Is Australia's Economy Headed for Trouble?

The Buzz

I don’t often write about Australia, partly because Australian politics are so stable and the country such a solid partner for the United States, but also because Australia has for twenty years basically avoided the ups and downs of the world economy. Alone among rich nations, Australia was basically unaffected by the global economic and financial crises of 2008-9 and the country also has not faced the kind of long-term economic slowdown challenges that confront Europe, the United States, and Japan. Unemployment today in Australia is around 6 percent, and earlier this year it was under 6 percent. Most forecasters project that Australia will grow by at least 3 percent in 2014, which is well above projections for most other developed economies.

The prolonged boom in Australia has led many Australians, including not a few Australian leaders, to think that the prosperity can go on forever, that Australia has found a way to defy some of the challenges that have slowed other rich economies. Any visitor to Melbourne or Sydney or even Darwin, in northern Australia, can see for themselves the enormous boom in residential and commercial construction, and the skyrocketing prices for even the simplest apartments and houses. When I was in Darwin, a city of about 130,000 people, homes and apartments were going up everywhere; Darwin is the closest city to a group of large liquid natural gas processing plants piping in offshore gas. Twenty years ago, when I visited Darwin, it looked like a tiny, run-down Midwestern American suburb, with the only excitement coming from the markets on the edge of town where immigrants from Papua New Guinea and other Pacific islands sold their wares.

But a series of recent commentaries and new books reminded me of what that visit to Darwin sparked in my mind – the idea that Australia’s growth, though impressive, seems a little too close to the frothy, wild, speculative growth that happened in Thailand in the 1990s and the United States in the mid-2000s. A new book by consultant and macroeconomist Lindsay David, Australia: Boom to Bust, argues that Australia’s housing market is wildly overpriced and is going to crash, and that overall Australia’s economic base is too narrow–housing, exports of natural resources to China, and (to some extent) financial services.

Bloomberg View columnist William Pesek recently wrote an excellent commentary on the book.  Pesek too notes that Australia is the most dependent of any major economy on China’s growth, which is headed down as China’s economy cools and its own housing market cools. Pesek concurs that, beyond simply being too dependent on China, the Australian economy also has become far too dependent on exporting natural resources and on housing sales. He doesn’t mention another point: Natural resources are not renewable, and dependency on natural resources does little to foster innovation and entrepreneurial activity. Pesek does note that the average price of housing in Sydney as a multiple of average income–a standard metric used to see whether housing is overpriced–now stands at nine. By comparison, the price of housing in Tokyo, hardly a cheap city, as a multiple of income stands at 4.4.

Meanwhile, in the past four weeks a series of major Australian companies and financial institutions also have sounded warnings about the Australian economy. Earlier this week, BHP Billiton Mitsubishi Alliance, Australia’s giant coal mining company, cut 7 percent of its workforce because of declining demand for coal from China, which takes in over half of all natural resources exports from Australia. (Two decades ago, China took in only about 10 percent of Australian natural resources.) In addition, earlier this week the treasurer of Western Australia, the Australian state producing the majority of the country’s iron and coal and other resources, expressed significant worry at the declining world prices of these commodities, a decline that stems from oversupply and declining demand in China. In addition to that warning, Australia’s own central bank recently warned that the Australian economy was becoming subject to increasing speculation over housing, speculation that could overheat the economy and cause serious imbalances.

These forecasts should be a warning to Australian policymakers as well–and to Australian home buyers, builders, and the Australian population as a whole. But as Pesek notes in his commentary, when he faced down Australian federal treasurer Joe Hockey in an interview, and asked him about whether Australia faced a property bubble, he got little response. The minister dismissed concerns about the Australian economy and projected continued robust growth for the “lucky country.” “It is just an easy mantra for international commentators and for analysts based overseas to say, ‘Well, there’s a bit of a housing bubble emerging in Australia,’” Hockey told Pesek. “That is a rather lazy analysis because fundamentally we don’t have enough supply to meet demand.”

Indeed, the entire government of Prime Minister Tony Abbott seems in denial about Australia’s vulnerability to any downturn in Chinese growth, and the country’s overdependence on exporting natural resources to China and overpriced housing sales for its decades-long growth. But at some point, probably quite soon, the lucky country’s luck is going to run out, and Abbott’s government will need a real response.

This piece first appeared in CFR’s Asia Unbound Blog here.

Image: Creative Commons/Flickr. 

TopicsEconomics RegionsAustralia

Is the "Liberal International Order" Dying?

The Buzz

President Obama’s speech to the United Nations was a spirited defense of the current world order and America’s role within that order. It was an acknowledgement that the liberal internationalist status quo is far from invulnerable and, in fact, is gravely under threat; and a warning that the widening and deepening of international cooperation, peace and security require good intentions and assiduous effort on behalf of nations.  Today’s relatively benign world order is the result of farsighted decision-making by past leaders, Obama told his audience; its maintenance is now the charge of today’s generation.

Obama’s stark warning was that all is not well at the core of the international system.  The benefits put in place by the victors of World War II are in jeopardy.  Autonomy, territorial integrity, security from predation, the right of self-determination and the conditions for economic growth and social flourishing—all of these supposed benefits of liberal international order are at risk of being taken away.  To blame for this historic threat to international progress (and chief among the president’s bêtes noire) are autocratic Russia and the fanatical militants of ISIS: Moscow’s annexation of Crimea and its meddling in Eastern Ukraine are representative of an aggressive way of conducting international affairs that has no place in today’s world, while ISIS’s brand of brutal religious fanaticism is similarly beyond the pale of acceptable behavior.

Against aggression, disorder, division and hatred stand the United States and its allies.  While Moscow engages in conquest and seeks to undermine the security of its neighbors, America devotes its energy towards fighting Ebola.  Russia imposes itself through the force of arms whereas the U.S. is comfortable with the use of diplomacy to resolve its differences with Iran.  The countries of Eastern Europe and Central Asia are drawn into Russia’s orbit through fear and intimidation but the United States acts as a benign hegemon in the Asia-Pacific, fostering peace and security through the rigid application of commonly understood “rules of the road.”  And although the U.S. is not shy of using its military might, it does so only in service of noble goals—in order to curtail the “horrific crimes” committed by ISIS militants, for example—and even then only with the cooperation of other like-minded states.

Obama cited this summer’s events in Ferguson, Missouri as evidence that Americans do not always live up to their ideals.  Skeptics in the audience of the UN General Assembly, however, will have been able to think of their own (foreign policy) examples of U.S. hypocrisy: the invasion of Iraq in 2003; the willingness to sanction the independence of Kosovo against a chorus of protestation from Belgrade and elsewhere; the support lent to those who ousted the elected leadership of Ukraine earlier this year; the widespread use of drone warfare in spite of sizable civilian casualties and weighty ethical (and legal) concerns; and so on.

In short, not all world leaders will be won over by the president’s portrayal of America as the knight in shining armor.  The truth is that even some of America’s closest military allies are mere fellow travelers rather than devotees to liberal internationalism; several of Washington’s most valued strategic partners are allies not out of conviction but rather because of a parochial interest in leveraging American power in the service of regional goals: the leaders of Sunni Arab states who fear the expanded influence of Iran, for example, or the nervous governments of East Asia living in the ever-growing shadow of a rising China.  Do these states quake at the prospect of the world losing liberalism as an organizing philosophy?  Or is it the loss of U.S. security guarantees that motivate them?

Finding partners with an indigenous belief in maintaining the core of the U.S.-led international order will be no easy task.  In this sense, Obama and his successors truly have their work cut out for them.  The timid—in some cases, non-existent—criticism leveled against Russia in the wake of its annexation of Crimea (perhaps the most flagrant challenge to liberal norms of recent times) only belies just how fragile support for the current setup really is.  When push comes to shove, who in the world is willing to defend what America and its allies built in 1945?

In the long run, the balance of power between supporters of the American world order and its discontents will come to define international relations.  For his part, of course, Obama has never doubted the importance of U.S. leadership in the modern world.  It is predictable that he would stand up for it. Whether or not his speech will enjoin others to commit to liberal order’s defense in a meaningful way, however, remains to be seen.

Image: U.S. Air Force Flickr. 

TopicsSecurityPolitics RegionsUnited States

Two Videos of American Airstrikes on ISIS That Should Scare Iran

The Buzz

Credibility in international relations, noted Benjamin H. Friedman in TNI in August, “doesn’t travel well.” Tough actions in one part of the globe don’t necessarily make leaders in another tremble at the sound of our footsteps. Weakness in one place doesn’t necessarily provoke aggression in another. “Historical studies show,” wrote Friedman, “that leaders deciding whether to defy foreign threats focus on the balance of military power and the material interests of the threatening state, not on its opponent’s record of carrying out past threats.” So all the worries that Obama’s false start on Syria last year inspired Russia’s revanchism in Ukraine or China’s pushiness in the South China Sea are overwrought. And the new campaign against the Islamic State will probably have a similarly ephemeral impact on America’s credibility in other confrontations.

But a faraway war can still send shockwaves through national-security establishments around the world. A rival might demonstrate that his forces are stronger than expected; a friend’s hidden weaknesses might come to light. The decisive U.S. victory in the 1991 Gulf War lit a fire under the Chinese military, which realized the extent of its inferiority. Days after the war, the Soviet Union’s Marshal Viktor Kulikov—formerly commander of the Warsaw Pact forces—told an interviewer that “The military operations between the coalition forces and Iraq have modified the idea which we had about the nature of modern military operations....The Soviet Armed Forces will have to take a closer look at the quality of their weapons, their equipment, and their strategy.” There were similar recalculations after, for example, the 1999 NATO air campaign in the former Yugoslavia.

The air assault on the Islamic State will be no different. And there’s one country that has to be paying particular attention: the Islamic Republic of Iran. US Central Command has released several videos of strikes on ISIS facilities. Two of these videos demonstrate advanced bombing techniques that analysts have noted will be important in an attack on Iran’s nuclear facilities. Writing in International Security in 2007, Whitney Raas and Austin Long dug into the technical side of a possible Israeli strike. Many of Iran’s nuclear facilities, such as the huge centrifuge halls at Natanz, are hardened and buried to make the attacker’s task harder. One bomb—even a “bunker buster” designed for the task—might not be enough to dig through all the dirt and high-strength concrete. “One method” for dealing with this, Raas and Long say, “is to use [laser-guided bombs] targeted on the same aimpoint but separated slightly in release time to ‘burrow’ into the target.” A former Israeli Air Force general said that this method could “eventually destroy any target.” But hitting the same spot again and again takes extreme precision.

And that’s exactly what we see in this footage of a strike on “an ISIL compound” near Raqqa on Tuesday.

Two bombs hit in quick succession—and then two more, right on the same spots. The first two bombs appear to have been “bunker busters” aiming to knock out some bunker that may have been beneath the building—their impacts produce no visible explosion. The second pair may have been intended for the above-ground portion of the structure—we see a lot more smoke and fire, and part of the building collapses.

But Iran’s nuclear facilities aren’t just buried—some of them are big, too. Centrifuges are fragile, but you wouldn’t want to go through the trouble of penetrating Iranian airspace and then penetrating the bunkers, only to leave many of them still functioning. You want to be sure you’ve destroyed them throughout the enrichment hall. Raas and Long use high-explosive blast curves, which show how quickly the destructive power of an explosion (in this case, overpressure) dissipates as distance from the explosion increases. Cold War-era research into the effects of nuclear explosions showed how much overpressure is needed to reliably destroy different sorts of structures and objects. If you know how much overpressure is needed to destroy your target, the radius at which your munition produces that much overpressure, and the area of your target, you know how to space your aimpoints. CENTCOM demonstrates this principle in this footage, also from Tuesday, of a strike on an Islamic State vehicle staging area. Pay attention to the outlines of the property:

About a dozen explosions, spaced throughout the target area. This method gives the attacker confidence that nothing on that property is going to show up on the battlefield again. Raas and Long calculate that about three munitions going off inside one of the big centrifuge halls at Natanz would be enough to ensure destruction.

In other words, an Israeli strike would likely combine these two techniques. An American strike, as Geoffrey Kemp and I noted in our 2013 book War with Iran: Political, Military, and Economic Consequences, would be easier and more likely to destroy the targets. We’d have better weapons—the thirty thousand pound GBU-57 Massive Ordnance Penetrator, for example—and better infrastructure to back us up. Yet we’d use the same principles.

The Iranians are aware of all of this. They know we can hit their nuclear facilities, and they know the Israelis probably can, too. They also know that we’re hesitant to go to war with Iran if we can avoid it. But their defense planners surely can’t have been thrilled to watch American airmen demonstrate these two techniques in Tehran’s neighborhood.

John Allen Gay, an assistant managing editor at The National Interest, is coauthor of War with Iran: Political, Military, and Economic Consequences (Rowman and Littlefield, 2013). He tweets at @JohnAllenGay.

TopicsDefense RegionsIranSyria

Damage from the Airstrikes in Syria, Visible and Invisible

Paul Pillar

As the United States embarks on a new air war in Syria, disturbing anomalies abound. Some of them were reflected in the front-page headlines of a couple of major U.S. newspapers Tuesday morning, which probably also reflected slightly different deadlines of the two papers but were substantively telling nonetheless. The Washington Post's headline was “U.S. Launches Strikes in Syria”. In the corresponding place in the New York Times, in an edition evidently put to bed before the new offensive in Syria could be reported, we read, “Weeks of U.S. Strikes Fail to Dislodge ISIS in Iraq”. The question that immediately comes to mind is: why should we expect what has failed to dislodge—much less “destroy”—a group in Iraq to succeed if we simply do more of the same thing in Syria? The question is all the more acute given that the United States is aiding and cooperating with the government in Iraq but barely on speaking terms with the one in Syria.

Another disconcerting dichotomy concerns the organizations that were the targets of the newest strikes. The United States announced that it struck not just ISIS but also an al-Qaeda offshoot that has ambitions to conduct terrorist attacks in the West and possibly the United States. The carefully worded official announcements used the word “imminent” but leave us to conclude that what was imminent was not the carrying out of an actual attack in the West but only perhaps the planning for one—and that striking the group involved hitting a target of opportunity, made convenient by having these strikes coincide with the strikes against ISIS in Syria. But at least terrorist attacks in the West, consistent with the al-Qaeda strategy of attacking the “far enemy,” are evidently part of this group's ambitions—underscoring that this is not the case with ISIS, which is following a quite different strategy of trying to build its self-styled caliphate through direct application of force in the Middle East. So why have the president and others spoken so darkly about a terrorist threat to us from ISIS, especially when before yesterday they had not even mentioned this other group? (The correct answer to that question can be found in our own fears, politics, and habitual ways of thinking about foreign threats.)

The very complicated lines of conflict and suspicion that are relevant to the ISIS story and are barely concealed by affixing the term “coalition” to a subset of the players give rise to other anomalies. Russia criticized the United States for using force in Syria without obtaining something like an authorization from the United Nations Security Council; Iran made a similar criticism, albeit in a rather mild and pro forma way. But the regime in Syria—the country the Russians and Iranians have both considered an ally and whose sovereignty they evidently were sticking up for—sounded more positive. The United States, we are repeatedly told, did not “coordinate” with the Assad regime, but it informed that regime in advance about the strikes, and the regime tacitly cooperated by not using its air defense capabilities to mess with the forces conducting the strikes.

That leads to the uncomfortable unanswered question about the desired political end state in Syria. Nothing that has been said since the strikes has helped to answer that question. The operations director of the U.S. Joint Chiefs of Staff essentially changed the subject when reporters asked about whether the air attack would aid the Assad regime. The “moderate” Syrian opposition—in whom the only apparent hope for answering the unanswered question has been placed—displayed this week some of the divisions that have been a major source of their weakness. The president of the Syrian Opposition Coalition made a positive statement, but the commander of Harakat Hazm—a rebel group often talked about as moderate and reliable enough to be entrusted with U.S. lethal assistance—said “the only beneficiary of foreign intervention in Syria is the Assad regime.”

Those are some of the most obvious anomalies about this offensive. We ought to be at least as disturbed about some the effects that may be less immediately visible, especially effects in hearts and minds of people in the region. The U.S. military has again demonstrated its awesome technical precision, in which it seems it is almost capable of firing a missile through the window of a bathroom and killing the person on the toilet while sparing others in the same house. But even with these technical capabilities, casualties among the innocent are inevitable. Reportedly there were civilian casualties from this week's strikes in Raqqa, the principal ISIS-held town in Syria. An unemployed university graduate in Raqqa said afterward, “We know the history of American strikes in Afghanistan, Iraq and Yemen. When civilians are going to be killed, sorry is not enough.”

And whatever are the actual facts about collateral damage and casualties, the usual suspicions and cynicism that come into play whenever the superpower uses its military muscle in this part of the world are being aroused by this latest U.S. action. The sentiments are those of the columnist in Egypt's Al Ahram who wrote that the United States and its allies “want to divide our lands, destroy our nations, occupy our homelands and monopolize our choices, without shedding one drop of their blue blood. They have no problem that our cheap Arab blood flows in rivers, it it achieves their goals and purposes.”

Such beliefs are grossly inaccurate and unfair, of course, but the beliefs exist. If we are worried about anti-U.S. terrorism, we ought to worry at least as much about such perceptions and sentiments, and about the extremism they nurture, as about the kind of kinetic accomplishments that can be observed with a gun camera or a reconnaissance drone.

Image: U.S. Air Force Flickr.                           

TopicsSecurityPolitics RegionsUnited States

The Next South China Sea Crisis: China vs. Indonesia?

The Buzz

As Indonesian president-elect Joko Widodo, also known as Jokowi, prepares officially to begin his term later next month, there remains a degree of uncertainty regarding the future policy settings of his administration both at home and abroad. One thing, though, seems increasingly clear: momentum is building toward the realization of Indonesia’s long-dormant potential to emerge as a maritime power.

The vision of Indonesia as a “global maritime nexus” (poros maritim dunia) gained prominence during the presidential campaign and seems set to become a central focus of the upcoming Jokowi administration. While Indonesia’s emergence as a maritime power is by no means assured—it will face many challenges ahead—we may be witnessing the dawn of a new era in Indonesian history.

The precise details of that maritime vision remain a work in progress, but some preliminary observations can be made. The foundation of the “global maritime nexus” concept is primarily economic: it seeks to increase maritime connectivity and thus economic equality between the various Indonesian provinces. That argument has been convincingly advanced by Faisal Basri, a leading economist and member of Jokowi’s expert team on the economy. Yet according to Basri, the vision of Indonesia as a maritime power isn’t limited to the economic dimension alone, and can also contain a security or defense function, including the protection of state sovereignty.

While Jokowi hasn’t spoken at any length on his own vision of the concept, the vision and mission statement he submitted during the campaign prioritized the protection of Indonesia’s maritime interests. The public statements that Jokowi has made on the issue have repeatedly touched on that priority, specifically the problem of illegal fishing.

In comments made earlier this month and published in the local Indonesian press, Jokowi stated that it was necessary to act decisively against foreign fishing vessels in order to prevent the continued theft of Indonesian resources. “If we do not act decisively, our fish will be stolen by foreign ships,” Jokowi was quoted as saying. Such comments indicate that he may not be as disengaged on foreign policy matters as some have expected; in fact he may be more assertive on certain priorities.

The issue of illegal fishing by foreign vessels is likely to prove a pivotal challenge for Jokowi’s administration, and will almost certainly create tension with another emerging maritime power—China. China is hardly the only country whose fishermen are operating illegally in Indonesian waters. But it’s the only one whose fishermen are directly supported if not encouraged by the coercive power of its state security services at sea.

China’s expanded presence in disputed areas of the South China Sea is increasingly bringing its fishermen, and its maritime security organizations, into direct contact and often confrontation with those of Indonesia. While the Indonesian foreign ministry continues to maintain there’s no dispute between China and Indonesia, China’s actions suggest otherwise.

A number of incidents have occurred in the area since 2010, resulting from what ultimately proved to be unsuccessful attempts by Indonesian security forces to prosecute Chinese fishermen operating illegally within Indonesia’s claimed EEZ. Those efforts to assert Indonesian jurisdiction in its claimed EEZ are beginning to form a pattern of persistent failure, a pattern which, if left unaltered, may eventually compromise Indonesia’s military deterrent posture in those areas, as well as the legal basis for its claims.

The most recent of those incidents occurred in March of 2013. Since I first wrote about that incident late last year new details have come to light, including the apparent use of electronic-warfare capabilities by the Chinese Maritime Law Enforcement (MLE) vessel Yuzheng 310. Based on the Indonesian captain’s own reporting, as well as subsequent investigation and analysis, it now appears highly likely that during that incident Yuzheng 310 jammed the communications of the Ministry of Maritime Affairs and Fisheries (KKP) vessel Hiu Macan 001.

Consistent with the KKP captain’s description of events, Yuzheng 310 may have been disabling his ability to receive communications from his headquarters ashore, in an apparent effort to sever the vessel from its command and control (C2) loop. It appears likely Yuzheng 310 would have been calculating that—in combination with other coercive measures—the action would force the Indonesian captain to release his Chinese prisoners. The suite of measures had the desired effect, but might just as easily have proved dangerously escalatory had the KKP captain instead decided not to acquiesce.

Continued patrols in those areas by what is now the China Coast Guard may confront Jokowi with an early test of his leadership, possibly in a crisis scenario not dissimilar to that from March 2013. It remains to be seen whether or not the new administration is even aware of that potential contingency, let alone prepared to respond effectively.

Despite the obvious overlap between Jokowi’s focus on combating illegal fishing and the recent incidents with China in the South China Sea, it’s also unclear to what extent Jokowi is himself aware of that overlap, or the severity of the challenge it presents to his vision of Indonesia as a global maritime nexus. Addressing that challenge will require decisive leadership from the new president and his team, both domestically and abroad.

Scott Bentley is currently a PhD candidate at the Australian Defense Force Academy, UNSW. His research focuses on security strategies in maritime Southeast Asia. This piece first appeared in ASPI’s The Strategist here

Image: Creative Commons License 3.0 

TopicsSecurity RegionsChina