Over the coming months, S-RM will be sharing regular updates and commentary on the BRI, its progress, and the implications for businesses operating in, or looking to operate in, the territories it will affect across Asia Pacific, Russia & CIS, the Middle East, Sub-Saharan Africa and Europe.
The Virtual Silk Road:
Digital Infrastructure Along the BRI
Mahathir: Old Dog, New Tricks
Malaysia’s shock election result hinged on Mahathir’s revival as an unlikely reformer, but is he all bark and no bite? REBECCA LAWRENCE examines whether Mahathir can really deliver on the promises that paved the way to his stunning victory, and what it means for investors going forwards.
As he was sworn in at a ceremony at the official state palace in Kuala Lumpur on the evening of 10 May, Mahathir Mohamed (‘Mahathir’) completed an unlikely political comeback. The Pakatan Harapan (‘PH’) coalition which he chaired had defied predictions to decisively win the election, taking 113 seats and outstripping the 79 won by the Barisan Nasional (‘BN’), the coalition that has ruled Malaysia continuously since independence in 1957. Mahathir’s election was remarkable for a number of reasons. He had ruled Malaysia in an uncompromising and intolerant fashion between 1981 and 2003 as the head of the BN, but dramatically quit his political party, the United Malay National Organization (‘UMNO’), in early 2016 in protest at the alleged involvement of Najib Razak (‘Najib’), the then-prime minister and a former protégé of Mahathir, in a vast corruption scandal involving 1Malaysia Development Berhad (‘1MDB’), a state-owned investment fund. Not only did Mahathir then join the same PH coalition which had suffered oppression under his rule, he rekindled his partnership with PH leader Anwar Ibrahim, a former Mahathir ally-turned-opposition-politician whom Mahathir had imprisoned on dubious charges in 1999. After announcing his candidacy for the election, the enduringly popular Mahathir successfully re-cast himself as a reformer who would clean up Malaysian politics, perhaps surprisingly, considering allegations about corruption during his own administration.
The election was as much lost by Najib as it was won by Mahathir. Najib, who had been prime minister since 2009, was brought down primarily by his alleged involvement in the theft of several billions of dollars from 1MDB, a fund ostensibly set up to promote economic development in Malaysia, and the suppression of any genuine Malaysian investigation into the allegations. The scandal had coincided with Najib’s introduction of a new Goods and Services Tax (‘GST’) in 2014. The new tax was highly unpopular as it was thought to have been imposed to make up for the loss of public funds from 1MDB. This claim was repeatedly denied by Najib, but the image of the prime minister helping himself to state coffers with impunity while imposing new tax burdens on his citizens was a highly damaging one that pushed public forbearance to breaking point.
“Mahathir successfully re-cast himself as a reformer who would clean up Malaysian politics, perhaps surprisingly, considering allegations about corruption during his own administration”
Mahathir’s immediate priorities upon assuming office are clear cut. On the campaign trail, Mahathir repeatedly promised that he would reopen investigations into the 1MDB scandal; he has already imposed travel restrictions on Najib and announced plans to name a new attorney-general. PH has also announced the abolition of the GST and has promised other measures to ease the cost of living, and will be under pressure to deliver noticeable improvements in this regard within its first few months of rule. Mahathir has also secured a full pardon for Anwar, paving the way for him to eventually succeed Mahathir as prime minister.
However, PH’s unprecedented victory also leaves Malaysia in unchartered waters, creating an uncertain political and investment environment in the short term. Questions linger over how PH, a varied coalition united primarily by contempt for Najib, will transition from campaign trail to government. Small fractures in the PH alliance have already begun to emerge. In the days following its victory, Wan Azizah Wan Ismail, Anwar’s wife and the president of the Parti Keadilan Rakyat (‘PKR’) party which holds the most parliamentary seats in the PH coalition, temporarily withdrew from negotiations regarding the make-up of the new cabinet after disagreeing with Mahathir over the appointment of the new finance minister. These fractures are not expected to break up the coalition, but struggles over the balance of power, particularly between Mahathir and Anwar, are likely to be a feature of the PH administration. There is a danger that perceived dysfunction in the highest levels of government would leave any post-election euphoria among the electorate short-lived, and could see BN support rebound ahead of the next election.
Questions also remain over the security of Chinese investments in Malaysia, linked to the Belt and Road Initiative (‘BRI’). One of Mahathir’s campaign promises was that he would review a number of agreements with China negotiated under Najib, and pull out of projects he deems unnecessary. The East Coast Rail Link, a 688-kilometer rail project costing USD 13 billion and under construction by a Chinese state-owned company, has attracted particular criticism from Mahathir. However, while Mahathir’s victory is likely to see the renegotiation of some agreements, these are likely to be limited in scale. Having just won the election promising to deliver greater prosperity to ordinary Malaysians, Mahathir will be wary of threatening Chinese investment in potentially lucrative projects. As long as Mahathir is able to renegotiate agreements on more favourable terms, Chinese investment will be too important to spurn.
Balancing Belt and Road: India-Japan Cooperation in Light of China’s Rise
China’s ambitious Belt and Road Initiative (‘BRI’) raises significant concerns for India and Japan, especially regarding maritime security. In response, New Delhi and Tokyo are jointly planning their own infrastructure projects which, while smaller in scale than BRI, will nevertheless offer significant economic opportunities in the coming years, writes ROB ATTWELL.
China’s Belt and Road Initiative (‘BRI’), which aims to establish a China-focused global trade network through a series of infrastructure development projects, has raised significant strategic concerns for India and Japan. BRI comprises two parts: the overland ‘Belt’, which connects China to oil and gas projects in South and Central Asia as well as the European marketplace, and the maritime ‘Road’, which connects China to maritime trade networks spanning the Indian and Pacific oceans. The development of this so-called ‘Road’ has raised significant concerns for China’s Asian rivals.
For both New Delhi and Tokyo, a reliance on maritime trade for continued economic prosperity makes BRI’s maritime dimension a geostrategic threat. An estimated 80 percent of global trade is transported along global shipping lanes. India, as a highly populous developing country surrounded by the Indian Ocean, and Japan, as an island nation on the edge of Asia, require access to maritime trade networks to access global markets. However, both countries have long-standing strategic rivalries with China stemming from unresolved territorial disputes in the Himalayas and East China Sea and, in the event of a conflict, China could threaten access to shipping lanes. BRI’s apparent role in enhancing China’s military presence internationally, as exemplified by the 2017 establishment of a naval base in Djibouti, has added to these concerns.
One of the key responses by New Delhi and Tokyo has been to enhance bilateral maritime security cooperation, as well as to improve defence ties with countries similarly concerned about China’s rise. One of the most significant developments in this regard has been the establishment of the informal Quadrilateral Security Dialogue (‘Quad’), through which India and Japan, along with the US and Australia, have planned to cooperate on a range of security issues, including China’s rise. Using the term ‘Indo-Pacific’ as an organising principle, collaboration between Quad countries has primarily manifested as enhanced maritime security cooperation, including joint participation in naval drills; although, in February 2018, they collectively announced the intention to create an alternative to BRI, the details of which have yet to be confirmed.
Joint participation in infrastructure development, outside of Quad, also remains a key component of Japan-India cooperation. In May 2017, for example, India, Japan and multiple African governments jointly announced their plans to establish the Asia-Africa Growth Corridor (‘AAGC’), an infrastructure development initiative. Unlike BRI, which has land and maritime components, AAGC will primarily comprise a sea corridor connecting East Africa to ports in South and Southeast Asia. The rhetorical focus by India and Japan has been on the construction of ‘quality’ infrastructure, implying that Chinese projects are sub-standard.
Connecting ports in East Africa with those in South and Southeast Asia is a key component of the AAGC. According to the initiative’s founding document, New Delhi and Tokyo hope to improve ports in Djibouti, Kenya and Zanzibar and connect them to ports in India’s Gujarat, Tamil Nadu and West Bengal states, as well as in Myanmar’s Rakhine State. From there, these would link up with existing networks transporting goods and materials to and from Japan. Emphasis is also placed on development projects in the health, pharmaceuticals, agriculture, and agro-processing sectors, as well as improving disaster management capabilities and human resources across the African continent.
The exact figure for the AAGC has not been announced. However, in comparison with about USD 60 billion from China, Japan has pledged to invest USD 30 billion in Africa by the end of 2018 and India has reportedly invested about USD 15 billion in the continent. Given the interest of all three countries in African economic development, the construction, energy, infrastructure, technology, telecommunications, and manufacturing sectors across the continent are likely to benefit from increased geopolitical competition in Asia.
To date, China has not publicly opposed increased cooperation between Japan and India on infrastructure development projects in Africa or elsewhere. BRI has been criticised abroad, with many commentators alleging that Beijing is trapping developing countries in debt for geopolitical purposes. As such, overt criticism of Tokyo and New Delhi’s attempts to establish alternatives would be viewed with suspicion. However, Beijing has expressed concerns about their maritime security cooperation with other Quad countries and the adoption of the term Indo-Pacific, which Beijing views as an attempt to contain its economic rise and undermine its territorial claims in the South China Sea.
While India and Japan share concerns about BRI and its implications for maritime security, neither wants to challenge Beijing directly, as China is the largest trading partner for both countries. Going forward, New Delhi and Tokyo will attempt to balance China’s influence in countries that stand to benefit from BRI with alternative financing for development projects. Competition in this regard is likely to be limited, at least initially. China has set aside between USD 4 trillion and USD 10 trillion to fund BRI projects – figures neither Japan nor India can realistically compete with in the short-to-medium term, given that Japanese institutions and companies are notoriously risk averse, and that India’s economy is characterised by significant internal inequality. Further, while the BRI is already a well-established element of China’s foreign policy agenda, backed by a strong government propaganda apparatus, the Quad and the AAGC continue to be at the planning stages, and limited details have emerged regarding the amount of investment involved.
The uncertainty surrounding the potential scope of joint initiatives between Japan and India makes it hard to predict their impact or success. It is important to remember that Japan is the world’s third largest economy, and that India is the world’s second most populous country, with a 2018-2019 economic growth forecast of 7.4 percent. As such, their co-operation could offer significant economic opportunities in the long term, as long as both countries ensure that they develop their initiatives peacefully and without appearing to threaten the BRI.
“For both New Delhi and Tokyo, a reliance on maritime trade for continued economic prosperity makes BRI’s maritime dimension a geostrategic threat.”
