December 12, 2019
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    The Importance of the Indo-Pacific

    May 09, 2019

     (Former US Ambassador to Sri Lanka and currently Senior Director (India and South Asia) of McLartyAssociates based in Washington D.C. Robert O. Blake Jr delivered a speech at the Pathfinder Foundation – Joint Apparel Association Forum of Sri Lanka as second in the series of seminars held in BMICH on May 7.)

    The following is Robert O. Blake’s full presentation.

    I return to Sri Lanka with mixed emotions. It is wonderful to be back in Sri Lanka and to see the many positive changes that have taken place in the ten years since I departed Sri Lanka. And I appreciate the hospitality and leadership of my old friend Milinda and the dynamic role of the Pathfinder Foundation.But I and Sri Lanka’s many friends in the US were also deeply saddened by the horrific Easter Sunday attacks that took the lives of so many and threatened to open new cleavages in Sri Lanka. Milinda asked me to talk about Sri Lanka’s place in the Administration’s Indo-Pacific vision as we look ahead, how China is viewed in the US and the implications of all this for the future of US-SL relations.If there is any one thing that has changed dramatically in the last 10 years, it is the growing predominance of China in Asia on many fronts, and the hostile and increasingly bipartisan reaction to these developments in Washington.

    Everyone seems to focus on the trade frictions between the US and China, but that is just one facet of a much larger and increasingly hostile competition between the US and China. Washington’s list of concerns includes, but is not limited to the following: The influence of China’s Belt and Road Initiative and the debt, labour and other impacts it has had on recipient countries; China’s militarization of disputed islands in the South China Sea; China’s growing surveillance state, powered by artificial intelligence and propagated by companies such as Huawei; Chinese theft of US company intellectual property; Chinese cyber-attacks and cyber theft; China’s suppression of its Uighur population; The growing role of the Chinese Communist Party and SOEs; The widening gap between what Chinese citizens and companies can do in the West as against what Westerners are permitted in China.

    Underlying many of these concerns is a growing understanding that the US may have made a misguided strategic bet about China. When then-President Clinton made the case that the US should support China’s entry into the WTO even though China was not yet a market economy, he and most Americans -- myself included -- believed that as China prospered, as its middle class grew, as more and more Chinese travelled and studied abroad, China would over time become more of a market economy and become more democratic. Today, most Americans see that this strategic calculation was wrong. Under Xi-Jinping, we have seen a strengthening of the role of the Communist Party, a doubling down on the role of the state and SOEs in China’s economy, and the strengthening of China’s surveillance state. Not only is China not a more liberal market economy, it is often seeking to promote its illiberal governance model overseas.

    Belt and Road Initiative

    Most Asian countries acknowledge and even share many of these concerns, but they also do not want to be asked to make a choice between the United States and China. They particularly want to benefit from the massive resources China is extending under its ambitious Belt and Road Initiative. China’s Ambassador to the US published an OpEd in Forbes two weeks ago in which he summarized the vast scope of BRI. According to the Ambassador, 126 countries and 29 international organisations having signed BRI cooperation documents with China. Total trade between China and other Belt and Road countries has exceeded $6 trillion, and China’s investment in these countries has surpassed $80 billion.To put these figures into context, China committed $113 B in BRI financing in 2017, which substantially exceeded the commitments of the World Bank and ADB combined. But increasingly we find pushback from BRI recipients: Debt diplomacy: The case of Sri Lanka’s own Port of Hanbantota has become a watchword for the rest of the world that countries must make sure they choose projects that have solid internal rates of return that will enable them to service the debt owed to China, or they will face Chinese pressures to convert that debt to equity.

    Labour issues: every recipient country also grapples with Chinese pressure to use Chinese labour on these BRI projects, when almost every country has surplus labour of their own for whom they want to provide opportunities for work. Lack of transparency: most BRI projects also face criticism for the lack of transparency about the financial terms of the loans, the extent of Chinese labour and other such sensitive issues. Environmental concerns: WRI published a recent analysis of BRI lending from 2014-17: found that Chinese energy and transport projects in BRI countries did not align with the low carbon priorities recipient countries outlined in their Paris pledges.What are recipient countries to do? First, the countries involved in BRI must be more forceful and clearer in negotiating with the Chinese.

    This is already happening. The WSJ recently reported that last year Myanmar renegotiated terms for a $7.3 billion Chinese-funded deep-water port and industrial zone, shrinking the scope of the project and slashing the country’s future debt burden to its economic powerhouse neighbour. Pakistan, Malaysia, Myanmar, Bangladesh and Sierra Leone also have backed away from BRI projects. Likewise, the Maldives has announced its own review of BRI contracts undertaken by the previous Government to ensure it is servicing only the debt for the true value of the projects undertaken, not for the inflated cost of what the new government alleges were large corrupt kickbacks on both sides. In Indonesia where I served as Ambassador from 2013-16, the signature BRI programme is Jakarta-Bandung High Speed Rail: many questioned the need for a $6 billion rail line given so many other infrastructure needs. Indonesian Ministers have criticized the high-speed rail project for being opaque and non-transparent, complaining that even Cabinet members are having trouble getting data and information.

    The good news is that China is beginning to respond to these concerns:  In a speech on April 26 to mark the latest BRI conference, President Xi Jinping told the conference that: Everything should be done in a transparent way and we should have zero tolerance for corruption, and we also need to ensure the commercial and fiscal sustainability of all projects so that they will achieve the intended goals as planned. In another sign of greater transparency Xi said China would welcome the participation of multilateral and international financial institutions in Belt and Road investment and financing. The Chinese also pledged to defuse tensions with Belt and Road recipients expressing willingness in principle to renegotiate debts. Beijing decided to forgive Ethiopia’s interest payments owed through the end of 2018.

    There are other signs China is sensitive to the criticism it has received: China itself and UNEP have formed International Coalition for Green Development on the Belt and Road to make BRI greener and more sustainable: the coalition includes all the major environmental groups, BRI countries and key Chinese businesses who are major BRI contractors. Batang Toru example – part of a coalition with Global Wildlife Conservation, WWF and others; letter by Cong Henry Waxman and others - BOC said in March by announcing it would review its loan. So China is listening. The test will come whether we see concrete changes implemented. So how has the US Sought to Advance its Interests in the Asia-Pacific and Respond to China’s Growing Influence? In some ways the Trump Administration has responded well to China’s increased diplomatic and infrastructure promotion efforts.

    First, recognizing that it is not enough to simply criticize BRI from the sidelines, the Administration and Congress understood that the US and other partners must provide alternatives, so partner countries have choices. Last October the BUILD Act was signed into law. It created a new U.S. International Development Finance Corporation, which will incorporate the OPIC and make available financing totaling $60 billion, more than double what OPIC had provided in the past. This in turn will unlock over $30 billion in additional funding to facilitate private sector investments in the region. The IDFC will offer loans, loan guarantees, and risk insurance to support new investments. They will also make equity investments and fund feasibility studies or potential investments making it even easier to collaborate with partner finance institutions. Now of course the IDFC’s $60 billion does not come close to the trillion dollars in BRI financing, but it does provide countries alternatives and, in that way, will oblige China to be more transparent and responsive to the needs of recipient countries. The US also has signaled its readiness to cooperate with partners such as Japan and India in co-financing projects, further expanding the scope and scale of alternatives.

    Investment: These resources complement the significant US private sector investment in the Asia Pacific. The value of U.S. foreign direct investment in the region is nearly $1 trillion, far outstripping what China or any other country has invested. Moreover, it is not widely known that our investment in Asia has more than doubled over the last decade and made the US the largest source of the region’s foreign investment.

    I also want to credit the Administration’s security commitment to the region. One of then Secretary of Defence Mattis’ first acts was to rename our Pacific Command to be the new Indo-Pacific Command, showing our understanding that we must have one vision for the Indian and Pacific oceans, and recognizing India’s growing power and influence across the Asia Pacific, and the importance the US attaches to our partnership with India.The Administration also has sustained our high-level military to military engagement in the region. In most countries in Asia where we have military partnerships, the US is the largest military exercise partner and the largest provider of military training. And the Administration has shown a steadfast commitment to continuing our longstanding commitment to ensuring freedom of navigation throughout the Indo-Pacific, but particularly in sensitive areas such as the South China Sea. This security commitment has underpinned Asia’s extraordinary economic rise for the last 50 years.

    But in important other ways, the current Administration has damaged US interests in the Asia Pacific. Let me mention two. The first is on the trade front. Fulfilling a misguided campaign promise, one of President Trump’s first acts was to withdraw the United States from the Trans Pacific Partnership, which the Obama Administration had played such a pivotal role in helping to negotiate. Since Sri Lanka is not a TPP member I will not be labour this point, except to say that almost every American business person working in Asia regrets this act of unilateral disarmament, particularly since the Trump Administration has not moved to negotiate bilateral or multilateral agreements to fill the gap. Second, there is a general perception across most of the Asia Pacific that the US places less of a priority on Asia than under President Obama. Unlike Obama, Trump has attended only one of the East Asia and APEC summits, one of the few leaders to do so.

    Trump Administration

    The President’s absence is magnified by the Trump Administration’s painfully slow progress in filling sub-Cabinet and Ambassadorial positions. Just to take two examples of relevance to all of you, more than two and a half years into Trump’s four-year term, we still do not have Assistant Secretaries of State for either East Asia or South and Central Asia. These are the point persons who are responsible for developing and executing our policy in these regions and who supervise the work of our Ambassadors and their interagency teams in these regions. You all recall I was A/S for SCA under Obama. Obama took office in January. Congress approved my nomination in June of the same year. US – Sri Lanka Relations: Let me now turn to US - Sri Lankan relations. As the US, China and other influential countries like India, Japan and Australia all jockey for influence in Asia, Sri Lanka is in an excellent position to benefit from and even play off these countries against each other. Your strategic location on the busiest shipping lanes; your democratic character and your economic openness make Sri Lanka an attractive partner.

    But of course, there are also caveats. Let me first give a brief assessment of US-Sri Lankan relations and then offer some advice about how Sri Lanka can best capitalize on and benefit from the growing strategic stakes of the world in the Indo-Pacific. The current Government’s embrace of the need for reconciliation and healing after Sri Lanka’s 26-year conflict has enabled steady progress in US-Sri Lankan relations over the last several years. The US and Sri Lanka now have regular constructive high-level diplomatic contacts. Until the US withdrew from the UNHRC, we worked together to co-sponsor UNHRC resolutions on Sri Lanka and other matters, turning an area of friction into opportunities for collaboration. I am pleased that our military to military relations have progressed substantially from the days when I was Ambassador. In the last years of the war in 2008 and 2009, human rights concern almost completely circumscribed our military exercises, training and assistance with the Sri Lankan Army and Air Force. I had to fight hard to maintain even small areas of Navy-to-Navy cooperation, in part by arguing that it was in our interest to help Sri Lanka interdict LTTE arms shipments. Today, I am happy those restrictions are behind us.

    Our two militaries train together in areas ranging from maritime security to humanitarian assistance and disaster relief. The US has announced plans for new security assistance of $39 million to Sri Lanka to support maritime security, freedom of navigation, and maritime domain awareness. In 2018 the U.S. transferred a U.S. Coast Guard cutter to the Sri Lankan Navy. And we have regular joint training and exercises with all the services. All these are signs of a healthy and growing military partnership. Likewise, our law enforcement cooperation has strengthened. There is no better sign of that than the quick and substantial FBI response to Sri Lanka’s request for assistance in its investigation of the Easter Sunday bombings. Our economic relations likewise have seen welcome progress. Over the past ten years, our two-way trade has increased by 40 percent to $3.2 billion. And the United States remains Sri Lanka’s largest export market. U.S. companies have invested more than $300 million in Sri Lanka, generating high-quality jobs for Sri Lanka’s people.

    Another welcome sign of progress is that talks are proceeding well on a new Millennium Challenge Corporation Compact with Sri Lanka. On April 25, the MCC Board approved a new compact agreement for Sri Lanka that is designed to expand economic opportunities and reduce poverty here. This is a strong signal of confidence, four days after the Easter bombings here. These decisions are made only after careful study of underlying governance trends. I had the dubious pleasure when I was Ambassador of canceling a planned compact in 2008 because of declining governance indicators. This new compact is therefore a concrete signal of U.S. confidence but also one that will depend on Sri Lanka’s adroit handling of the post Easter crisis aftermath.

    Easter bombings

    Let me now turn to some thoughts about how Sri Lanka can sustain progress in its relations with the US, particularly given the new challenges posed by the terrible Easter Sunday bombings. My old boss, Deputy Secretary of State Bill Burns, who is probably the most respected American diplomat of this generation, used to joke that US diplomats are never shy about giving advice, often when it is unwelcome. The Easter attacks were not just personal tragedies for the families of those killed and wounded. They opened old wounds still fresh from Sri Lanka’s 26-year civil conflict, and they raised new questions in the minds of potential business partners about the wisdom of doing business in Sri Lanka. What steps should Sri Lanka take to successfully manage these new challenges and sustain its progress of the last ten years? Job one of course must be to pursue with vigour the investigation into who was responsible, what links they had to outside terrorist groups, how the bombers were able to mount such a sophisticated and well-coordinated series of attacks in multiple cities without detection from your intelligence and security services, and what networks may remain so the Sri Lankan people can be sure the threat has abated.

    One priority during this phase of investigating and hopefully wrapping up any remaining terrorist elements must be for the Government and security services to conduct investigations in a professional and impartial manner that respects the rights of all Sri Lankans and does not inadvertently add to the problem. The Government should also make every effort to limit scope and duration of emergency regulations. Sri Lanka can learn from mistakes America made after 9/11. Most civil liberties experts believe the US over-reacted by expanding government surveillance without appropriate constitutional checks; by extended detentions at Guantánamo Bay that circumscribed the legal rights of detainees, by extraordinary renditions and interrogations, all of which gave rise to questions of what the limits of government power should be in times of crisis. Our system of checks and balances ultimately righted most of these wrongs, and the press had a powerful role to play in exposing excesses and wrong-doing.

    Sri Lanka can also benefit from another US lesson learned after 9/11. One of our mistakes was that there was poor communication and intelligence sharing between the CIA, FBI and other agencies. To improve interagency communication and cooperation, the Bush White House established a working group of senior technocrats from all the intelligence and law enforcement agencies. This group met regularly to evaluate all intelligence from all sources and agree on responsibility for follow-up on specific threats. The group was headed by DNSA John Brennan who reported directly to the President. Sri Lanka could benefit from a similar high-level group. Sri Lanka must also be careful not to allow ISIS or other extreme Islamic groups to take root. Although the precise role of ISIS in the attacks remains to be investigated, one must ask why Sri Lanka proved a tempting target of opportunity.

    First, they may have calculated that since Muslim-Christian relations have historically been good, and extreme Islamic thought has never gained wide favour on the island, they and NTJ could organize with undue scrutiny. Secondly, they probably calculated that the security forces have relaxed their efforts since 2009 and to the extent they were still concerned, that concern was more likely on preventing a revival of the LTTE. Having suffered the loss of their self-proclaimed caliphate and territory in Iraq and Syria, ISIS must show its followers it is still relevant and strong. Without a central caliphate, ISIS is metastasizing into smaller units wherever opportunities present themselves. One is in the southern Philippines where they are seeking a beach-head in SE Asia. But they also looking to use bombings such as those in Sri Lanka to sow discord between Muslim, Christian and other communities that they can then exploit for their evil ends. Sri Lanka cannot allow that to happen. Which brings me to my third recommendation, which is that Sri Lanka needs to give new focus and priority to reconciliation and good governance.

    Easter Sunday bombings

    The Easter Sunday bombings opened a potential new divide in Sri Lanka’s already complex ethnic amalgam. Sri Lanka continues to debate the pace and scope of reforms aimed at reconciliation between Sinhalese and Tamils. Some tensions remain as Important priorities such as a Truth and Reconciliation Commission, reparations and accountability, remain on the drawing board. Even as Sinhalese-Tamil reconciliation remains a work in progress, the Easter bombings threaten to open new wounds and cleavages in Sri Lankan society and raise new questions. Will the attack on St. Anthony’s church in Batticaloa rekindle memories of the Tamil-Muslim violence in the East during the country’s civil war? Will extremist Sinhalese Buddhist groups seek to exploit popular anger about the attacks to renew their attacks on Muslims as we saw most recently in Kandy in May of last year? Will Christians, themselves the victims of Muslim and Sinhalese Buddhist violence, seek their own retribution? This complex and combustible mix requires the country to come together for a national dialogue. Given the political chasm and open antipathy between the President and Prime Minister, careful thought must be given as to who might lead such efforts.

    Two good places to start would be Sri Lanka’s religious leaders and its youth groups. Cardinal Ranjith has managed the aftermath of the attacks with considerable aplomb and grace. And there is a long history interfaith dialogue that can help bring these disparate communities together and reduce tensions. With tensions high and the possibility that social media can be misused to spread false rumours, the communities would be wise to set up an early warning system to monitor rumours and then have senior religious figures quickly deny these. This system has worked well in Eastern Indonesia. Likewise, I was impressed that after the war, youth groups like Sri Lanka Unites sprang up to counter extremist narratives and engage Sri Lanka’s youth so they became part of the solution. But religious leaders and young people can only do so much. The Government itself has a crucial role to play to heal old and fresh wounds: Every Sri Lankan citizen should be able to count on equal justice and no group that breaks the law or violates the rights of other citizens should be above the law. Renewed thought should be given to increasing Tamil and Muslim recruits in the country’s security services so they more accurately reflect Sri Lankan society as a whole. The same should be done with the civil service. Islamophobia, already on the rise in India and my own country, should not be allowed to take root in Sri Lanka.

    In the end, any country’s response must depend not on its political leaders who too often succumb to the temptation to defend narrow party and personal interests, but rather on the strength of its institutions. The recent constitutional crisis underlined the critical role of independent institutions like the Constitutional Council and the judiciary. Their continued independence will be an important part of restoring faith in Sri Lanka’s ability to recover and prosper.Economic Reforms: Let me now turn to the business climate. International business looks to invest in countries that offer not only economic opportunity, but also stability and predictability.

    Sri Lanka’s strategic location, its relatively open market and its relatively well-educated work force certainly will bring international business to your door. But then they will measure the relative merits and risks of doing business here versus in huge and growing markets such as India or ASEAN. And Sri Lanka will often be found wanting in such comparisons. Certainly Sri Lanka has made impressive progress to boost its tourism sector. That will face new challenges after the recent bombings. Apparel exports continue to thrive. But efforts to diversify sources of growth beyond these areas have yielded little.

    What to do?

    With your relatively small market, you must compensate by having world-class openness and ease of doing business. Sri Lanka is ranked 100 among 190 economies according to the latest World Bank Ease of Doing Business ratings. It is true that Sri Lanka. improved to 100 in 2018 from 111 in 2017, but 100 is still far too low to draw investors away from more attractive opportunities elsewhere. India, for example, is 23 points better and Prime Minister Modi has vowed that India will get to 50; countries such as Uzbekistan, Albania and Mongolia are still further up the rankings from Sri LankaHandicapped by what inevitably will be investor security apprehensions, the country should therefore undertake efforts to work not only with the World Bank to undertake more systematic reform efforts but benchmark those against those of nearby competitors like Vietnam and India.In the same vein, more fundamental reforms are needed to address corruption. Transparency International ranks Sri Lanka 89 on its Corruption Perception index. Countries such as China, Belarus and Cuba that any knowledgeable observer might guess would rank below Sri Lanka in fact rank above. That should not be.

    Third, as AI, IOT, robotics and other new technologies shape the 21st century business future, that future will belong to the educated: In his influential new book on AI Superpowers, Kai-fu Lee who headed Google’s AI efforts in China, then started VCs in AI companies first in China then Silicon Valley, predicts that the US and China will dominate AI because both generate huge and growing amounts have data, have universities training world-class engineers, and have VCs to power further investment.

    Countries like Sri Lanka that want to succeed in this increasingly competitive environment will be wise to invest in their own universities who can then partner with US and Chinese companies to support the research that can catalyze Sri Lanka-specific AI growth. Unfettered pure research still matters: Credit Suisse report that although China accounted for nearly one-third of the world’s 326 startups valued at US$1 billion or more, its share of unicorns in sectors requiring more advanced scientific research capability such as AI, big data, robotics, and software was just 14 percent, compared to 40 percent in the US. Let me give another example from my own country: Erie, Pennsylvania, which most people associate with the Rust Belt, and aging uncompetitive factories. Most big factories there indeed have closed in recent years, but the city is rebuilding itself around its local universities and a big insurance company. Profits from a big gambling casino in Erie County are funneled partly to “innovation spaces” at four local campuses that are enabling Erie to re-invent itself.

    Sri Lanka can do the same. Companies like Accenture already are operating here to help your export-oriented companies maintain their competitive edge. Sri Lanka should prioritize developing partnerships with US universities that will enable bright young Sri Lankans to get degrees in AI, IOT, cyber security and other fields that will increasingly underline growth and competitiveness in this century. Companies like Coursera can offer intermediate solutions through online courses offered by our best universities as well as companies such as Google and cyber-security specialists Palo Alto Network.

    Let me conclude on a note of optimism. Sri Lanka stands to benefit from the US and Chinese competition for influence in the Asia-Pacific. But it will need strong and unified political leadership to fully investigate the Easter bombings, an even-handed security approach, and a new commitment to reconciliation that will insulate Sri Lanka from efforts by ISIS or others to exploit religious differences to expand their hate-filled influence. Even as Sri Lanka grapples with these shorter-term challenges, it must take active measures to establish the university and business partnerships that can position the country to ride rather than be overtaken by the opportunities presented by AI and other new technologies. These are tall challenges, but Sri Lanka has overcome worse!

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