aviv University.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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