As the Barack Obama administration moved towards its last year in office, the United States’ relations with ASEAN were ostensibly sound. However, Washington's future ties with the region remained contingent on larger forces of global change that could undermine such relationships. Most regional leaders quietly welcomed, for example, the American naval destroyer USS Lassen's passage within the twelve nautical mile territorial limit claimed by China at Subi Reef near the Spratly Islands during late October 2015, as a symbolic demonstration of the United States’ determination to maintain freedom of navigation (FON) in the South China Sea. If China continues to rise, the United States will invariably be viewed by ASEAN policymakers as an indispensable counterweight for maintaining regional stability in Asia. American policy planners, however, are facing increasingly daunting challenges in the Middle East, in Europe and from international terrorism which is increasingly threatening to envelop their homeland. Given the growing intensity of such challenges, matching resources with the capabilities required to implement and sustain a viable U.S. geopolitical footprint in Asia will become increasingly formidable.

The case of the U.S. “pivot” or “rebalancing” strategy is illustrative. This policy approach was touted by key officials serving during President Obama's first term in office (2009–12) as “a sustained and multi-dimensional strategy” rather than as “simply a shifting of [U.S.] military resources” to the Asia-Pacific region. It was represented as a posture with widely diverse diplomatic, economic and cultural designs underpinning Washington's regional engagement. However, one of its key instigators, Kurt Campbell (Obama's initial Assistant Secretary of State for East Asian and Pacific Affairs) has since lamented that the military aspects of this strategy have been exaggerated relative to its broader objectives, including the solidification of the international norms and law upon which Asia- Pacific order-building should be predicated, strengthening regional prosperity and promoting democratic values.

A subsequent policy correction in this regard has indeed been realized, but largely by default. Confronted with intensifying budgetary constraints affecting all U.S. government expenditures, the U.S. Department of Defense has recently served notice in key documents forwarded to the American Congress that the FY2016 U.S. defence expenditures would be predicated on a “global” rather than an “Asian basis” due to intensifying global strategic concerns. How the United States has adjusted its rebalancing policy as it applies to Southeast Asia during the period 2014–15 is initially discussed.

The Philippines has been tagged repeatedly as the “the sick man of Asia” for its lacklustre economic performance. In turn, this poor showing can be attributed to its long history of institutional failure which led to a pandemic system of corruption. Hence, the recent determined attempts at improving governance procedures and institutions as a means of reducing and eliminating corruption have caught the attention of Asia and the rest of the world.

The administration of President Benigno S. Aquino III was elected on the basis of weeding out corruption. Its slogan of Walang Corrupt, Walang Mahirap (No Corruption, No Poverty) has permeated all levels of the government and resulted in changes beyond those that were initially expected. Based on Transparency International's Corruption Perceptions Index (CPI) for 2014, the Philippines has been perceived as becoming less corrupt over recent years. The Philippines was ranked 85th out of 175 countries by the Germany-based organization, higher than the rank of 94th in 2013, and 105th in 2012. Although the Philippines still scored below 50 in the index, its CPI score of 38 for 2014 is a “marked improvement” from its score of 34 in 2012 and 36 in 2013, according to Transparency International.

Tagged as Matuwid na Daan (the Straight Path), these reforms seemingly have translated into economic gains, with real gross domestic product (GDP) growth rates averaging 6.12 per cent for the past three-and-a-half years, capped by an unprecedented economic growth rate of 7.2 per cent at the end of 2013. Despite the slowing down in 2014 to 6.1 per cent due to debilitating typhoons resulting in a stagnant agricultural sector and limited government disbursements, the economy remains robust. While the current election period has attracted a diverse number of candidates, all of them, including the main opposition party, have vowed to continue the reforms of the Aquino administration.

Moreover, the various credit rating upgrades received by the country were measurable indications of its accomplishments in governance, especially in fiscal discipline and monetary management. Government revenue's share to GDP was 13.3 per cent in 2013, up from 12.1 per cent in 2010.

With this development, can we say that the country is on the verge of joining the ranks of other Southeast Asian nations whose growth have preceded it? Unfortunately, the answer is negative.

In his 2015 New Year message to the nation, Malaysian Prime Minister Najib Razak called 2014 the most challenging year of his career, with the twin airline tragedies — the disappearance of MH370 in March and the downing of MH17 in July in Ukraine — and the worst floods to hit the country in decades, which displaced more than 200,000 people, dampening the country's economic outlook.

But 2015 proved that Najib may have spoken too soon. At home, Malaysia and its embattled Prime Minister spent most of 2015 muddling through a daunting set of political, economic and social challenges, all made worse by the long shadow of one of the country's biggest scandals directly implicating Najib himself. And though 2015 was an important year for Malaysia's regional and international diplomacy, with the country's chairmanship of ASEAN and a non-permanent seat on the United Nations Security Council (UNSC), the spillover from its domestic politics along with a series of crises put a dent on some otherwise notable achievements.

Political Turmoil and Turbulence

For much of the year, Malaysia was consumed by allegations that Najib had mismanaged funds linked to debt-ridden state investment fund 1Malaysia Development Berhad (1MDB). 1MDB had long been under assault, weighed down by 42 billion ringgit ($11.4 billion) in debt. But the scandal truly rocked the country following a 3 July report by the Wall Street Journalwhich disclosed that investigators had found that nearly $700 million from entities linked to 1MDB was deposited into Najib's private bank account. Najib denied using government funds for personal gain. But revelations — including the fact that the money had come from an unspecified Middle East donor prior to Malaysia's 2013 general elections — only raised more questions in what some began calling the biggest scandal in Malaysia's history.

Some expected the 1MDB scandal to be the death knell of Najib, especially since his approval ratings in February had already plunged to their lowest levels since he assumed office in 2009. Indeed, there was initial speculation about his removal either by opponents within his party, the United Malays National Organization (UMNO), or through a no-confidence vote tabled in parliament.

Yet Najib turned out to be far more ruthless and resilient than his opponents anticipated.

Political and security developments during 2015 posed major challenges to the Association of South East Asian Nations’ (ASEAN) promotion of regional autonomy and community building. The vexed issue of maritime disputes in the South China Sea took a new turn with China's accelerated construction of artificial islands, Japan's stepped-up support for claimant states, and the initiation of freedom of navigation operational patrols (FONOP) by a U.S. warship and aircraft. These three developments illustrated once again the difficulties confronting ASEAN in maintaining Southeast Asia's autonomy in the face of intensified major power rivalry. During the year ASEAN continued to press China for an expeditious conclusion of a Code of Conduct (COC) in the South China Sea.

During 2015 ASEAN encountered five significant challenges to its efforts at community building: the Rohingya refugee crisis; the flare-up of border tensions between Cambodia and Vietnam; competing organizational forms of regional economic integration; domestic political transitions in Thailand, Cambodia and Myanmar; and the resurgence of international terrorism.

South China Sea Dispute

China's Artificial Islands

In 2015 China accelerated construction of infrastructure on seven artificial islands in the Spratly archipelago — Fiery Cross Reef, Subi Reef, Mischief Reef, South Johnston Reef, Gaven Reef, Hughes Reef and Cuarteron Reef. Between February and September China completed construction of a three-kilometre-long runway on Fiery Cross. This became operational in January 2016 when China conducted three test flights by civilian passenger aircraft. In mid-year China began building a second airstrip on Subi, while in September China commenced preparatory work for a third runway on Mischief Reef. When completed, the total length of China's airfields (9,000 metres) will be more than twice as long as the four airstrips maintained by Malaysia (1,368 m), Taiwan (1,195 m), the Philippines (1,000 m) and Vietnam (500 m). With the exception of Vietnam, all the runways in the South China Sea will be able to accommodate jet fighters; but only China will be able to operate bombers.

During 2015, U.S. spokespersons repeatedly called on all claimants to halt land reclamation and new construction and refrain from militarizing the features that they occupied. For example, on 18 November President Barack Obama told a press conference in Manila, after meeting his Philippine counterpart Benigno Aquino, “We agreed on the need for bold steps to lower tensions including pledging to halt further reclamation, new construction and militarization of disputed areas in the South China Sea.”

Infrastructure is vital for development. Today, the role of physical infrastructure has taken centre stage as a country's international competitiveness is determined by the state of development of its infrastructure. Estache and Fay find that, over the past twenty-five years, there is abundant empirical evidence showing the impact of infrastructure on economic growth, especially at lower levels of development. Investment in infrastructure is perceived as key to improving the efficiency and productivity of an economy, thus supporting the country's economic growth while reducing income inequality and poverty.

The current state of the infrastructure in Indonesia is better than it was after the economy was hit hard by the 1997 Asian financial crisis. However, Indonesia is still struggling to increase investment in infrastructure to a level sufficient to support the high growth rates it saw in the early 1990s. In the thirty years prior to the crisis, infrastructure played a key role in driving growth and poverty reduction in the country. After the 1997 crisis the Indonesian government experienced financial difficulty that forced it to reduce development spending, especially for infrastructure. When Susilo Bambang Yudhoyono (SBY) became President in 2004, the state of Indonesia's infrastructure ranked among the lowest in the region. For several years the lack of investment in infrastructure has been blamed for deterring investors, hence dragging Indonesia's economic growth down from its potential. According to World Bank estimates, Indonesia's dilapidated infrastructure has contributed to a 1 per cent loss of economic growth each year since 2004.

During his two-term presidency (2004–14), to his credit, SBY managed to restore and maintain political and economic stability in Indonesia's complex democratic environment. Fiscal consolidation was achieved during his first term (2004–9). This set the necessary foundation for Indonesia to move beyond its infrastructure impasse. During SBY's first term, Indonesia hosted several infrastructure summits to attract investors, both foreign and domestic. It was during this time that the country slowly opened up its infrastructure sectors to private sector participation, mainly in power, toll roads, railways and seaports. Several regulations were enacted and institutions established to promote public private partnerships (PPPs). Then, in 2011, the SBY administration unveiled the Master Plan for Acceleration and Expansion of Economic Development of Indonesia (abbreviated as MP3EI).

Amid worldwide salutes and suspicion, China's international strategy took full shape in 2015. While many observers find increasing opportunities in China's multiple initiatives to enhance regional and global development as well as economic cooperation, others see an ever more assertive China, projecting might with its growing wealth. Especially for Southeast Asian nations, the most susceptible to China's moves due to their proximity to and close economic ties with China, the many new Chinese initiatives have brought both hope and challenges. Now that three years have passed since President Xi Jinping took office and the basic framework of China's international strategy has been established, it is time to examine the new features of China's international endeavours and draw salient implications for the future trends of its political, security and economic relations with the world, and in particular with its closest neighbour, ASEAN.

From the author's perspective, despite its widely perceived image as a revisionist, hegemony-seeking power, China has maintained its course of peaceful rise, and its new international strategy features more continuity than change. Nevertheless, with the evolving geopolitical environment of the world and bigger stakes in regional stability and global economic well-being, China has made many adjustments to its international strategy under the new leadership. If effectively implemented and well understood by other nations, this strategy will not only help achieve the grand “Chinese Dream”, but also boost global peace and development as well as regional stability and integration.

Old Ambition, New Approach: Five Changes to China's International Strategy

The peaceful and inward-focused nature of China's rise was reaffirmed when President Xi put forward China's strategic goal to achieve the “Chinese Dream”, a new name for the century-long ambition for “the great rejuvenation of the Chinese nation”, on 29 November 2012, only two weeks after he was elected as General Secretary of the Communist Party of China (CPC). Despite occasional headstrong behaviour since then, China has in general demonstrated a peaceful and constructive stance in the international arena, and domestic reform and development have remained its first and foremost strategic targets.

It is my pleasure to present the forty-third edition of Southeast Asian Affairs. The information and analysis in this annual review will be useful for all those interested in developments in Southeast Asia.

The year 2015 saw global economic headwinds grow stronger in Southeast Asia. Growth in Japan and Europe remained subdued, while in China growth weakened and market volatility increased. These external factors were the main reasons for the lower growth rates, manufacturing exports, stock market capitalizations, and currency values in Southeast Asia. These headwinds will likely continue throughout 2016.

On the security front, the problems in the South China Sea worsened, particularly between the United States and China. China, the United States, Japan and India all increased their active interest in the South China Sea. The United States and China increased their pressure on Southeast Asian states and ASEAN to support their positions on the South China Sea.

Politics in 2015 reflected the region's diversity. The election in Singapore saw a strong surge of support for the ruling People's Action Party. Myanmar's first free election in many years saw a definitive defeat for the ruling Union Solidarity and Development Party. In Indonesia, the Jokowi administration struggled to translate its election victory into effective rule, while the Philippines, Vietnam and Laos geared up for leadership changes in 2016. The long-standing political regimes in Cambodia and Malaysia faced greater popular pressure for change, while Thailand moved no closer to a return to democracy.

I would like to thank the authors, the editors as well as others who have helped to make this publication possible. The chapters in the volume contain a wide variety of views and perspectives. They do not necessarily reflect the views of the Institute. The authors alone are responsible for the facts and opinions presented in their contributions.

For Brunei Darussalam, 2015 was primarily about the dilemma of maintaining domestic stability in the face of significant regional and global instability in areas of particular vulnerability for Southeast Asia's smallest country. Plummeting global energy prices saw the country's once extremely large current account surplus reverse into a large deficit. At the same time, as the smallest and weakest claimant in the South China Sea, Brunei has the fewest means to counter the effects of growing Chinese assertiveness, U.S.–China rivalry, and ASEAN ineffectiveness in relation to these disputed waters that lap on to the shores of the Sultanate. Aided by significant long-standing financial, political and diplomatic reserves, Brunei Darussalam was able to maintain an impressive level of social, political and diplomatic stability in these challenging times. On the economic and diplomatic fronts, Bandar Seri Begawan responded by enhancing existing relations and assets and seeking greater diversification. On the social and political fronts, the response was one of greater conservatism and centralization. As Brunei Darussalam's economic problems are significant and structural, the responses will have to pass the test of time for the country to overcome them.

More than Headwinds

Even a cursory glance at Table 1 shows how dramatically the Brunei economy was affected by falling energy prices. And yet, the growth estimates for 2015 are based on inflated price assumptions for both oil and liquefied natural gas, so the reality will likely be even worse. Likewise, current market movements suggest the IMF price assumptions going forward err on the side of optimism.

The Sultan, His Majesty Haji Hassanal Bolkiah, is well aware that the country's hydrocarbon resources will eventually expire, possibly as early as 2025, and has tried to extend their life in recent years by capping production. The volume of oil production reportedly is now a full 40 per cent less than in 2006. In 2015 the scheduled and unscheduled maintenance of some of the most important energy projects has further hit production. However, the short-term costs of the policy have been exacerbated by the global collapse in the value of hydrocarbons with the price of crude oil having fallen from above US$100 in mid-2014 to less than US$30 per barrel by January 2016 and the value of natural gas per million Btu (British Thermal Unit) having fallen from over US$6 to nearly US$2 during the same period.

For Indonesia, 2015 has been a year of tremendous fluctuations on the political front as President Joko Widodo (Jokowi) has been seeking to find his political feet, as well as on the economic front, as the country experienced the worst currency devaluation since 1998, and a dramatic turnaround in economic policy in the second half of the year. Foreign policy was not without its own drama, featuring among other things the drawn out and sensationalized execution of eight foreign drug offenders, and a U.S. state visit. Finally, in 2015 Indonesia was responsible for the worst “haze” in eighteen years, choking the region for several months and causing approximately US$34 billion in damage.

This chapter will review the highlights of the year in Indonesia, focusing on four areas — political highlights, institutional reform, the economy, and foreign policy. It will conclude with a brief section on Jokowi's leadership style and the country's future outlook.

Political Highlights: Jokowi's First-Year Performance

The biggest political story of the year by far is the story of Joko Widodo's first year as President of Indonesia. Elected in October 2014, he came into the presidency riding a tide of euphoria and expectation for reform somewhat reminiscent of the delirium that greeted President Obama in the United States in 2009. And, also similarly, these high expectations were quickly dashed, as political manoeuvres in the first months of his presidency meant that he faced an opposition-controlled House of Representatives (DPR) and a Cabinet reflecting the political strength of his “patron”, PDI-P head Megawati Soekarnoputri, his Vice President Jusuf Kalla, and National Democrats (NasDem) party chair Surya Paloh. During the past year Jokowi has had to manoeuvre politically between the interests of these party allies (who did not always act like allies) and multiple teams of advisors who had been with him since his gubernatorial days.

In early January 2015, only three months after becoming President, Jokowi took the bold move of abolishing fuel subsidies — an act which no president before him had been able to do. This gave the administration an additional 200 trillion rupiah (roughly US$16 billion) to spend on infrastructure and service delivery.

The year 2015 marked the eighty-fifth anniversary of the Communist Party of Vietnam (CPV) and the fortieth anniversary of Vietnam's reunification under its rule. After almost thirty years of economic transformation, Vietnam has achieved considerable progress in terms of socio-economic development, but challenges to the country remain substantial as the economy has not regained full steam since the 2008–9 slowdown. Politically, the CPV has also been faced with a testing period. Its performance-based legitimacy has been undermined, while popular support declined due to widespread corruption as well as various socio-economic problems that cast doubts on the efficiency and accountability of the state and party systems. In terms of foreign policy, Beijing's increasing assertiveness in the South China Sea presents a major challenge for the party. While seeking to maintain a peaceful relationship with its northern neighbour, Vietnam also needs to look into new options to deal with the rising China threat.

Developments in Vietnam in 2015 show that the CPV was struggling to overcome these challenges while probing for changes to strengthen its political legitimacy, to improve the country's economic performance and to navigate through complex foreign policy issues. Preparations for the CPV's Twelfth National Congress obviously topped the country's domestic agenda in 2015, but other economic and foreign policy developments were also noteworthy as they may indicate how Vietnam in general and the CPV in particular will perform in 2016 and the years to come.

Politics: Preparations for the CPV's Twelfth National Congress

The CPV's quinquennial national congresses are always important events for the country's political system. Each congress not only elects the country's top leadership, but also reviews its past performance and sets out a framework for future socio-economic, political and foreign policies. Although policy orientation is generally considered the most important task of the congresses, the election of the party's top leadership attracts the most attention from the public, party members and Vietnam watchers around the world. The party's Twelfth National Congress, planned for January 2016, has been no exception.

To prepare for the congress, in September 2015 the party released a draft political report for public comment. After reviewing the achievements and shortcomings for the past thirty years of doi moi, as well as since the last congress, the report outlines objectives and solutions for the next five years.

The year 2015 in Timor-Leste was marked first and foremost by the withdrawal of Xanana Gusmão from the Prime Minister position he had held since 2007, and the gradual beginning of a long called for leadership transition. His resignation has not, as some had thought, signalled his complete withdrawal from political life. Instead, his stepping down was accompanied by the restructuring of the Timorese government, with Gusmão now serving as Minister for Planning and Strategic Investment, a role in which he is expected to continue the focus on infrastructural development advanced during his time as Prime Minister.

The security situation remains one of overall stability, in spite of relatively contained security incidents, which this year culminated with the death of rebel leader “Mauk Moruk” in a clash with Timorese security forces. In the coming years, Timor-Leste and its new government faces the challenge of how to diversify its economy away from its current heavy dependence on the Petroleum Fund to finance its national development. This requires balancing popular demands and governmental preference for fast-paced “big development” infrastructure projects with more long-term and sustainable initiatives less dependent on the petroleum industry and targeted more at creating viable employment opportunities for the country's youth.

Leadership Transition

Since the beginning of his political reign, former resistance leader, later President and lastly Prime Minister Xanana Gusmão more frequently expressed his intention to withdraw from formal Timorese politics. By early 2015, however, amidst growing critcism of his leadership style both internationally and locally, coupled with domestic calls for a leadership transition, he regularly aired the idea of his impending resignation. On 6 February 2015, Gusmão formally handed in his resignation as Prime Minister, a role he had held since parliamentary elections in 2007. The 2007 elections had signalled Gusmão's real entry into party politics, when he resigned from the Presidential position he had held since independence and launched a new political party, Conselho Nacional de Reconstrução de Timor (CNRT). Since then, he served as Prime Minister in two governments, first between 2007 and 2012, and again between 2012 and up until his resignation in early 2015.

His oft-repeated intention to resign had long prompted speculation about possible successors to Gusmão, with international commentators expecting that his replacement would come from within his own party. However, Timorese politics is rarely predictable.

Malaysia aims to transform itself into a technologically sophisticated, export driven, high-income and developed nation by 2020. Foreign and domestic private investment and high-quality human capital have been targeted as the pivotal drivers of Malaysia's economic growth. They are expected to propel the country from its position as an upper-middle-income country to high-income and developed nation status. To accelerate the growth of a talented, entrepreneurial and balanced human capital, Prime Minister Najib Razak announced a new motto of “Soaring Upwards” for the Malaysian higher education system to quicken the pace of creating a firstrate educated workforce. The recently launched Malaysia Education Blueprint 2015–2025 (Higher Education) has targeted that by 2025 at least one Malaysian university should be ranked among the top twenty-five in Asia, two universities in the global top hundred, and four universities in the global two hundred. In The Times Higher Education's World University Ranking for 2015–16, one Malaysian university achieved a place in the 401–500 rank, while another four are in the lower 601–800 band. The government estimated that Malaysia would need about 500,000 highly skilled and talented science, technology, engineering and mathematics (STEM) oriented workers, a large pool of trained graduates, and a great number of skilled and semi-skilled workers. It is envisaged that skilled and semi-skilled personnel will be provided through technical and vocational educational training institutions.

This chapter examines the role of high-quality education and discusses issues related to the Malaysian vision. Equal opportunities to pursue an all-round excellent education to accomplish the objectives are of paramount importance. The focus of the chapter is on current educational provisions and what is needed to secure well-equipped, creative and innovative high-quality human capital to become a developed nation by 2020.

Inclusive and Quality Education Drives “Holistic” Talent

To produce the critical number of graduates and skilled employable workforce, a country requires an inclusive, high-quality and equitable education system. Such standards should be ensured both at school and tertiary levels. This is Malaysia's core challenge and dilemma. The country's present centrally controlled and managed public higher education system is based on a politically resolute, racebased affirmative action strategy and managed by a rather insular bureaucratic system. Parallel to this public provision, there is a sizeable profit-based private sector delivery system. Can the country under such constrained supply conditions generate the critical mass of high-quality and skilled employable workforce?