ISAS Brief 2009

ISAS Brief 2009

ISAS Brief No. 92 – Date: 6 January 2009 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

India’s External Sector: Emergence of New Structural Trends Amitendu Palit1 The Reserve Bank of India (RBI) released India’s latest balance of payment (BOP) estimates on 31 December 2008. The estimates are for the first six months of the financial year 2008-09 (that is, April-September 2008). It is evident that India’s BOP has undergone some significant structural changes in the current year. Most of these changes are attributable to the global financial crisis. If the changes deepen further during the rest of the year, then India’s BOP and external sector are likely to look much different from what they did in recent past.

The most striking feature of the current BOP estimates is the development on foreign exchange reserves. After a long time, India has not experienced any net addition to its outstanding stock of foreign exchange reserves. The latter went down by US$23.4 billion during April-September 2008. On a comparable basis, India’s foreign exchange reserves had increased by US$48.6 billion during April-September 2007. As a result of no net accretion, India’s total outstanding stock of foreign exchange reserves has come down from US$309.7 billion as on 31 March 2008 to US$286.3 billion as on 30 September 2008. The development does not indicate a weakening of external sector fundamentals since, at their current level, the reserves cover import requirements for more than 11 months. However, they do point to the onset of interesting structural changes in India’s BOP and external sector.

Why did the reserves decline during the current year? An important reason is valuation loss.

The value of India’s foreign exchange reserves – as determined by their currency composition – experiences significant gains or losses depending upon the movement of the United States dollar (USD) vis-à-vis other major currencies. Gains accrue if the USD weakens against others and vice-versa. During April-September 2008, the USD gained against major currencies of the world. Between 2 April 2008 and 29 September 2008, the USD appreciated against the Great Britain pound, the Euro and the Japanese yen by 7.9 percent, 7.3 percent and 3.9 percent respectively. These trends have been reflected in the movement of the Indian rupee (INR) vis-à-vis the major global currencies as well. During April-September 2008, the INR depreciated the most against the USD (17.4 percent) compared to the Great Britain pound (7.6 percent), the Euro (7.5 percent) and the Japanese yen (10.3 percent). With the USD gaining against other currencies, Indian reserves have experienced significant valuation losses. Such losses during April-September 2008 were as 1

Dr Amitendu Palit is a Visiting Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be reached at isasap@nus.edu.sg.

much as US$20.9 billion. This was in sharp contrast to valuation gains of US$8.1 billion during April-September 2007, a period when the USD was weakening against other currencies.

While global cross-currency movements partly explain the drop in India’s foreign exchange reserves, the other reasons are more structural to India’s BOP. In this context, it is essential to look at the structural features of India’s BOP. India has traditionally had a current account deficit accompanied by a capital account surplus. During the external sector crisis of 199091, the current account deficit increased to three percent of its gross domestic product. A progressively greater services-orientation of the economy from the 1990s, coupled with outward-oriented external sector reforms, led to ‘invisibles’ assuming a larger role in the current account. Invisibles include receipts from services (software, communication, business and professional services, and travel), exports and inward remittances. Buoyant services receipts and heavy remittance flows slowly brought down the current account deficit until India achieved a current account surplus in 2001-02. On the other hand, the capital account surplus kept enlarging due to higher external commercial borrowings (ECBs), non-resident deposits in commercial banks and larger portfolio and foreign direct investment (FDI) flows.

The twin surpluses resulted in steady accretion of reserves from the early years of the current decade. Reserve build-up gathered momentum as the capital account surplus expanded fast on account of a deluge of foreign institutional investor (FII) inflows precipitated by a robust capital market since 2003-04. The capital account surplus more than compensated the current account deficit that resurfaced from 2004-05. As a result, reserve accretion continued unabated with India’s reserves crossing US$300 billion by the end of 2007-08.

With reserve growth showing a departure from its rising trend in the current year, it is important to revisit the current and capital account dynamics. At the end of the first six months of 2008-09, the current account showed a deficit of US$22.3 billion. This was more than double the deficit of US$11.0 billion in April-September 2007. The deficit has swelled mainly on the account of an increase in trade deficit (US$69.2 billion in April-September 2008 compared to US$43.3 billion in April-September 2007), which has expanded due to the stiff rise in prices of oil imports. Though invisible surplus also increased due to robust inflow of remittances during this period, the trade deficit grew faster leading to a larger overall deficit in the current account.

While a bigger current account deficit was expected, the contraction in the magnitude of the capital account surplus was somewhat unexpected. The latter was only US$19.8 billion during April-September 2008. This is in sharp contrast to a surplus of US$51.4 billion in April-September 2007. The drop in the size of the capital account surplus vis-à-vis the increase in the current account deficit has exacerbated the decline in reserves. Indeed, had the capital account surplus more than compensated the current account deficit, as it used to in the past, then the reduction in reserves would have been much less than the reported US$23.4 billion in spite of valuation losses.

The capital account of the BOP for the current year reflects some major structural transformations. The most important of these is in the nature of flows dominating the account. Unlike previous years, when portfolio investment flows made up a major part of the capital account balance, the situation is different this time around. Portfolio flows have turned into net outflows. During April-September 2008, net portfolio investment amounted to US$5.5 billion, reflecting a larger outflow of such investment vis-à-vis inflow. While this has contracted the capital account, the effect has been reinforced by drops in ECBs and short-

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term trade credits that are mostly used for financing imports. These declines have not been compensated by an equivalent increase in longer-term FDI flows and have led to a significant reduction in the size of the capital surplus.

The changes in India’s BOP are correlated to the volatility in global financial markets observed since the beginning of the current financial year. The first quarter (April-June) of 2008-09 saw an accretion of US$2.2 billion to the existing stock of foreign exchange reserves. During the second quarter (July-September), the reserves dropped by US$4.7 billion.2 However, the difference in accretion to reserves between the two quarters masks the prevalence of some similar trends during both periods. Capital outflows had gathered momentum during the first quarter itself. Net portfolio investment was an outflow of US$-4.2 billion during April-June 2008. This outflow reduced to US$-1.3 billion in the next quarter.

However, the lower outflow should not be taken as a signal of revival of domestic capital markets. On the contrary, it probably reflects a marked dip in gross FII inflows as well as lower resource mobilisation through American depository receipts and Global depository receipts by Indian companies on the account of the liquidity crunch affecting global markets.

The most significant structural development in India’s external sector, as reflected in its BOP, is the inability of the capital account to overcome the deficit in the current account. As a result, after a long time, there has not been any addition to foreign exchange reserves. In a related development, the quality of the capital account in terms of nature of flows is undergoing a structural transformation. Short-term and relatively ‘volatile’ flows like FII investments that have been dominating India’s capital account are reducing in importance. It is the same for debt-creating flows such as ECBs and trade credits. The capital account for the first six months of the current year has had longer-term FDI flows as the most significant contributors.

What is the outlook for the BOP in the remaining part of the year? The year is unlikely to experience a significant reserve accretion. There are two reasons for this. First, in spite of the global recession, the USD has kept on strengthening against major currencies of the world.3 Investors have been picking up United States dollars by selling large chunks of emerging market securities. This has increased the demand for the greenback. Dollar demand has also gone up due to higher purchases of United States Treasury bonds that are being considered as the ‘safest’ investments. A northward-bound dollar means valuation losses for India’s reserves. The cross-currency trends after September 2008 clearly point to more such losses.

Second, India’s trade and current account deficits are likely to widen with exports slowing sharply. However, the higher current account deficit is unlikely to be compensated by a corresponding increase in capital surplus. There are little chances of portfolio inflows increasing significantly in the next couple of quarters due to depressed sentiments in global and domestic capital markets. At the same time, liquidity problems are unlikely to see an increase in ECB inflows. The stimulus package announced on 22 January 2008 has relaxed end-use restrictions for ECBs by allowing their use in integrated townships. The FII investment ceiling in corporate bonds has also been hiked. However, these measures are likely to work with a lag and the effects are unlikely to manifest before the next year.

During the current year, longer-term FDI flows have been 73 percent of net capital flows compared to only 9.5 percent in the corresponding period of 2007-08. While other capital 2 3

The accretion figures for both quarters exclude valuation changes.

The sharpest appreciations have been against the Great Britain pound and the Euro during OctoberDecember 2008. It has weakened slightly against the Japanese yen.

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inflows have shown a declining trend in the current year, FDI flows have been exceptions.

Greater dominance of these flows might make the capital account more ‘stable’ compared to relatively volatile portfolio flows. But whether the former will be large enough to make the capital surplus cover the current account deficit is doubtful. That will require a further deepening of the structural change that has commenced in India’s BOP and is unlikely to happen this year. Thus, there are strong possibilities of 2008-09 being the first year after 1995-96 when India’s foreign exchange reserves are unlikely to increase from their previous year levels. oooOOOooo

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ISAS Brief No. 93 – Date: 7 January 2009 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Return of Democracy in Bangladesh: Can the New Government Deliver on its Promises?

M. Shahidul Islam∗ The Awami League (AL)-led grand alliance’s 1 sweeping victory in the 9th parliamentary elections witnessed the return of democratic rule in Bangladesh after nearly two years of an army-backed caretaker government. The grand alliance was expected to win the polls.

However, its landslide victory stunned many Bangladeshis. Former Prime Minister Ms Khaleda Zia’s Bangladesh Nationalist Party (BNP), once a mighty party, performed poorly in the national elections. With the return to democracy, there is now hope among the Bangladeshi people that the new government would fulfill their expectations. Ms Sheikh Hasina, the AL leader, who took the oath as Prime Minister on 6 January 2009, has a wonderful opportunity to determine the fortune of the nation. However, her government faces some key challenges in this regard.

This paper looks at the reasons for the Bangladeshi people voting overwhelmingly for the AL and its allies at the elections. At the same time, it assesses the new government’s ability to deliver on its promises.

Why did the AL win so comprehensively?

Held on 29 December 2008, the elections witnessed an impressive voter turnout of 87 percent. The grand alliance won 262 seats, followed by the BNP-led four-party alliance, with 32 seats, and the independents winning five seats.2 The AL alone secured 230 seats and received about 49 percent of the votes in the elections. On the other hand, the BNP secured 27 seats and received 33 percent votes.

There are several factors that accounted for the exceptional performance of the AL and its allies at the polls. The first is anti-incumbency. This is supported by the fact that the country has seen power alternating between the two begums since the fall of the military rule in 1990.

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Mr M. Shahidul Islam is a Research Associate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasmsi@nus.edu.sg.

The other major stakeholders of the grand alliance are Jatiya Party (Ershad), Bangladesh Workers Party and Jatiya Samajtantrik Dal. The National Parliament of Bangladesh consists of 300 seats. In the 9th parliamentary elections, candidates contested in 299 constituencies. The elections in the last constituency will be held on 12 January 2009.

During the BNP’s five-year rule (2001-2006), Bangladesh witnessed a marked improvement in law and order. Furthermore, Ms Zia’s recent term as Prime Minister saw an increase, albeit marginally, in the gross domestic product (GDP) growth rate, when compared to her predecessor’s tenure. 3 Despite these positives, why did the BNP government fare so badly at the elections? It is quite a common phenomenon in developing countries for sitting governments to lose elections despite having performed well in office. However, this routine explanation needs to be examined much more carefully. This brings us to the next set of points.

Breaking the traditional three to four percent GDP growth rate cycle, the Bangladesh economy grew at five to six percent annually since the fall of General Ershad’s government in 1990. With a favourable external environment in recent times, the economy was expected to witness a seven percent-plus growth rate. Unfortunately, under the BNP government, this potential growth did not materialise.

It is widely believed that widespread corruption by Ms Zia’s sons and her cronies 4 is largely responsible for the less than expected growth in the country. Due to omnipresent corruption practices, the BNP government failed to deliver on basic infrastructure, notably electricity, 5 when the economy badly needed the infrastructure to enter into the new phase of growth cycle. 6 The elder son of the then-Prime Minister ran a parallel government from the BNP chairperson’s party office, which was widely perceived to be an alternate centre of power and malpractices. 7 The Anti-Corruption Commission that was reformed under the auspices of the caretaker government has chronicled the BNP’s and the AL’s corruption records. The AL is found to have a better record (less corrupt practices) as compared to the BNP. 8 Even in the remote corners of the country, the people came to know of the BNP’s corruption records, due largely to the massive growth of the media in Bangladesh in recent times. This factor made a significant difference in the results of the elections.

Furthermore, the incumbent caretaker administration’s drive against corruption made the BNP organisationally weak and in a state of disarray – most of its leaders were either behind bars or out of the country to avoid the ‘kangaroo’ trials. Though the leaders of the AL, including Ms Hasina, faced similar trials, the party was relatively less affected as compared to the BNP. Moreover, the AL’s and its allies’ election campaign focused on key issues facing the country and the grand alliance reached out to new voters who found the alliance a harbinger of change. On the other hand, misreading the caretaker government’s popularity amongst the

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The average GDP growth rate under Ms Zia’s recent tenure was 5.7 percent, whereas the economy grew, on average, by 5.35 percent annually under the premiership of Ms Hasina (1996-2001).

‘You shall reap as you sow’, The Daily Star, 31 December 2008.

‘Ex-BNP Minister accuses alliance government of siphoning TK10,500 crore’, The New Age, 5 November 2006.

According to World Bank estimates, the Bangladesh economy loses US$1 billion annually due to unreliable electricity supply, which, in turns, results in a 0.5 percent reduction in its annual GDP. (Tamim and Gulen, “Perils of Bangladesh Energy Value Chain”, Energy and Power, July 2004).

‘Khaleda shuns Hawa Bhaban’, The Daily Star, 7 October 2008.

For details, please refer to the website of the Anti Corruption Commission, Bangladesh (http://acc.org.bd/oct08.php)

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Bangladeshis, Ms Zia took a stance against the interim administration during the campaign trail.

Finally, Ms Zia was a reluctant participant in the polls. While the Election Commission and the whole country were gearing up for the polls, the BNP leaders were divided on opinion on their participation in the elections. By the time Ms Zia made up her mind to run for the elections, it was, in essence, too late for the BNP to organise itself for the elections and, more importantly, to reach out to the voters.

Can the AL deliver on its promises?

The new government is now in place. The pertinent question is whether the AL and its allies can deliver on their promises. The election manifesto of the AL, called ‘A Charter for Change’, promised to address five priority issues, inter alia. These are maintaining economic stability and controlling commodity price hikes in the face of global financial crisis; taking effective action against corruption; addressing the power and energy crisis; eliminating poverty and inequality; and establishing good governance.

The AL’s coming to power coincided with the collapse of commodity prices and the spread of a global recession. During the elections, most voters, of whom about 45 percent live below the poverty line¸ were asked about their expectations of the new government. Their answer was simple and straightforward – ensure cheaper food prices. 9 Though price stability in the domestic market largely depends on the country’s food production, the recent collapse in commodity prices in the international markets will help the AL government to control the prices of essential items in the country.

However, as the financial crisis spreads to the real economies, the Bangladesh economy could face some downside risks, particularly to its macroeconomic stability. Bangladesh’s key macro variables, including exports and remittances – the two lifelines of the country’s external sector – have remained somewhat insulated from the financial crisis, at least for the time being.

Ms Hasina’s real test would be to tackle corruption which has been a longstanding problem for the country. She too has also been accused of corruption several times in the past. Though the fight against corruption is a difficult task for any government, Ms Hasina can learn some lessons from the price her predecessor paid for being accused of corruption and from the current caretaker government’s fight against this malaise. It would be unrealistic to expect Ms Hasina to rid the system entirely of corruption. However, her government would be seen as having achieved some success in this regard if it allows the Anti-Corruption Commission to work independently.

The new government is well aware of the importance of electricity generation as the economy has been reeling under the power crisis. The government needs a long-term energy policy which should incorporate the best utilisation of the country’s domestic gas resources, among others. Bangladesh’s energy security has to be linked to the country’s national security. The recent incursions by India and Myanmar in Bangladesh waters for the exploration of oil and gas are yet another reminder that Dhaka needs to take prudent policies on its energy and national security.

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‘Bangladesh’s Elections: The Tenacity of Hope’, The Economist, 30 December 2008.

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The elimination of poverty and inequality is also a serious challenge for the new government.

In the post-election news conference, Ms Hasina identified this challenge as the top-most priority for her government. In spite of modest economic growth, the country has had some success in alleviating poverty as well as minimising social indicator gaps. The Bangladesh economy grew at five to six percent per annum in the current decade despite poor governance, rampant general strikes and political instability. If the new government can address these issues, the country can achieve seven percent-plus GDP growth.

The fifth priority for the AL, according to its manifesto, is the establishment of good governance. The caretaker administration has done some good work in its efforts to ensure good governance in the country. Its efforts included the separation of the judiciary from the executive body of the government; constitution of the independent Election Commission and the Anti-Corruption Commission; formation of new laws to tackle corruption and ratification of the United Nations Convention against corruption; and greater efficiency in the country’s major ports, among others. The new government has inherited the system from its predecessor. It should allow these institutions to function independently.

It would also be important for the new government to ensure good relations with its immediate neighbours, notably India. Historically, New Delhi sees the AL as its close ally. In the past, the AL had resolved some critical issues with India, particularly the Ganges water sharing dispute and the Chittagong Hill Track problem. Both Dhaka and New Delhi will need to resolve some key issues, including the trade imbalance, transit, the Asian highway route and terrorism.

In order to achieve its goals, the new government should carry forward some crucial reforms initiated by the incumbent caretaker government, apart from initiating its own sets of reforms.

The BNP government’s success in dealing with law and order, and environmental issues should also not be ignored. The new government’s success or failure will also largely depend on its ability to bring the opposition, notably the BNP, to Parliament, as the country’s politicians have a long history of spending much more time on the streets than in the national assembly.

Finally, the main opposition to the AL’s efforts to implement its electoral manifesto would not come from the BNP or the other political forces. Rather, it would be the AL and its allies.

Since its inception, the political history of Bangladesh – from the late Sheikh Mujibur Rahman to the recent past BNP government – points to the fact that absolute majority in Parliament alienate the incumbents from their electoral promises. If the new government can learn from past lessons, the overwhelming mandate is an opportunity to carry forward its economic policies and other reforms.

The AL and its allies have a historic opportunity to elevate the economy to a new phase of growth and to make a real change in the country. If the new government allows the country’s institutions to function independently and it learns from the lessons of the past on the key challenges and issues, it is likely to deliver on its promises. However, the major downside risk in this regard would be the BNP’s future political strategies.

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ISAS Brief No. 94 – Date: 15 January 2009 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Satyam Fiasco – Impact on Corporate India S. Narayan + Following the revelations of fraud and misdemeanour in the financial accounts of Satyam Computers, a public-listed company with over 50,000 employees and a market leader in the Indian information technology (IT) industry, the Indian Ministry of Company Affairs moved swiftly to replace the company’s Board of Directors. Several investigations, regulatory as well as criminal, have been launched by different state and central agencies, and the promoter, Mr R. Raju, has been arrested. Three professionals, Mr Kiran Karnik, former head of the National Association of Software and Service Companies, the IT industry association, Mr Deepak Parikh, head of HDFC Bank and Mr C. Achuthan, a former member of the Securities and Exchange Board of India (SEBI), have been appointed as directors. The government has allowed this group to increase the number of directors further, as needed, up to 10 members in all.

The government used provisions under Section 388 (B to D) of the Companies Act to push its intent to appoint 10 nominees on the Satyam board. The section provides for a change of management in case the existing personnel are found to be guilty of fraud, malfeasance, persistent negligence or default in carrying out their obligations and functions under the law, or for breach of trust. The government can use the ground that the business is not being run in a prudent manner and the management can cause, or has caused damage to the business. Such a board is independent in nature and the appointment of a new Board of Directors does not mean government acquisition of the company.

It is a provision which is used as a last resort. The government’s nominee-directors will have the powers to appoint new statutory auditors. The government is empowered to issue directives to the board. The nominee-directors are immuned to any prosecution and they are not subjected to the requirement that they hold any qualification shares or are liable to retire by rotation.

The supersession of a company’s board does not automatically lead to the appointment of fresh directors. Under Section 408 of the Companies Act, the central government has the power to appoint a completely new board or appoint additional directors once approved by the Company Law Board (CLB). The directors can be appointed for a period of up to three +

Dr S. Narayan is a Visiting Senior Research Fellow and Head of Research at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He is the former economic adviser to the Prime Minister of India. He can be reached at snarayan43@gmail.com.

years. Apart from the government, the CLB can ask for a change in the board if 10 percent of the shareholders seek its intervention on the grounds of oppression and mismanagement.

Satyam remains the biggest case of board supersession in corporate India. There have been instances of such supersession in the past, for example, CRB Capital and WH Bradey. In many cases, the government had only appointed nominee-directors and not superseded the board.

There was public pressure on the government to act after Mr Raju made public a letter to the regulators that he had not been truthful in reporting the performance of the company. The letter stated that its operating profits were overstated by an amount of 22 percent of its total revenues. Cash balances were also overstated and liabilities understated.

However, even the latest ‘confession’ may not represent the true picture. For example, the company’s operating margin of three percent now reported appears to be far below industry standards. The company’s September 2008 financials state that it had as many as 690 clients, suggesting a large number of small clients. It does not have many clients who are billed more than US$100 million a year. It has claimed that it specialises in enterprise-based solutions, where margins in the industry are close to 20 percent. The only explanation for the low revenues earned could be that Satyam was heavily discounting its services to its clients in order to secure orders and clients. The sizeable dressing up of both its revenues as well as financials makes it difficult to value Satyam as a business. However, even with a new Board in place, and investigations launched by SEBI, the Ministry of Corporate Affairs and the police, it would be difficult for Satyam to do ‘business as usual’. New clients may be difficult to come by, employees may look for alternatives and existing order books may vanish. Any merger or takeover would also have to take note of the class action suit in the United States as well as the suit by Upaid in the United Kingdom.

There are also issues relating to other companies linked to Satyam such as Maytas Estates and Maytas Infrastructure, and the inter-corporate investments. Some of these transactions would have to be written off, as the underlying cash is no longer in the business. Unraveling the transactions and the flow of funds is likely to take considerable time.

There are several key issues arising from the Satyam case. Firstly, the government has superseded the Board of Directors and has nominated three independent people to act as the new Board. The persons appointed are respected public figures and the market has reacted favourably to the names. However, there is concern that the government can, by notification, change the management of a publicly-listed company and remove the representatives of the shareholders by executive direction. In this particular case, though a criminal case has been registered, investigations are still going on and no formal charges have been laid. There is concern that the due process of management changeover has not been transparent. It is not clear whether this is an interim measure and that the shareholders would have their say in management. There would inevitably be concerns that such an exercise could be repeated for other private companies, given subjective justification for the government, a conclusion that would shy away investors to India.

Secondly, Mr Raju’s confessions and the subsequent processes have turned public attention away from two other major events associated with this company. One was that the company was debarred by the World Bank for a period of eight years from further contracts, due to unethical behaviour. The other is a suit filed by a United States company against the firm for

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leaking out confidential data to competitors. Internationally, unethical behaviour and issues of trust and reliability are likely to weigh heavily on future seekers of services from this company. It is not surprising that the IT industry in India is calling it an isolated incident, for it would like to distance itself from Satyam’s actions to limit collateral damage to the industry. At a time of a slowdown in outsourcing services, these concerns are likely to weigh on the minds of future clients of the company. WIPRO Technologies’ recent disclosure that the World Bank had declared it ineligible for contracts for the period up to 2011, mainly due to some unethical practices, deepens the concern about Indian IT companies. There is likely to be much greater due diligence done by clients in the future before sensitive tasks are outsourced.

Thirdly, the investor community is likely to be worried about these developments. The financial markets have come to depend on foreign institutional investors to shore up equities and to give range and depth to markets. It is likely that these investors will become more cautious. In the trading days following the Satyam exposé, investors went back to shares where they had confidence in the management such as BHEL, Siemens, ITC and the like, and went away from the shares where they felt less confident about the results such as DLF, Unitech, IVRCL and India Bulls. The clear differentiation in the minds of the investors between the better managed companies and the others is visible in the market sentiments now.

There could be some welcomed developments arising out of the Satyam saga. Firstly, investors are likely to become more discerning and cautious, and hopefully, more demanding of transparency. Secondly, company managements are likely to be more diligent and demanding of auditors and more risk averse. These developments are likely to result in a more mature, objective and balanced evaluation of the performance of the companies, and the chase after fictitious valuations is likely to be dampened.

The next question relates to governance. It is clear that the management and the Board of Directors have been remiss and the auditors poor. Market leader, PricewaterhouseCoopers, has been the auditor of this company, while the valuation of Maytas Group was done by Ernst and Young, another international company. The confidence in the community of auditors is shaken. There is also concern that the Board of Directors was either misled or did not act with professional objectivity. There are big names in the Satyam Board but none of them saw through the machinations of the management – indeed a matter of worry.

The real question is whether this would have repercussions for the IT industry, for investments in India and, indeed, for the Indian economy. It is a fair comment that the open media, the habit of public debate and the firm underpinning of democratic institutions have been responsible for the considerable publicity for this incident. It is possible to argue that a similar event in a company in China would not have attracted a similar public attention – one has seen the way in which embarrassing situations arising out of the Bird Flu, the milk scandal and the like have been handled by the Chinese authorities. In other countries, barring the United States and a few other developed countries, the matter would have been much less under public glare.

This is perhaps a strength of the Indian system. It was public criticism and pressure that made the government act last week. It is the need to make accountability transparent that has ensured that all investigations are launched as soon as possible. Public behaviour in the financial markets points to aversion to such corporate behaviour. Finally, even if it is argued

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that the levels of governance are low, the levels of public awareness have risen considerably, and there are several incidents in corporate management where the public has taken corporates to account. 1 There will be some churning. However, it is quite clear that there would be small damage to corporate India. More importantly, there would be more and more openness about disclosures and this would reflect in the prices of shares of these companies.

Systemic damage is, therefore, likely to be short term.

The Satyam issue is a wake-up call for India. Although the systemic damage may be short term, India needs to look seriously at issues of transparency, accountability and governance if it wants to truly become the financial hub of Asia. The Indian regulatory institutions need to ensure that such an event does not recur. It is important that the auditors and the Board of Directors are held to account and pay the full penalty. At the same time, regulatory bodies such as the SEBI and the CLB need to take steps to become more pro-active and put in place better monitoring and supervision systems.

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Recent cases of the Vedanta share offering and the Nagarjuna Finance misdemeanours, where public outcry stopped the management, come to mind.

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ISAS Brief No. 95 – Date: 19 January 2009 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Fate of the Liberation Tigers of Tamil Eelam: From Civil War to Guerilla Warfare?

S. D. Muni 1 The military debacle suffered by the Liberation Tigers of Tamil Eelam (LTTE) should not come as a huge surprise to any keen observers of the Sri Lankan developments. This is not the first time that the LTTE has been thrown out of its stronghold in Kilinochchi and is being pushed into the jungles of Mullaithivu. It happened 12 years ago under Chandrika Kumartunga’s presidency and it also happened when the Indian Peace Keeping Forces (IPKF) had to take on the LTTE during 1987-89. The myth of the LTTE’s military invincibility was consciously built up and nursed both by Tamil and Sinhalese vested interests as well as the media.

On all previous occasions, the LTTE re-emerged, even more powerful and more determined, after being bottled up in Mullaithivu jungles. This may not happen this time. The IPKF and Chandrika left the LTTE in the jungles in the hope that a viable political resolution of the ethnic issue would emerge. The IPKF also had the constraint of the Tamil political factor to leave Velupillai Prabhakaran and his LTTE un-eliminated. President Mahinda Rajapaksa’s regime, particularly its defense establishment, seems determined to ‘eliminate’ the LTTE. On previous occasions, the LTTE also retained its international credibility. While it has pockets of support in the western world even now, in the aftermath of 9/11, the LTTE terrorism has been discredited. The European Union has branded the LTTE as a terrorist organisation, and even the United States and India have decided to tacitly support Colombo’s military operations. The LTTE’s sources of diasporas funding and support have also depleted from what they were five years ago.

Organisationally, the LTTE’s cohesion and resilience has been eroded considerably. It has lost some of its experienced leaders. Colonel Karuna Amman, who was the LTTE’s strongest pillar in the East, defected in 2004 and joined the Sri Lankan side. Its principal strategist after Prabhakaran, Anton Balasingham died. Last year, Prabhakaran’s confidant and the LTTE’s political strategist, S. P. Tamilselvan, was also killed in Sri Lankan military operations. There are now reports of serious differences between Prabhakaran and his intelligence chief, Pottu Amman. These reports suggest that Pottu Amman is unhappy over Prabhakaran’s attempts to usher in his son, Charles Antony Seelan, to succeed him. However, these reports cannot be 1

Professor S. D. Muni is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassdm@nus.edu.sg.

taken on their face value as they could have been exaggerated or even wholly concocted by the Sri Lankan army to demoralise the LTTE. Any assessment of the LTTE’s remaining resistance to the advancing Sri Lankan forces must be based on the objective understanding of the reality on the ground. The LTTE has been drastically weakened but no exact estimate of its remaining strength is available. The Sri Lankan government’s claims that no more than 3,000 of the hardcore LTTE cadres are left cannot be taken as reliable. There is confusion even on the area that remains under the LTTE control. The Sri Lankan army sources put this as about 30 square kilometers, but Sri Lanka’s army chief himself admit that the Tigers have nearly 40 kilometres of coastline under their control. However, according to the Sri Lankan President, it is about 60 square kilometres.

Although under tremendous pressure from the Sri Lankan army, the LTTE retreated from Kilinochchi on its own, in a planned manner (spread over a period of a month or so). The Tiger evacuated all the civilians under their control, leaving a ‘ghost town’ behind with full of land mines to increase Sri Lankan military casualties. The civilian population moved out of Kilinochchi to Mallaithivu may be used by the LTTE as human shield and a bargaining factor in the continuing conflict. While the LTTE claims the number of such people to be more than 300,000, the Sri Lankan President accepts that only 100,000 Tamils are now under the LTTE control. However, even 100,000 people are a large number to deter the Sri Lankan forces from running over the territory remaining with the LTTE. Ruthless killing of these people will amount to be an ‘act of genocide’ against which the LTTE has already launched an international campaign in order to build pressure for a ceasefire. The Sri Lankan government is trying to lure people out of the LTTE control but, so far, only about 1,800 people have reportedly gone to the government side since the fall of Kilinochchi. In their drive to ‘eliminate’ the LTTE, how the Sri Lankan forces will find a safe passage for these innocent people and clear the dense jungle of Mullaithivu from the thousands of hardened LTTE cadres remains to be seen. The Sri Lankan army itself admit that it would need at least a couple of months more in this operation, as the area cannot be bombed.

No one in the Sri Lankan security establishment is hoping to get Prabhakaran alive. The Sri Lankan army chief suspects that he may have already escaped but such speculation could also be to mislead and demoralise the LTTE cadres. Many times earlier, claims had been made about Prabhakaran’s death and/or serious injuries sustained by him. The Sri Lankan navy claims to have sealed the Mullaithivu coastline but the LTTE has shown the capacity to dodge such naval surveillance in the past. The LTTE has 800 horsepower fast boats ready to whisk him away, as and when required, either to a South Indian or a Southeast Asian coast. In the case that Prabhakaran is cornered and is forced to take a cyanide pill, either his son, Antony Seelan, or Pottu Amman will lead the LTTE operations. However, the strong possibility is that, notwithstanding the already floated Sri Lankan speculations about Prabhakaran, he will command the coming guerrilla warfare against the Sri Lankan state with terrorist attacks. Colombo and its vicinity were being targeted even when the LTTE was retreating from Kilinochchi. Many of his hardened cadres will escape the Sri Lankan attack in disguise as ‘innocent Tamils’ under the human shield of civilian Tamil population, possibly to carry out guerrilla and terrorist operations in the unfolding dimensions of war. An Iraq-like situation with regular attacks on Sri Lankan forces in the territories gained from the LTTE seems like a strong possibility.

What the Rajapaksa regime refuses to accept is that the cause for the LTTE to live and bounce back, in one form or another, and under the leadership of Prabhakaran or anyone else, will remain so long as a credible political solution to the ethnic issue is not found. The international community, including India, has failed to persuade the Rajapaksa regime to be 2

responsive in this respect. With a decisive military victory over the LTTE, the regime may feel even less compelled to offer any such solution, leaving the potential for persisting insurgency.

Indian Foreign Secretary Shiv Shanker Menon’s visit to Colombo last week underlined the urgency for a political solution, besides relief and rehabilitation of the Tamils trapped in the war zone. Colombo has assured India that a political package on the lines of the 1987 IndiaSri Lanka Agreement will be worked out. However, there has always been a huge gap between Rajapaksa regime’s promises and performance in this regard so far.

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ISAS Brief No. 96 – Date: 22 January 2009 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Sukhbir Badal as Punjab’s Deputy Chief Minister – Implications and Prospects for the Akalis Tridivesh Singh Maini∗ Sukhbir Singh Badal, son of Punjab Chief Minister, Parkash Singh Badal, was sworn in as Deputy Chief Minister of Punjab on 21 January 2009. At 46, the former represents the modern generation of the Shiromani Akali Dal (SAD), a Sikh-dominated party which is a constituent of the National Democratic Alliance, headed by the Bharatiya Janata Party (BJP).

He is an industrialist by profession and obtained a Master in Business Administration from the United States. Junior Badal has served as Minister of State for Industry during the Atal Bihari Vajpayee’s government from 1998 to 1999.

During his father’s previous tenure as Chief Minister from 1997-2002 and then in the current tenure since 2007, it is said that Sukhbir has been the driving force behind many decisions of the government – both administrative and political. During the 2007 elections, Sukhbir handled the election campaign and was quite successful in introducing new techniques of campaigning for the SAD. Apart from this, it is believed that, due to his insistence, ‘development’ was made an important slogan of the SAD campaign.

If one were to look at the political significance of Sukhbir’s appointment as Deputy Chief Minister, first of all, it would be important to clarify that, not only is his appointment a step further towards ensuring that he does not have any difficulty in succeeding his father as Chief Minister of the border state, it is also to silent many of the critics in the party and in the opposition who are unhappy with the undue interference by Sukhbir in the government’s functioning, in spite of having no official position. Earlier last year, Sukhbir was made President of the SAD so as to allow him to be more active in the affairs of the party and to build a rapport with the rank and file of the party.

Reaction to Sukhbir’s Appointment What has been quite surprising and interesting is that there has not been any real opposition to Sukhbir’s appointment from either within the SAD, a party known for its internal democracy, or the BJP. In fact, nobody has objected to the fact that, with Sukhbir’s inclusion, there are now four ministers from one family in the Punjab cabinet. They are the Chief Minister, Finance Minister Manpreet Singh Badal (Sukhbir’s cousin), and Minister for Excise ∗

Mr Tridivesh Singh Maini is a Research Associate at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be reached at isastsm@nus.edu.sg.

and Taxation and Information Technology Adesh Partap Singh Kairon (Sukhbir’s sister’s husband). Bikramjeet Majithia (Sukhbir’s wife’s brother), Minister for Information and Public Relations submitted his resignation to the Punjab Governor on 18 January 2009.

The only quarter to raise some sort of objection to Sukhbir’s appointment is the State Unit of the BJP, a crucial ally of the SAD – the former has 19 seats. However, after a few statements against Sukhbir’s appointment, it too has gone quiet, after the BJP high command’s acceptance of the appointment. The BJP high command is in no mood to annoy the top brass of the SAD. While the numerical strength of the SAD in the Lok Sabha is only eight, it is an important ally for the BJP for a number of reasons. Firstly, within the state of Punjab, the SAD’s rural Sikh vote complements the BJP’s urban Hindu vote. Secondly, the SAD has good relations with some other regional parties, such as the Indian National Lok Dal (INLD) of Haryana, and has been instrumental in the INLD joining the National Democratic Alliance.

Thirdly, for the BJP, even outside Punjab, the alliance with SAD is an illustration of HinduSikh unity and amity.

As far as the SAD itself is concerned, there has not been even a murmur of discontent in public, at least. In fact, erstwhile rebel Akalis have welcomed Sukhbir’s appointment. Apart from Bikramjeet, certain ministers in the cabinet have also offered to step down in his favour.

Party Politics and Acceptability It is too early in the day to analyse what impact Sukhbir’s elevation will have on the functioning and performance of the government, especially with regard to governance and economic policies. His first test will be to galvanise the workers of the SAD for the forthcoming Lok Sabha elections. If he could ensure a good performance of the party and garner the support of the youth, that would be a big shot in the arm for him and increase his acceptability, both within his party and, to some degree, within the state, especially the younger generation of Punjabis.

Sukhbir’s handling of the SAD’s campaign in the 2007 Assembly elections clearly brought out the fact that he is an excellent public relations manager, aggressive and extremely pragmatic and ready to incorporate new paradigms into the Akali agenda. Sukhbir has also shown a desire to expand the support base of the SAD beyond its traditional vote bank – the Sikh peasantry. To ensure this, he has been focussing on getting more and more non-Sikh members into the Akali fold.

His other focus has been to attract younger Punjabis to the SAD. For this purpose, he has been focussing on strengthening the youth wing of the Akali Dal. He has also been taking up issues on drugs and unemployment – two issues which will affect the youth of the state in the long run. It remains to be seen how certain fence-sitters and the youth who Sukhbir is trying to win over will react to his overtures.

Punjab’s Economy Beyond the election agenda, if one looks at the policy sphere, Sukhbir does not have much to show during his stint in the centre. Both as a minister and parliamentarian, Sukhbir was not able to raise any issues relevant to Punjab.

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Ever since the formation of the current Akali government in Punjab however, Sukhbir, behind the scenes (in his unofficial capacity as ‘defacto Chief Minister’ as his critics say) has been trying to woo industrial houses such as the Vedanta Group and G. V. K. Industries, to invest in Punjab. Last year, he was also the brain behind the organisation of a convention of non-resident Punjabi businessmen.

Being a successful businessman himself, Sukhbir is a partner in The Trident Hotel, Gurgaon.

While speaking to the media and giving speeches, Sukhbir gives the impression of having a clear understanding of what the state needs for industrial development. By now, being part of the government, Sukhbir has a chance to convert his words into reality by building a sound economic policy, which should not only attract investment to the state (which had a disappointing six percent growth rate in 2008) but should also stop the flight of industry from Punjab to other states.

Sukhbir did not commit himself earlier to populist issues such as subsidies and free power to the farmers since he was not in any official capacity. Now he needs to take a clear stand.

Some hard decisions on these issues and a break from the policies of the past could play a crucial role in rebuilding the state’s fledging economy. His cousin and Finance Minister, Manpreet, has been quite vocal in his plea to remove all freebies for the farmers.

Conclusion At the moment, Sukhbir has been able to ensure that there is no dissidence to his appointment. However, in the days to come, the SAD’s performance in the forthcoming parliamentary elections and Sukhbir’s performance as Deputy Chief Minister will decide whether the SAD and, more importantly, the people of Punjab are ready to accept yet another Badal to lead them.

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ISAS Brief No. 97 – Date: 6 February 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Sino-Indian Naval ‘Encounter’ in the Gulf of Aden: Mitigating Sino-Indian Maritime Rivalry C. Raja Mohan 1 We might never get to piece together the full story behind the alleged first-ever stand-off between the Chinese and Indian navies in the Gulf of Aden last month. What we do know, however, is significant enough to reveal the profound changes in the military orientation of China and India, and the growing risks of their naval rivalry.

In a report this week, Hong Kong’s South China Morning Post, quoting mainland Chinese media, publicised what it called a naval stand-off in the Gulf of Aden with an Indian submarine. 2 When they detected the Indian submarine tracking a Chinese anti-piracy mission, Chinese destroyers and an anti-submarine helicopter forced the Indian vessel to surface and retreat.

If the Chinese navy seemed to embellish the encounter as a major triumph, the Indian side simply dismissed the reports as untrue. India’s naval headquarters in New Delhi denied that any of its submarines had surfaced in the Gulf of Aden and insisted that “nobody can force anybody to surface in international waters”. 3 Like most other navies, India was not going to confirm or deny the operational movement of its submarines. This does not necessarily mean India was not involved in the incident. Senior naval officials in New Delhi, however, confirmed that its ships routinely monitor the movement of ships in the waterways of the Indian Ocean. China does the same thing surely in the East and South China seas. In 2006, the United States Navy had reported that a Chinese submarine had come up close to its aircraft carrier, USS Kitty Hawk.

Since it was the first major deployment of Chinese warships in the Indian Ocean, the Indian Navy had every incentive to get a full measure of them. It is also a fact that many other navies operate in the Indian Ocean, and some of which, like that of the United States, do have an interest in monitoring the Chinese naval operations in the Indian Ocean.

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C. Raja Mohan is a Professor at the S. Rajaratnam School of International Studies, Nanyang Technological University. This paper was prepared as part of an ongoing consultancy project for the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. Professor Raja Mohan can be contacted at iscrmohan@ntu.edu.sg or crmohan53@gmail.com.

Chow Chung-yan, “Chinese navy sees off Indian sub”, South China Morning Post (Hong Kong), 4 February 2009, p .1.

Rajat Pandit, “Indian sub stalked China warships”, Times of India (New Delhi), 5 February 2009, p. 1.

The veracity of the presumed encounter between the Chinese and Indian navies is less important than the fact that it reportedly took place in the Gulf of Aden. The Chinese and Indian navies were not playing cat and mouse games in the territorial waters of either nation but rather were circling each other in waters far away from their shores.

The very deployment of their navies off the African coast underlines the growing military muscle of China and India, and the new political will in Beijing and New Delhi to show it off.

Traditionally, the principal objective of the Chinese and Indian military forces has been territorial defence. Beijing and New Delhi never tire of affirming that they will use military force only in self-defence and never in pursuit of larger foreign policy objectives. To be sure, India was among the early and consistent contributors to international peacekeeping missions since the 1950s. New Delhi was determined to limit its participation to those operations that were approved by the United Nations. China avoided participating in United Nations peacekeeping operations for many decades. It has reversed that policy in recent years and has taken to United Nations military operations with some enthusiasm.

As the United Nations authorised the world’s navies to take on the Somali pirates, Beijing and New Delhi sensed a major opportunity to project their power with full international legitimacy. New Delhi was quick to move into the Gulf of Aden in November 2008 and its sinking of a ship controlled by the pirates drew worldwide attention to its impressive naval power and its willingness to use it. China followed soon by despatching its own naval mission to the Gulf of Aden in January 2009.

As rising powers, the anti-piracy operations off the African coast were a blessing for both countries in projecting themselves as responsible stakeholders in the maintenance of regional security order and in contributing to the collective good in the maritime domain.

The Chinese foray into the Indian Ocean and the reported naval encounter has revealed the profound mutual maritime distrust between Beijing and New Delhi. In the last few years, Beijing had warily watched the rapid expansion of India’s military diplomacy and its frequent and impressive bilateral and multilateral naval exercises in the Indian and Pacific Oceans.

The five-nation naval exercises, convened by India in September 2007, which included the United States, Japan, Australia and Singapore, drew considerable flak from Beijing. India, in turn, has been anxious about Beijing’s plans to develop maritime infrastructure in the South Asian waters. As China built a port at Gwadar in Pakistan and sought similar project contracts in Bangladesh and Sri Lanka, India has convinced itself of the potential threats from the so-called ‘string of pearls’ strategy in the Indian Ocean attributed to Beijing.

If China is not prepared to accept the Indian Ocean as an exclusive sphere for Indian influence, New Delhi is not ready to sign off on the proposition that the South China Sea is Beijing’s lake. Given the overlap between their presumed spheres of influence, the mutual distrust is deep-seated and could be the source of a prolonged maritime contestation.

China and India are also locked into a security dynamic where one nation’s pursuit of what it considers a legitimate interest is seen as threatening by the other. Take for example, Beijing’s fears of being choked off at the Malacca Straits and its perceived need to develop alternative supply routes for energy and mineral resources through South Asian ports linked to transportation corridors heading into China.

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As Beijing raises its profile in the South Asian waters, India inevitably sees it as part of a Chinese strategy of encirclement. Beijing, on the other hand, has seen India’s expanding naval engagement with the United States, Japan, and the countries of the Association of Southeast Asian Nations as part of an effort to build an ‘Asian NATO’ 4 against China.

As we look ahead, could China and India mitigate, if not avoid, a costly and dangerous maritime rivalry in the Indian and Pacific Oceans?

For one, China and India need to recognise that it is impossible in this modern globalising world to sustain exclusive spheres of influence. Put simply, neither can promulgate a Monroe Doctrine of the kind the United States declared against the European powers in the 19th century.

Second, Beijing and New Delhi must acknowledge that the prosperity of their billion-plus populations is tied inextricably to their national ability to access energy and mineral resources in distant lands and ensure their safe transportation to the homeland across major sea lanes.

Third, as they build larger navies with longer reach, Chinese and Indian maritime forces are likely to bump into each other in many high seas. To avoid unseemly and unwanted incidents, Beijing and New Delhi need to develop a series of confidence-building measures at sea of the kind that Washington and Moscow negotiated during the Cold War. Fourth, as their reliance on naval power increases, Beijing and New Delhi might be compelled to seek facilities and access arrangements in other countries. The emphasis on forward presence, without transparency on strategic intentions, could turn their bid for political influence in littoral states into a nasty competition.

Five, China and India need to talk a lot more to each other about their respective national security strategies at the highest levels in their establishments. Although there are some mechanisms for a strategic dialogue between the two nations, and frequent military exchanges, there is strong tendency in both capitals to bury mutual suspicion in tall talk about friendship and cooperation. Continual and honest exchanges about deeply held differences are critical for limiting the scope and consequences of the unfolding Sino-Indian rivalry.

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NATO refers to North Atlantic Treaty Organization.

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ISAS Brief No. 98 – Date: 27 February 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Oscar-winning ‘Slumdog Millionaire’: A Boost for India’s Global Image?

Bibek Debroy∗ Culture is difficult to define. This is more so in a large and heterogeneous country like India, where there is no common language and religion. There are sub-cultures within the country.

Joseph Nye’s ‘soft power’ expression draws on a country’s cross-border cultural influences and is one enunciated with the American context in mind. Almost tautologically, soft power implies the existence of a relatively large country and the term is, therefore, now also being used for China and India. In the Indian case, most instances of practice of soft power are linked to language and literature (including Indians writing in English), music, dance, cuisine, fashion, entertainment and even sport, and there is no denying that this kind of cross-border influence has been increasing over time, with some trigger provided by the diaspora.

The film and television industry’s influence is no less important. In the last few years, India has produced the largest number of feature films in the world, with 1,164 films produced in 2007. The United States came second with 453, Japan third with 407 and China fourth with 402. Ticket sales are higher for Bollywood than for Hollywood, though revenue figures are much higher for the latter. Indian film production is usually equated with Hindi-language Bollywood, often described as the largest film-producing centre in the world. Bollywood films are watched in South Asia (Afghanistan, Bangladesh, Nepal, Pakistan and Sri Lanka), the Middle East (Saudi Arabia, United Arab Emirates, Oman, Kuwait, Bahrain, Qatar, Palestine and Jordan), Africa (Somalia, Nigeria, Syria, Egypt, Mauritius, Kenya and Senegal), Eastern Europe (Russia), Western Europe (Britain, Germany, France and Scandinavia), the Americas (the United States, Canada and the Caribbean) and Oceania (Australia, New Zealand and Fiji). They are sometimes dubbed in local languages and viewership is not restricted to the diaspora.

One often tends to forget that several Bollywood-related awards (Bollywood Movie Awards, Global Indian Film Awards, International Indian Film Academy Awards and Zee Cine Awards) are held overseas, films are shot in overseas locations, technical work is outsourced, films are watched through cable television and digital video routes, and there is the occasional foreign actor or actress who has featured in Bollywood films. Similar effects exist for television serials, Bollywood songs and song-based contest programmes, and the odd Indian choreographer and music composer has now been hired for Broadway and Hollywood. ∗

Professor Bibek Debroy is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasbd@nus.edu.sg or bdebroy@gmail.com.

While Bollywood stories and music have borrowed liberally from Hollywood, ‘Munnabhai MBBS’ is now being remade in Hollywood. However, one should not equate the Indian film industry with Bollywood alone. There is the Kannada (Sandalwood), Bengali (Tollywood), Assamese, Tamil (Kollywood), Malayalam, Marathi, Oriya (Ollywood) and Punjabi (Pollywood) film industries too. Ismail Merchant, who died in 2005, was a director many in North America and Western Europe would have identified with.

One should not make a big deal about the Academy Awards (known officially as the Oscars from 1939). No one can deny subjectivity. Nor can one deny preferences and biases of the 6,000-odd voters of the Academy of Motion Picture Arts and Sciences (AMPACS). No one can deny the importance of lobbying and advertisement campaigns, and their use to influence votes. One reason why Oscars were moved from April to February was that the time for lobbying could be shortened. Membership of the AMPACS is not in the public domain. There are entry barriers. Unless a film has been released in Los Angeles County, California, in the preceding year, it does not qualify. Having said this, given the strengths of the Indian film industry, India should have done better at the Oscars and should have moved beyond the foreign-film category. Satyajit Ray’s was a special award – life-time achievement. Other than this, in the contested category, India had a ‘win’ by Bhanu Athaiya (with John Mollo) for costume design in ‘Gandhi’ and nominations for ‘Mother India’, ‘Lagaan’, ‘The Sixth Sense’ and ‘Elizabeth’.

The box office is not necessarily the best criterion of how good a film is. However, it does offer some indication of how the world at large judges a film. In contrast, the best picture award at the Oscars is based on voting by AMPACS members and their preferences do not necessarily mirror what the world at large thinks. In recent times, the world, at large, clearly endorsed ‘Braveheart.’ ‘Titanic’, ‘Shakespeare in Love’, ‘Gladiator’, ‘A Beautiful Mind’ and ‘Lord of the Rings’ for the Best Picture award but they were not that enthusiastic about ‘Chicago’, ‘Crash’ or ‘No Country for Old Men’. If one takes a vote on the best Englishlanguage films ever, ‘Citizen Kane’, ‘Psycho’, ‘The Shawshank Redemption’, ‘Pulp Fiction’, ‘Vertigo’, ‘2001: A Space Odyssey’, ‘Star Wars’, ‘Apocalypse Now’, ‘Fargo’, ‘Philadelphia’, ‘Goodfellas’, ‘ET’, ‘Dog Day Afternoon’, ‘Bonnie and Clyde’, ‘The Graduate’, ‘Some Like It Hot’ and ‘Goodbye Mr Chips’ will figure on many lists. However, these did not win the ‘Best Picture’ award. In some cases, they were not even nominated.

In that sense, one should not blow up the importance of ‘Slumdog Millionaire’, certain to win several Oscars after bagging four Golden Globes, 11 British Academy of Film and Television Arts awards and 10 Oscar nominations. Strictly speaking, there were nine Oscar nominations, since two different songs were nominated under the same category. ‘Slumdog Millionaire’ swept the 81st Academy Awards with ‘Best Picture’, ‘Best Director’, ‘Best Song’ (composer A. R. Rahman and lyricist Gulzar), ‘Best Score’ (A. R. Rahman), ‘Best Adapted Screenplay’, ‘Best Cinematography’, ‘Best Sound Mixing’ (Resul Pookutty) and ‘Best Film Editing’. The documentary ‘Smile Pinky’ also won an Oscar.

India became the flavour of the month. However one should not overreact. This does not establish ‘Slumdog Millionaire’ as a great picture. It is not and most Indians will agree that ’Taare Zamin Par’ was better. There have been several Indian films (in multiple languages) that are better than ‘Slumdog Millionaire’. However, they were not as technically perfect, nor were they marketed and packaged that well, and sometimes they did not pass the test of being released in Los Angeles County. Once the nominations were in, ‘Slumdog Millionaire’ did

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not have to be a great picture to win, it only had to be better than the competition, which, in the ‘Best Picture’ category, was the rather bizarre ‘The Curious Case of Benjamin Button’.

In this age of gloom and doom, ‘Slumdog Millionaire’ winning an award is much more politically correct, especially because it fits a certain clichéd Indian stereotype in the minds of the AMPACS members. Of course, it is not an Indian-made film. It is a British-Americanmade film, set in India. Yes, it distorts quite a bit compared to the original novel by Vikas Swarup, now rechristened ‘Slumdog Millionaire’ from ‘Q&A’. Yes, it is set in poverty, though contrary to what several people have said, it hardly glorifies poverty. The poverty and squalor of Dharavi were not created by ‘Slumdog Millionaire’ and there is no denying these exist. Films in other countries have also depicted poverty and one need not bristle simply because a film has been made by a foreigner. Maturity means taking things in one’s stride.

The British did not seem terribly upset when Shekhar Kapur depicted the virgin queen as less than a virgin. And yes, A. R. Rahman has done far better as a musician and composer.

‘Slumdog Millionaire’ is a poor sample.

However, on balance, is this good for India? It certainly is because positive externalities and multiplier benefits will be left behind for the future. Things tend to snowball and legacies remain. These are not important for the likes of Danny Boyle. However, they are important for film-makers, composers, musicians and technicians who work in India. In this age of globalisation and cross-border influences, their expertise has that much greater probability of being tapped, not very different from the legacy effects of ‘Crouching Tiger, Hidden Dragon’ in China, or perhaps even ‘Kung Fu Panda’. There may well be a mirror image in the beauty business. Were there no beautiful women in India between 1966 (Reita Faria) and 1994 (Aishwarya Rai, Sushmita Sen)? After 1994, as with Venezuela, India learnt the packaging and marketing game. That can now happen for the Indian film industry.

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ISAS Brief No. 99 – Date: 4 March 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Attack on Sri Lanka’s Cricket Team: Is Pakistan in Total Chaos and Anarchy?

Ishtiaq Ahmed 1 The unthinkable has happened! On 3 March 2009, 12 gunmen sprayed bullets and threw grenades and bombs with rocket launchers on the bus carrying the Sri Lankan cricket team which was touring Pakistan. The team was on its way to the Gaddafi Stadium in Lahore for the ongoing test match with Pakistan. Since the target was a fast-moving one, not all the deadly ammunition hit the target. Eight Sri Lankan players were injured, none critically, while five Pakistani security personnel died defending them. Two other Pakistanis are also reported killed in the attack.

In a very rude and shocking way, the dastardly assault bore the hallmarks of the attacks in Mumbai in November last year. One could see on television the terrorists moving around with great ease and confidence, shooting at will and showing no signs of nervousness or hurry. Not surprisingly, a senior minister in the Punjab Cabinet, Raja Riaz, unequivocally drew parallels between the attack and the Mumbai outrage, alleging that the same forces were involved in the Lahore attack.

There is little doubt that the whole operation had been planned in minute detail and the men drafted into its execution had been thoroughly brainwashed not to waiver in their resolve to kill. Mercy, compassion and simple human decency seemed to have been effectively extricated from their mental make-up. They seemed to relish their killing spree. Among their motives or intentions, one must have been to prove that they can strike terror anywhere and anytime.

Several other cricket teams, including those from Australia and India, had refused to play in Pakistan for fear of possible terrorist attacks. Only Sri Lanka agreed to send a team. Those who planned and executed the attacks were more than hell-bent on punishing them for showing solidarity with Pakistan. This is the inevitable inference one must draw because there cannot be any other reason for attacking the Sri Lankans.

Who are the perpetrators of this crime? The Sri Lankan government has overruled a revenge attack by the Tamil Tigers. The Pakistani media have circulated a theory that a foreign hand was involved in the attack and the allusion is towards India. There is no doubt that all types 1

Professor Ishtiaq Ahmed is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg.

of conspiracy theories will now flourish and the complicity of India’s Research and Analysis Wing, the Mossad of Israel and the American Central Intelligence Agency being individually or collectively behind the conspiracy to attack the Sri Lankan cricketers will be pedalled.

However, this time round, it was truly homegrown terrorism. The calm and composed manner in which the attack was carried out and the ease with which the attackers disappeared from the scene point to the culprits being rooted in the soil.

Given the brazen nature of the attack amidst tight security by the Pakistan government for the Sri Lankan cricket team, it would be perfectly legitimate to argue that the civilian government, the police force, the Criminal Investigation Department or even the military has little or no control over what is happening in the country. The attackers had scant regard for the security forces when launching the attack.

Given the similarities with the attacks in Mumbai, it would be reasonable to argue that the same team comprising cadres of the Pakistan Taliban, Al Qaeda, Lashkar-e-Toiba, Jaish-eMuhammad and other such organisations coordinated their efforts to carry out the attack.

Rouge elements in the Inter-Services Intelligence and the military may have provided intelligence. Such an operation requires being one up on the government.

The current political crisis and impasse in the Punjab probably served as an extra incentive to attack just now. Last week, the government of the majority party in the Punjab, the Pakistan Muslim League-Nawaz, fell because Chief Minister Shahbaz Sharif was declared illegible to hold public office by a three-judge bench of the Supreme Court. He was presumably declared party to the decision taken by his elder brother, Nawaz Sharif, not to let a Pakistan International Airlines flight carrying General Pervez Musharraf land in Pakistan in October 1999 when the latter returned from Colombo. It endangered the lives of hundreds of people who were on board that aircraft. The full verdict has not been released yet. President Asif Ali Zardari imposed Governor’s rule in the Punjab.

In the absence of a functioning government, it is very likely that the routine gathering, collation and provision of intelligence to the head of government in Pakistan’s key province was disrupted. Of course Salman Taseer continued to hold the office of the Punjab’s Governor. However, with the Chief Minister sent home some days before the attack, the lapse that must have occurred in the Punjab’s continual governance and administration played into the hands of the terrorists.

The second question is why attack the cricket team of a country that has traditionally enjoyed friendly relations with Pakistan. Moreover, the Sri Lankan Muslim minority is better protected in the Sinhalese regions of Sri Lanka than where the Tamil Tigers once held sway.

The most obvious explanation is that the Sri Lankans were literally within reach and that factor alone may have sufficed to qualify them as a target. Terrorists are after all pragmatists and an opportunity on home ground must have been very tempting.

One can even think of an obsessive ideological concern with making Pakistan adhere to a strict Islamic code of life as the motivation for the attack. Cricket is most certainly a game Pakistanis have learnt to love because of their colonial contact with the English. From a twisted theological point of view, cricket may be considered an ‘un-Islamic sport’ which creates stars and heroes that fans adore and worship. For hardcore Islamists, that is tantamount to idolatry and, therefore, punishable in the harshest of ways. After all, it was the

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Taliban who destroyed the more-than-1,500-year-old statues of Buddha at Bamiyan in Afghanistan and there was no other reason except a rabidly fanatical opposition to idols.

It is a sad day for Pakistani cricket lovers because there is no other sport that touches the emotions of Pakistanis so deeply as cricket. Lahore will never be the same again. The future of Pakistan as a great cricketing nation has been put into jeopardy. It would be very difficult to convince foreign teams to visit and play in Pakistan. More significantly, Pakistan’s reputation as a failed state, as the epicentre of terrorism and as a society dissipating under the weight of corruption and fanaticism will only be reinforced by the attack. Pakistan may even be considered a ‘pariah’ nation.

Under the current circumstances, there is only one option available now for Pakistan. Its ruling elite, comprising the elected members of parliament, the bureaucracy and the military, must develop a consensus to fight terrorism with all the resources at its disposal. It would also make good sense and wisdom to join hands with India and Afghanistan, and develop a regional policy of zero tolerance towards extremism and terrorism. Only then perhaps Pakistan would be able to achieve some degree of success in combating the terrorists.

Otherwise, the country will sink into total chaos and anarchy. It will then truly become a failed state.

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ISAS Brief No. 101 – Date: 13 April 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Asia’s Economic Revival: Seeking Solutions beyond the Fiscal Stimulus M. Shahidul Islam 1 As the recession in the United States (US) deepens, it is apparent that America’s traditional role as the world’s ‘consumer of last resort’ is now at stake. Consumer confidence in the US has plunged, owing to the ‘wealth effect’ following the burst of the assets bubble. The McKinsey Quarterly reports that the two forces which until recently turbocharged the US consumer spending – growing household debt and a falling savings rate – are now following a reversal trend. 2 American consumers have accounted for more than three-quarters of its gross domestic product (GDP) growth since 2000 and for over one-third of global growth in private consumption since 1990. 3 The rise in US savings and the fall in its debt (and vice-versa for Asia) are indeed badly needed to correct the global imbalances, a financial mismatch between the US and Asia which is believed to be the epicentre of the current crisis. Now there is a consensus among economists that unless there is a significant correction in the global imbalances, the US’ twin deficits are not sustainable. Thus, sooner or later, this adjustment has to take place.

The crisis has clearly shown that Asia has not decoupled from the US growth. The region is, thus, also bound to absorb the cost of adjustment. The drop in Asia’s exports to the US is expected to continue. China and some other Asian countries risk the grind-down of their reserves which are invested in US treasury and other American assets.

Considering these scenarios, the key question is – where does Asia stand in terms of its growth potentials? Though 2008 (and 2009 too?) has been an annus horribilis for growth forecasters such as the International Monetary Fund (IMF) and the Asian Development Bank, it is widely viewed that Asia’s growth prospects are not that bleak owing to several positive signs. These include fewer mismatches in external debt, lower imbalances within the government, better corporate and banking sector balance sheets, and ample foreign exchange reserves, inter alia.

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Mr M. Shahidul Islam is a Research Associate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contact at isasmsi@nus.edu.sg.

The Economic Impact of Increased US Savings, The McKinsey Quarterly, March 2009, McKinsey & Company.

Ibid.

Although the fundamentals of emerging Asia’s banks and financial sectors are much better than those in the West, banks in the Asian region have stopped lending to riskier borrowers.

Regional equity markets have plunged and Asia’s access to external finance faces severe challenges. All these factors are affecting bank lending as well as consumers’ and investors’ confidence adversely. Consequently, fiscal policies are in the spotlight more than monetary measures – a general phenomenon during an economic downturn.

Is a Fiscal Stimulus Adequate for Asia?

In line with the Keynesian prescriptions, one of the major policy responses that several key Asian countries have adopted are fiscal stimulus plans aimed at stimulating their aggregate demand. The question, however, is whether a fiscal stimulus is enough to rebound Asia’s growth. There is also a debate on the degree of effectiveness of the fiscal multiplier.

The old Keynesian multiplier which captures the impact of government spending is estimated to be in the range of 1.5 to 2. However, recent research, particularly following the publication of the Smets-Wouters model in the American Economic Review, 4 suggests that the impact of government spending is much less in the new Keynesian multiplier which is more forwardlooking. The reason is that the effect on the GDP diminishes as non-government components (consumption and private investment, in particular) are crowded out by government spending.

However, one should be more cautious in explaining the impact of the fiscal multiplier as one-size-does-not-fit-all. The impact of the fiscal stimulus depends on leakages into savings and imports, and the responses of the monetary policy to the fiscal actions, among others.

According to a recent IMF Staff Position Note, 5 for a relatively closed economy with few or no financing constraints for the government such as the US, it is plausible that the fiscal multiplier would exceed 1, especially when combined with an accommodative monetary policy, whereas the size of the multiplier would be smaller for a small open economy that is usually prone to higher leakages into imports. Moreover, such economies are more susceptible to financial market constraints (owing to upward pressure on real interest rate) or could be subject to a monetary policy that offsets the fiscal stimulus.

However, compared to the current US fiscal measures, the Asian economies have some leverage in terms of their effectiveness. About half of the Washington package consists of transfer payments, as opposed to a permanent increase in government spending. However, in most Asian economies, in the absence of programmes such as unemployment benefits, money can be spent directly on infrastructure or in other similar sectors instead of transfer payments.

Nevertheless, the effectiveness of government expenditures on infrastructure projects, particularly in terms of employment generation, depends on whether the concerning projects favour capital or labour.

Moreover, Asia is home to the largest number of hand-to-mouth households which generally consume all their current income. This is yet another good sign that the money will be spent on consumption rather than savings even if some fiscal stimulus comes as transfer payments.

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Smets, Frank and Raf Wouters (2007), “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach.” American Economic Review, 97, 3: 506–606.

The Case for Global Fiscal Stimulus, IMF Staff Position Note, International Monetary Fund, 6 March 2009.

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The IMF Staff Position Note 6 shows that the size of the fiscal stimulus packages announced for 2009 by the US, Euro zone, Japan and emerging Asia is equivalent to 1.9, 0.9, 1.4 and 1.5 percent respectively of their economies’ GDP, albeit the US’ fiscal package for 2010 is much bigger than the other regions. It also reveals that, of the two major types of stimulus plans, namely, tax cuts and infrastructure, emerging Asia is banking much more on the latter.

Generally, the multipliers for tax cuts are much smaller, ranging from 0.5 to 1. The study projects that the growth effects of a fiscal stimulus could result in 2.1 percent growth in Asia, followed by the US (1.5 percent), Japan (1.1 percent) and the Euro area (0.9 percent) in 2009.

Using its global macro model, the simulation run by the Oxford Economics has also found that fiscal packages could drive Asian growth from as low as 0.5 percent for India to as high as 6.5 percent for Thailand, depending on the size of their packages as a share of GDP, among others. 7 Of all major Asian economies, India does not have much fiscal space, owing to its current high fiscal deficits. India’s consolidated fiscal deficit is estimated to be between 11 and 12 percent of its GDP for the current year. Singapore’s fiscal plans that accounts for 5.9 percent of its GDP is expected to generate a 3.6 percent growth rate in 2009. Being an open economy, much of the city-state’s government expenditure could leak to other economies. 8 Although the ultimate effects of government expenditures vary from country to country, the broad picture is that Asia can bank on fiscal packages in 2009 and perhaps in 2010 too.

However, the governments’ fiscal imbalances cannot be sustained for an indefinite period. If the current recession is no different than the previous ones, then one can expect Asia and the rest of the world to rebound following the adjustments of a traditional boom and bust of business cycle. However, if there are some outliers with low predictability and high impact, then this recession could be very different from the previous ones. Unfortunately, we do not know that just yet. Nevertheless, despite massive quantitative easing (historic lowest interest rates and other easy monetary measures) and record fiscal packages, markets from the Atlantic to the Pacific show no sign of rebound; rather one notices a continuous deterioration of growth scenarios around the world.

If the rest of the world does not recover by 2010, particularly if the US and Europe go into a prolonged recession, then Asia’s decades-long high growth may come to a halt. The simple reason is the region’s excessive dependence on external demand for growth, India being an exemption to some extent. To avert such a gloomy scenario, Asia requires another plan.

Asia Needs to Think of ‘Plan B’ Asia’s ‘Plan B’ would be the creation of a sustaining consumer class, which is a lengthy process. Here, economies such as China and India have an edge as both the countries have witnessed the growth of a huge middle class population in the recent past. For these countries, the challenge is to sustain this population by investing in education, agriculture, infrastructure, technology and small-medium enterprises, inter alia. In this regard, China is in a better position than India, thanks to its financial strength. Economies such as Singapore need to engage with them as much as possible and share their capital, expertise and 6 7 8

Ibid.

Asian Development Outlook 2009, Asian Development Bank.

Ibid.

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technology, owing to their own limited internal markets. Asia’s largest economy, Japan, too faces limitations to grow its banking merely on its internal demand.

The Asian countries should look more closely in their backyards in pursuit of growth. The economic complementarities between the highly developed Asian regions and the least developed ones have to be explored. Asia needs to create more growth zones such as the Mekong-Ganga cooperation. The successes of the South China growth zone could also be emulated in other parts of Asia. Cross-border infrastructure projects like the Asian highway needs to be beefed up.

The European Union’s success in integrating its relatively least developed eastern region with the highly developed western part is worth noting in this context. The economic crisis will possibly pay off China’s Africa mission not just strategically, but economically as well.

Asia has much room to bank beyond the fiscal stimulus to rebound by primarily employing its economic fundamentals. Waiting for the US to recover as in the past could be a costly mistake for the region. As the Black Swan logic says, the history of a process over a thousand days tells us nothing about what is to happen next. The best example is a turkey before and after Thanksgiving. oooOOOooo

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ISAS Brief No. 102 – Date: 13 April 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The South Asian Nuclear Genie: Out of the Bottle, It can be Useful Iftekhar Ahmed Chowdhury 1 When the South Asian nuclear genie got out of the bottle in May 1998, with both India and Pakistan overtly conducting nuclear tests, there was much consternation, in particular, at the Conference on Disarmament. A permanent forum of the United Nations based in Geneva, the Conference on Disarmament is the only inter-governmental negotiating forum on disarmament. The author was then the Bangladesh Ambassador to this body.

Being a regional member of the Conference of Disarmament, the current nuclear-weapon states (NWS) expected Bangladesh to lead off the protests. Instead, Bangladesh urged calm upon the outcry. After all, India and Pakistan were not the first two countries to have nuclear weapons but rather the seventh and the eighth (after the United States, Russia, the United Kingdom, France, China and Israel) and there was no reason to believe that these would be any less safe in the hands of heirs to an ancient civilisation. Also, neither party had signed the Non-Proliferation Treaty and the Comprehensive Test Ban Treaty and, as such, no commitments were broken. To date, it appears that Bangladesh’s confidence has not been misplaced.

This does not mean, however, that the situation does not warrant careful monitoring and a modicum of wariness. After all, the South Asian region has seen a number of wars in recent times and has widely been acknowledged as a flash point. It is also true that the more the weapons spread, both horizontally and vertically (that is, both in terms of the number of countries, and in the improvement in technology and fresh additions to existing arsenals), mathematically, the chances of usage will rise. It is a matter worth noting that while the NWS opposed the spread of nuclear capability horizontally, they were continually adding to their armouries and sharpening precision, thereby engaging in vertical proliferation all the time.

Bangladesh believed then, as it does now, that the global community must accept the realities on the ground and try to create a framework that would preclude the occurrence of a nuclear mishap.

Between India and Pakistan, the Indian capabilities are, not unexpectedly, greater. While the actual size of the Indian stockpile is debatable, it is generally estimated to be between 45 and 100 warheads, 75 percent of which are reportedly maintained in assembled form and the 1

Dr Iftekhar Ahmed Chowdhury is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the Foreign Advisor (Foreign Minister) of Bangladesh from 2007 to 2009. He can be reached at isasiac@nus.edu.sg.

balance in unassembled form. However, India has the capacity to rapidly expand the arsenal as some suggest it is already doing. According to some reports, Pakistan has approximately 60 warheads and counting. For enhanced security, these are stored unassembled, with the fissile core separated from the non-nuclear explosives, and all components are distinct from delivery vehicles. While Pakistan has used mostly highly enriched uranium for its weapons, it also continues to pursue the production of plutonium.

India’s delivery capability is by far superior. It is also necessary to be so because, apart from Pakistan, China has also to be factored into the calculations, for which long-distance ballistic missiles are an appropriate system. Besides, many in India see this as an appendage to its perception of being a global military power, just like its aspirations of being a blue-water navy.

Former Indian President, Dr Abdul Kalam, led the Integrated Guided Missile Development Programme for a comprehensive range of missiles that are capable of hitting near, distant and varied targets. Some of these are Agni (surface-to-surface missiles), Akash (surface-to-air missiles), Trishul (surface-to-air missiles) and Nag (anti-tank missiles). While India currently lacks ballistic missile submarines, it is looking to becoming a ‘Triad’ country soon, with nuclear capability on land, air and sea. It has sufficiently adequate aircrafts to take on closerat-hand Pakistani targets.

Pakistan is less ambitious and disavows great power aspirations, though it is pleased to be seen as a powerful regional state actor. Unlike in the Indian case, China is not a factor in the Pakistan nuclear equation. It is, in fact, widely believed that Pakistan had considerable Chinese assistance in the development of its nuclear weapon potentials. For these reasons, a less advanced delivery system suffices for its purpose. It has nuclear-capable F-16 aircrafts which have been retrofitted for the purpose. Also, the medium-range Ghauri missiles, which, according to such Pakistan’s scientists as the now-disgraced Dr A. Q. Khan, would be preferable for targets in India because of the possible fallout effects for Pakistan of shorter range missiles. By the way, Pakistan also possesses these shorter-range missiles.

Incidentally, the naming of the missiles were said to reflect historical rivalry between the two countries. The Ghauri is named after an early Muslim Afghanistan conqueror of India whereas the indigenous Hindu prince who gave him battle was called Prithvi Raj. The term Prithvi also means ‘earth’. It is worthwhile mentioning that Pakistanis take some pride at the perceived heightened prestige of their country being the only Muslim nation with the capability and, at one time, the late Prime Minister Zulfikar Ali Bhutto, looking into the future, called it the ‘Islamic bomb’.

India has a publicly-pronounced nuclear doctrine, stated albeit briefly, in a document published by the Indian External Affairs Ministry in January 2003. It says that India seeks ‘minimum credible deterrent’. Of course, given a wider spread of potential adversaries, the expression assumes a different capability than is the case with Pakistan, whose officials expound the same principle. In other words, India would require greater firepower. The Indian position is reflected in the following elements: a)

‘no first use’ and ‘no use’ against a non-nuclear weapon state unless there is a major attack against Indian forces using biological or chemical weapons;

b)

civil control by the Prime Minister; and

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c)

nuclear retaliation against a first strike which is massive and designed to inflict unacceptable damage.

The Indian Nuclear Command Authority is composed of a Political Council chaired by the Prime Minister and empowered to authorise the use of nuclear weapons, and an Executive Council chaired by the National Security Advisor. The arsenal is generally believed to be well protected.

Given the overwhelming conventional superiority of the Indian armed forces, Pakistan eschews the ‘no-first-use’ doctrine. The Pakistani posture is somewhat akin to the North Atlantic Treaty Organization’s ‘trip-wire’ principle during the Cold War, that is, nuclear retaliation would follow if the Warsaw Pact tanks or forces ‘tripped the wire’ by rolling into West Germany. Indeed, Pakistan does not have a declared doctrine following the logic that the ambiguity would enhance deterrence. However at a lecture in Monterey, California, in November 2006, the Director-General of Pakistan’s Strategic Plans Division, LieutenantGeneral Khalid Kidwai, said that Pakistan would always act with ‘restraint and responsibility’. He added that the four salient features of its policy would be: a)

deterrence of ‘all forms of external aggression’ (which means including conventional attacks);

b)

ability to deter a counter-strike against strategic assets;

c)

stabilisation of strategic deterrence in the South; and

d)

conventional and strategic deterrence methods.

On 4 June 2002, then-President Pervez Musharraf, in fact, stated that, “The possession of nuclear weapons by any state obviously implies they will be used under some circumstances”. In Pakistan, decision-making with regards to its use can only be undertaken by the 10-member National Command Authority, chaired by the President but with a sizeable representation from the armed forces. It should be stated, though, that President Asif Ali Zardari stunned the Pakistani establishment in November 2008 by speaking of a ‘no first-use’ posture. However, Lieutenant-General Kamal Matinuddin, a leading defence analyst, said the remarks were made ‘off the cuff’ and the President was apparently ‘not fully informed’ or ‘completely aware of’ Pakistan’s stated doctrine.

Pakistan is striving to achieve a ‘second strike capability’ which basically refers to the capacity to absorb a ‘first strike’ and still be able to retaliate massively. Theoretically, if the entire arsenal is vulnerable, it could invite a pre-emptive attack. Thus, it is trying to disperse and conceal its weapons and, in future, when it acquires the capability, it is likely to move them into submarines.

Indeed, it is said that after the September-11 attacks in the United States, then-President Musharraf ordered the redeployment of the arsenal to ‘at least six new locations’. It is noteworthy that neither Pakistan nor India has any defence shield that would be considered strategically destabilising. Pakistanis feel the nuclear balance between the two countries would remain unstable until the equilibrium is reached by Pakistan acquiring a matching ‘second strike capability’. Meanwhile, India beefed up its ‘second strike capability’ when, in November 2008, it tested a new generation ballistic missile, Shaurya, a 600-kilometre range

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sub-surface weapon which can be easily concealed from detection launched. An earlier acquisition was BrahMo, the product of a joint-venture with Russia. It the world’s fastest cruise missile and it can also be launched from submarines. There is an on-going project called the Advanced Technology Vessel, costing US$3 billion, which aims to build, for the future, five nuclear-capable submarines. It also has plans for the K-15 ballistic missiles which can be nuclear-tipped and submarine-launched.

While both countries so far have behaved most responsibly, there are two dangers beyond the rim of the saucer. One is that deterrence is stable when the damages caused by its failure are perceived to be unacceptably high but if the technology reaches to such a point of sophistication that specific ‘hard’ targets such as military installations can be taken out by precise weapons or by small-yield so-called ‘battlefield’ or ‘theatre’ devices, then the propensity to use these weapons would increase. This would be in line with the ‘Schlesinger Doctrine’ of the mid-1970s when the United States’ Defense Secretary, James Schlesinger, floated the idea that a nuclear war was ‘fightable and winnable’ by ‘selective targeting’. This would be an unstable development and must be addressed by constant sharing of information and by forgoing destabilising vertical escalation. The other danger, seen as more pronounced in the case of Pakistan, is that of the weapons falling into the ‘wrong hands’ such as those of terrorists or fundamentalists. Pakistan has been arguing strongly that there are ‘layers and layers’ of protection against such an eventuality though it reportedly turned down a United States’ offer of Permissive Action Links, a system to further control detonation. That the arsenal is ‘absolutely’ secure and under a very tight command and control mechanism was also stressed by former Pakistani National Security Advisor, General Mahmood Durrani, at a recent seminar at the Institute of South Asian Studies in Singapore. Also, United States officials such as former Deputy Secretary of State, John Negroponte, have expressed satisfaction to the United States’ Congress on the standards of safety and security of the weapons.

Optimists hope that the possession of nuclear capabilities by both India and Pakistan, which in any case is a given reality for all times unless there is a dramatic breakthrough in disarmament, will preclude another major war between the two countries. Former Indian Army Chief, General Shankar Roychowdhury, said in a seminar in New Delhi in March this year that Pakistan’s possession of nuclear weapons prevented India from attacking it on two occasions – one after the terrorist attack on the Indian Parliament and the other after the Mumbai mayhem. Be that as it may, while conventional conflicts of some intensity cannot be entirely ruled out, it is clear that no level of even conventional conflict can provide a significant victory to either side. If that be so, the only rational corollary is collaboration between the two countries.

There is obvious necessity for confidence-building measures on the nuclear front. This can and should be spread to other areas across a broader spectrum of issues such as terrorism since the perceived threat from it, including on the nuclear front, are mutually applicable.

Despite the fact that the nuclear genie is out of the bottle in South Asia, it can be tamed and controlled, and even pressed into the service of peace. The leaderships of both India and Pakistan must realise that they have a Hobson’s choice (no choice) in this regard and Track II must relentlessly keep pointing it out to them.

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ISAS Brief No. 103 – Date: 16 April 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Sino-Indian Naval Engagement C. Raja Mohan1 The Indian Naval Chief Admiral Sureesh Mehta’s visit to China next week opens the door for the construction of an enduring maritime security dialogue between the two rising powers of Asia.

Admiral Mehta will participate in the first international fleet review being held in Qingdao port to mark the 60th anniversary of the founding of the Chinese navy. India is one of the 15 nations that are sending naval ships to participate in these celebrations. Admiral Mehta is also expected to speak at a symposium on “Harmonious Seas” to be organised by the People’s Liberation Army’s Navy (PLAN).

According to media reports, four of the 40-odd international ships joining the fleet review will be Indian. Chinese and Indian warships have been calling at each other’s ports for a while as part of an agreed programme on military confidence-building measures. However, next week’s interaction at Qingdao is probably the most significant between the two navies.

At the fleet review, the PLAN is expected to put up an impressive display of its expanding maritime muscle. Having come a long way since 1949, the PLAN has every reason to be proud of its recent achievements. The PLAN was formed on 23 April 1949 when nine warships and 17 boats defected from the nationalist forces to the communists.

As in the case in India, the navy in China was treated as a stepchild by the political leadership. Given the unremitting focus of the Chinese Communist Party (CCP), after the revolution, on consolidating China’s new land borders, it was inevitable that there was insufficient focus on maritime capabilities.

China’s neglect of the maritime space is now a thing of the past. As China becomes the world’s second largest economy and a political force to reckon with on the global stage, a strong navy is now seen in Beijing as an absolute necessity. The CCP leadership today believes that maritime power projection is an inevitable and natural adjunct to China’s new status as a great power.

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C. Raja Mohan is a Professor at the S. Rajaratnam School of International Studies, Nanyang Technological University. This paper was prepared as part of an ongoing consultancy project for the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. Professor Raja Mohan can be contacted at iscrmohan@ntu.edu.sg or crmohan53@gmail.com.

President Hu Jintao has taken a special interest in boosting China’s naval strength. His call at the end of 2006 to build a ‘blue water’ navy has become the guiding principle for the PLAN. President Hu had declared that China ‘should strive to build a powerful navy that responds to the needs of PLAN’s historic mission in this new century’.

As a result of China’s rapid economic growth in the last two decades, financial resources are no longer a constraint in Beijing for the rapid modernsiation of the naval forces which, by nature, are capital intensive.

As the CCP and the Chinese State Council lavish resources on raising the nation’s maritime profile, the missions of the PLAN too have rapidly evolved. From the 1950s to the end of the 1970s, the main task of the PLAN was to conduct inshore defensive operations. Since the 1980s, the Chinese navy has moved towards offshore defensive operations.

In the 21st Century, Chinese media reports say, PLAN will strive to ‘improve its capabilities for integrated offshore operations, strategic deterrence and strategic counter-attacks, and to gradually develop its ability to engage others in cooperation in distant waters and countering non-traditional security threats’. Translated, it means that the PLAN is no longer a weak coastal defence force. It has offensive capabilities to contest the domination of more powerful navies like that of the United States in specific areas and conditions. It wants to have an invulnerable nuclear deterrent by deploying more of its atomic arsenal at sea, having its ships in far away seas and joining other navies in addressing the collective maritime security threats.

The newly acquired Chinese capabilities to operate far from its shores and the political will in Beijing to leverage its maritime clout have been amply demonstrated by the despatch of Chinese ships in early 2009 to protect the sea-lanes in the pirate-infested waters of the Gulf of Aden and the Somali coast.

It is not a surprise that China’s plans for naval modernisation and its growing presence in the Indian Ocean have raised eyebrows within the Indian strategic community. Some old fears in New Delhi about Beijing’s intention to ‘encircle India’ have now been projected onto the maritime domain.

China’s expanding aid to and investments in the smaller island states of the Indian Ocean and its construction of new ports in the smaller South Asian nations has rung alarm bells in New Delhi. This anxious discourse in New Delhi feeds into the international perceptions of growing Sino-Indian rivalry and its extension into the Indian and Pacific Oceans. India’s deepening defence and naval cooperation with the United States has also tended to reinforce the view that the maritime interests of China and India are now antagonistic.

The Indian navy, however, has taken a far more pragmatic and sensible view of China’s growing naval capabilities and its new interest in the Indian Ocean. The Indian navy is secure in the sense of its own growing capabilities and it is aware of the significant limitations on the PLAN’s ability to maintain a permanent presence in the Indian Ocean.

As Admiral Mehta heads to Qingdao to participate in the fleet review next week, he knows that the Chinese Navy too is concerned about India’s maritime forays into the South China Sea. Just as the Chinese navy sends a second group of ships to Gulf of Aden this month to relieve the units that had set sail in January 2009, the Indian navy is on its second major

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expedition into the Pacific Ocean. The last time it showed up in these waters was during the summer months of 2007.

After conducting bilateral exercises with Singapore last month, the Indian warships have moved into the Pacific Ocean. Among the flotilla’s wide-ranging interaction in the region is a trilateral naval exercise with United States and Japanese ships.

It is not difficult to see that the drivers behind the maritime strategies of China and India are very similar. Both are increasingly reliant on imported natural resources (energy and mineral) to sustain the high economic growth rates at home. Both have an interest in ensuring the reliable supply of these resources across many seas. Beijing and New Delhi also recognise the importance of looking beyond their traditional maritime zones of interest.

China’s economic and political interests are no longer limited to the South China Sea – they have begun to encompass the waters of the Indian Ocean. The Indian expansion is in the opposite direction – from the Indian Ocean to the Pacific. As the footprints of the two expanding Asian navies begin to overlap, the need for a continuous bilateral engagement on maritime issues has become more important than ever. The Sino-Indian naval interaction needs to graduate beyond port calls, occasional high-level military exchanges and simple exercises. It needs to focus on understanding each other’s maritime motivations.

In Beijing and New Delhi, the naval leaderships have emerged as the most outward-looking and sophisticated spokesmen of their nations’ ambitious world views. In Qingdao then, Admiral Mehta will have an opportunity to lay the foundations for a sustained high-level strategic dialogue between the world’s emerging maritime powers.

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ISAS Brief No. 104 – Date: 28 April 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Pakistan’s India Fixation can bring the Taliban into Power Ishtiaq Ahmed 1 Several statements published in the News on 23 April 2009 illustrate the diverse perceptions of the real or imagined existentialist threats to Pakistan. In one key statement, United States’ Secretary of State Hilary Clinton alleged that Pakistan has abdicated to the Taliban by agreeing to the imposition of Islamic law in a part of the country and that nuclear-armed Pakistan poses a ‘moral threat’ to world security.

It would not be presumptuous to say that Mrs Clinton expressed an opinion which is shared by the inner circle of United States’ President Barack Obama’s government. If that is the case, the Americans will most certainly exert even greater pressure on Pakistan to do something urgently to thwart the Taliban peril. It may also mean that airstrikes by the United States will continue, notwithstanding Pakistani protests. In case the situation gets out of control, an American military intervention cannot be overruled.

However, in an interview to the CNN soon after Mrs Clinton’s remarks, Pakistan’s Ambassador to the United States Husain Haqqani refuted the threat of the Talibanisation of Pakistan. He found suggestions that the Taliban were steadily extending their influence and power in Pakistan and that their writ prevailed less than 100 kilometres from the Pakistani capital, Islamabad, gross exaggerations. He remarked that ‘Pakistan is facing many challenges in terms of threats posed by (the) Taliban but (the} government is cognizant (of the) responsibilities and (is) geared up to take the Taliban bull by the horns’. Further, he observed that the ‘Swat peace accord was aimed at disarming (the) Taliban’.

However, the Taliban do not seem any less steadfast in their mission and objective. The recent flogging of a girl by Taliban brutes for appearing in public without a legally-correct male escort and their almost daily announcements that they are aiming to expand the enforcement of the Sharia all over Pakistan as well as concrete threats to lawyers for functioning in a non-Sharia legal system leave hardly any room for doubt about their intentions and the actions being undertaken in pursuit of their objectives.

In a very different but nevertheless closely-related context, Pakistan’s Interior Minister Rehman Malik alleged in a Senate discussion on Balochistan that India and Russia were 1

Professor Ishtiaq Ahmed is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg.

supporting the insurgency mounted by the Balochistan Liberation Army in its secessionist bid. Mr Malik urged India to stop its interference in Balochistan. He went on to describe India as ‘an open enemy of Pakistan’. His assertions were challenged by some senators from Balochistan but he stood his ground.

What Mr Haqqani and Mr Malik have said is in conformity with the views expressed by Pakistani governments in the past, whether they were headed by elected representatives of the people, civil servants or army generals. Quite simply, India remains the constant referral for definitions and rationalisations of Pakistan’s national identity and security. It is the villain in the piece in Pakistan’s security paradigm.

Now, security paradigms tend to become dogmas if they are not constantly revisited. As dogmas, they obfuscate rather than identify and highlight real threats. The classic case is the United States’ Soviet fixated security paradigm. It invested almost entirely all its resources to warding off a nuclear attack from the Soviet Union. The Al Qaeda very skillfully exploited that weakness and ordered terrorist attacks from within the United States. The United States was woefully ill-prepared for such an assault on its security.

In the case of Pakistan, the refusal to treat the Taliban as the main and most imminent threat is of a similar nature. Whereas it is reasonable to assume that neither the Pakistan military nor the political class or the civil service would want the Taliban to impose their will on them because each one of them will have its privileges considerably curtailed, it is equally reasonable to assume that the Pakistan ruling elite is not a cohesive body of power and influence wielders.

The Taliban have sympathisers and supporters in the highest echelons of power in Pakistan.

Some former top generals and Inter-Services Intelligence operatives, rightwing politicians and a host of journalists and political commentators are open supporters of the Taliban version of Islam. It is most distressing to note that the main opposition leader, Nawaz Sharif, has not spoken out strongly against the Taliban threat – he has expressed only symbolic concerns about some of their actions.

If we now return to the India-fixated Pakistan security paradigm, it can be argued that confronting the Taliban threat and prioritising resources for this threat does not necessarily require Pakistan lowering its preparations for the perceived threat from India. If India is stoking secessionist passions in Balochistan, then that is totally unacceptable. Pakistan should convey to the Indians that they cannot subvert its sovereignty with impunity.

However, the real and imminent danger threatening Pakistan’s existence is the one posed by extremism, and the Taliban are its most notorious practitioners. They are not the only ones though. Extremism as a creed has many other adherents and, together, they represent a Third World-type cultural fascism.

Classical fascism was the mobilisation of vile passions and atavistic drives to fuel vain ideologies and mob-based movements that seek to establish the supremacy of some pure race or nation. In the late-industrialised and nominally-secularised European societies of the 1930s, fascism did not have to rely directly on religious invocations to win over the support and devotion of the bigoted sections of the society.

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However, in the deeply-religious societies of South Asia where agrarian and tribal forms of society and culture still fashion politics, fascism is bound to exploit the religious factors to recruit their shock troopers. Therefore, cultural fascism deliberately distorts and mutilates the spiritual and ethical values of a religious system. The so-called Islamisation process unleashed by the late General Zia-ul-Haq (1977-88) set that process in motion. The Taliban are determined to subvert whatever vestiges of pluralism, democracy and peaceful coexistence that survived General Zia’s Islamisation.

The question is, of course, whether the Pakistani power elite are conscious of the peril that the Taliban represent. Up until now, it seems that this is not the case. Narrow personal interests and ambitions continue to signify the behaviour of the politicians and the civil servants are not heard any more.

The military had until now maintained a troubling silence. However, on 25 April 2009, the News reported that the Chief of Army Staff, General Ashfaq Kayani, issued a strong statement, emphasising that the peril of terrorism will be defeated decisively by the armed forces. Verbal pronouncements need to be backed by determined action. Time is running out.

Pakistan needs to act now. Otherwise irreparable damage to its security and existence will take place. oooOOOooo

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ISAS Brief No. 105 – Date: 28 April 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Maldives: A Paradise in Peril?

Iftekhar Ahmed Chowdhury 1 The Maldives is small and beautiful. Its picturesque scenic bounties lend the smallest member state of the South Asian Association for Regional Cooperation certain paradise-like qualities.

Its people enjoy a reputation of being mild-mannered. However, despite these attributes, a combination of politics and geography is increasingly rendering the future of this tiny nation somewhat perilous. Its vulnerabilities to the vagaries of nature are well known. Much of the world is aware by now that, due to climatic changes, a slight rise in the sea level can spell disaster for the country, immersing much of its land space. However, less reported in the world is the fact that the Maldives’ recent transition from authoritarian rule to democracy stands threatened if the parliamentary elections, due on 9 May 2009, throw up results that would effectively block governance.

The smallest Asian country, with a total area of 298 kilometres spread over 26 atolls and comprising 1,192 islets, less than a hundred of which are inhabited, the Maldives is also the smallest predominantly Muslim country in the world, with a population of 300,000. It is also a country which, at 2.3 metres, has the lowest highest point in the world. Given its natural splendours, it is not surprising that tourism is its biggest foreign exchange earner, drawing 60 percent of the receipts.

By the existing criteria determined by the United Nations, it is on the list of the 50 Least Developed Countries (LDCs). However, it enjoys a high per capita income of over US$3,000.

As such, there have been pressures upon it at times to graduate from the LDCs list. However, since being on this list brings it some benefits in terms of trade preferences, the Maldives has used diplomacy to resist such pressures, and with help from fellow South Asian friends such as Bangladesh, the Chair of the Group of LDCs, it has so far succeeded in doing so.

In October 2008, the Maldives experienced what was generally seen as a positive political transformation. Much will now depend on the forthcoming parliamentary elections.

Having obtained its independence in 1965 from the British, the Maldives was run with an iron hand for three long decades from 1978 onwards by President Maumoon Abdul Gayoom.

He ruthlessly suppressed all opposition and won six consecutive elections without anyone running against him. Anyone on President Gayoom’s wrong side found himself in prison, 1

Dr Iftekhar Ahmed Chowdhury is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the Foreign Advisor (Foreign Minister) of Bangladesh from 2007 to 2009. He can be reached at isasiac@nus.edu.sg.

including the current Head of State, Mr Mohamed Nasheed, a long-time political activist.

However, even this remote island could not remain indifferent to international and local calls for political liberalisation. The Maldives experienced several coup attempts mostly in the 1980s which were put down by the government with Indian assistance. However, these eventually led to President Gayoom relenting and allowing for multi-party elections. The first round of elections was held on 9 October 2008 and a run-off poll between the two highest vote-winners took place on 28 October 2008.

It was an interesting process. President Gayoom secured the highest number of votes in the presidential elections, totalling 70,000, with Mr Nasheed coming a somewhat distant second with 40,000 votes. However, in the run-off poll, several key candidates in the presidential elections such as Dr Hassan Saeed, who had the third highest votes, and Mr Gasim Ibrahim, a billionaire, supported Mr Nasheed. This ultimately resulted in a 54-percent majority votes for him. This, thus, ended the rule of the longest serving leader of any Asian nation, with winds and waves of change blowing across these pleasant islands.

However, the Maldives has had to contend with less savoury winds and waves such as those brought by the Tsunami of 2004 which completely destroyed at least six islands and seriously damaged 57 islands. A total of 21 resort islands had to close down. It must be said to the then-President Gayoom’s credit that he displayed strong leadership in the aftermath and individually approached many world leaders for help, which was forthcoming. He also acted as a spokesman for the environmentally-threatened countries in many international forums and, in that sense, put the Maldives on the global diplomatic map. This is something his successor is continuing with. Indeed, President Nasheed has floated an interesting idea of creating a sovereign wealth fund from resources generated by tourism to purchase lands in Sri Lanka, India and even distant Australia for the Maldivians to relocate if their country is indeed inundated. The Maldives continues to be seriously imperilled by the effects of climate change.

Another threat to its stability may sadly come from human resources such as through the mismanagement of the democratic process. After a brief euphoria following the toppling of the authoritarian Gayoom, President Nasheed began to face challenges from within the willing coalition. His first 100 days witnessed the departure of Mr Saeed who resigned from the post of Adviser and Mr Ibrahim who quit as the Home Minister. Both of them had supported him in the run-off poll.

President Nasheed began to drag on his promises of early parliamentary elections which he argued were prompted by pressures from his former colleague, Mr Saeed. Foreign Minister, Dr Ahmed Shaheed, who belongs to Mr Saeed’s party, went public to say that should President Nasheed’s party win the majority votes in the forthcoming Parliament elections, it would impede checks and balances on the government, thereby severely compromising the democratic process. Perhaps the lack of a democratic culture led to friction between the government’s political appointees and civil servants, so much so that President Nasheed was compelled to write to the Parliament complaining that the Civil Service Commission has failed to implement the government’s policy.

Unfortunately, that was not the end of President Nasheed’s travails. Upon his return from a successful trip to Europe and to the United Kingdom where he was feted by the Queen (President Nasheed has maintained good connections with British politicians), he received a letter from the Attorney-General cautioning him that the candidates for the parliamentary

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elections are not intimidated by the ruling party (the Maldivian Democratic Party [MDP]).

President Nasheed has now claimed that the letter was politically motivated because the Attorney-General is a member of his former ally (and now opponent) Mr Ibrahim’s Jamhoory Party. There were also accusations that President Nasheed’s MDP was trying to buy votes which also prompted a warning from the Election Commission. At long last, the election date for the 77-member parliament or Majlis has been set for 9 May 2009.

Is it possible that President Nasheed’s ruling MDP, due to these manifold crises, becomes a minority party in a dead-locked Majlis, imperilling governance so soon after the democratic transition? It may not necessarily be the case. President Nasheed may still have several tricks up his sleeve. His MDP is contesting all of the 77 seats, the only party to do so, and, as of now, it is slated to win at least 32 seats. This is, of course, insufficient to constitute a majority. However, it would be a better result than that of any of the other parties. His principal rival remains Mr Gayoom and his Drivehi Rahiyyithunge Party (DRP), which, unfortunately, recently had troubles of its own. For instance, a strong Gayoom supporter, Mr Aneesa Ahmed, is leaving the party. The forecast is that Mr Gayoom’s DRP will win about 10 to 15 seats. Mr Saeed’s and Mr Ibrahim’s parties are not likely to win more than 10 seats each. There will be several independent members in the Parliament, as many such candidates are running for the elections. As the growing political culture demonstrates, President Nasheed will not fight shy of using his many wherewithal and opportunities as President to lure away many independent members and even other party members. This may not be strictly ethical but it would be in line with democratic practices elsewhere in South Asia and it will only go to show that politics in the Maldives has come of age.

The transition in the Maldives could still and, hopefully, would have positive ramifications for democracy in South Asia. President Nasheed, of course, has a long ‘to-do’ list. The economy has to be restored in the post-Tsunami period. The concerns of the effects of global warming have to be addressed. He will need to focus on unemployment, corruption and widespread drug-use, especially among the youth. He must be able to assert the authority of elected persons over the bureaucrats. Most importantly, he must contribute to the evolving liberal, pluralist and democratic culture in the South Asian Muslim nation. The friends of the Maldives will help, as President Nasheed discovered on his trips abroad. The world is not ready to see a ‘paradise lost’ in these otherwise serene and idyllic isles.

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ISAS Brief No. 106 – Date: 30 April 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Sri Lanka: What Next?

S. D. Muni 1 Sri Lanka’s war against the Liberation Tigers of Tamil Eelam (LTTE) has reached its conclusion. The security forces may still take a few days in the last stage of mopping up of the war zone. The area is heavily mined, some 30,000 to 50,000 civilians are still suspected to be trapped in the war zone and there are last ditch attempts by the remaining Tigers to kill as many Sri Lankan soldiers as they can.

The question of the fate of the LTTE leader, Velupilla Prabhakaran, still remains unanswered.

At one stage, the Sri Lankan army sources had conceded the possibility of Prabhakaran having already escaped through the sea route. This is not impossible despite the claims of the Sri Lankan navy of keeping the area under strict surveillance. A couple of days ago, eight innocent Tamils from the war zone, in fact, reached the Tamil Nadu coast in a rubber boat without navigation equipment by dodging the Sri Lankan surveillance. It is possible that even if Prabhakaran is still in the so-called ‘No Fire Zone’, his son, Charles Anthony, may have escaped with a trusted band of associates to keep the struggle for Eelam alive. If the Sri Lankan army succeeds in getting Prabhakaran dead or alive, the world will soon know. If Prabhakaran has indeed escaped, he may not find it too difficult to get a shelter, if not asylum, outside the Sri Lankan shores.

If Prabhakaran and/or his son have escaped, the myth of the LTTE will remain alive and the organisation may be revived in due time. The support for such a revival may come from two sources. The first source is the Tamil diaspora. Though the LTTE’s credibility among the Tamil diaspora has been eroded in the past few years and increasing curbs have been placed on the flow of funds to them, the core of the disapora’s support for the LTTE remains intact.

This was evident in the demonstrations in Europe, the United States and several Asian countries, including India, to protest against ‘the genocide of the Sri Lankan Tamils’ by the Mahinda Rajapaksa regime. These diaspora groups may easily be mobilised to rebuild the LTTE. The second source of support to the LTTE revival project would depend upon the way Colombo responds to the Tamil question. There are clearly two aspects of the Tamil question in a post-LTTE Sri Lanka. One is of immediate attention and that is to take care of and 1

Professor S. D. Muni is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassdm@nus.edu.sg.

rehabilitate more than 250,000 internally-displaced persons (IDPs) resulting from the last phase of the conflict. There are also millions of other IDPs from the northeast scattered in Sri Lanka as a result of the conflict. President Rajapaksa is seeking assistance of at least US$1 billion from the international community for this purpose. How much of this assistance will flow in and how it will be used will depend considerably on the sincerity and efficiency of the Rajapaksa administration. Various non-government organisations and international donors will also be involved in this massive exercise of reconstruction and rehabilitation, and this will make the process complicated and diversified. Any lapses, and there are bound to be many, in looking after the IDPs and ensuring their permanent resettlement will be politically exploited by the managers of the LTTE revival project.

The other aspect of the Tamil question is the lasting resolution of the ethnic issue in Sri Lanka. This will be a slow and tardy process. Before addressing this question, President Rajapaksa may like to fortify his political position, in relation to his political opponents in Parliament and otherwise, by taking advantage of his ‘military victory’. His approach to the ethnic question may be outlined in the way he runs his campaign for political consolidation.

However, there are clearly three alternatives. The first is that he sincerely pushes for a devolution package that is acceptable to the majority of Sri Lankan Tamils. This may be easier said than done in view of the opposition, not only from the Sinhala chauvinist forces in the opposition parties like the Janatha Vimukthi Peramuna or the People’s Liberation Front and the Hella Urumaya, but also from within his own party. Even the coterie around him may not let him proceed smoothly in this direction. His brother, Gothabaya Rajapaksa, and the Sri Lankan Army Chief have clearly laid the parameters of accommodation to the Tamils. They would not prefer their hard won military victory to be frittered away by ‘political generosity’ to the Tamils. In their perception, Sri Lanka is a country of the Sinhalese and for the Sinhalese. The Tamils could live here if they so want peacefully. There are people around this coterie that have for long been planning a demographic restructuring of the Tamildominated northeastern parts of Sri Lanka.

The second option is that, under the influence of the Sinhala chauvinist forces, President Rajapaksa fails to carry out any meaningful devolution of powers to the Tamils and plays with just cosmetic concessions. This would be resisted by the international community. Not that the Rajapaksa administration has cared much about the international community, but in the months and years to come, his dependence upon the donors will increase and he may have to listen to them. Countries like China have stood by President Rajapaksa in waging the war and such countries will also extend financial support to his task of reconstruction and rehabilitation. However, that support would not be adequate or even politically viable, particularly so if countries such as India and the United States are alienated and left out.

This will take Colombo to the third option, that is, to only partially accommodate the Tamil demands. A partial accommodation of their rights and aspirations will only build the frustrations of the Sri Lankan Tamils. President Rajapaksa may seek the help of non-LTTE groups, led by Duglas Devananda, Colonel Karuna and Anand Sangari, to push his partial package which may also keep his coterie in good humour. It is, however, doubtful if these Tamil groups will become his allies to only a truncated and half-hearted resolution of the ethnic question. These groups have their strong internecine political rivalries and have found it difficult, thus far, to come on one platform. Anyone who is seen to be getting closer to Colombo will face opposition from the others. This is where Prabhakaran’s LTTE-revival project will draw strength from. The possibility of the non-LTTE groups, who have hitherto

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been collaborating with Colombo under the fear of the LTTE, now taking up the Tamil question in their mutual competitive political mobilisation also cannot be ruled out.

The challenge of stabilising Sri Lanka after defeating the LTTE is a formidable one.

President Rajapaksa can meet this challenge only by sincerely resolving the ethnic question in a just and fair manner to the satisfaction of the Tamil community.

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ISAS Brief No. 107 – Date: 19 May 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Indian Elections 2009 – A Return to the Centre Sanjaya Baru 1 The elections to the Lower House of the Indian Parliament, Lok Sabha, have thrown up a clear mandate in favour of the United Progressive Alliance (UPA), led by the Congress Party.

Prime Minister Manmohan Singh becomes the second prime minister after Jawaharlal Nehru to secure a renewal of mandate after completing a full term in office.

India will have a stable government that will serve its full five-year term in office. The results mark a turning point for the country’s largest and oldest political party, the Congress Party.

The comprehensive defeat of the Left Front and of the so-called Third Front as well as the weak performance of the principal opposition party, the Bharatiya Janata Party (BJP), is expected to push these parties on the political ‘Left’ and ‘Right’ into both an ideological turmoil and an internal power struggle for a new leadership.

The phenomenal performance of the ‘centrist’ Congress Party will strengthen traditional forces of political moderation. India can be expected to be a predictable player in global affairs, focussing on its own economic development and seeking stability and development in its wider Asian neighbourhood.

A golden rule of politics in India is that this diverse, plural, continental nation can only be governed from the ideological ‘centre’. India can neither swing ‘Left’ nor ‘Right’ for any length of time. Individual states could lurch in one direction and remain there for long periods of time such as West Bengal on the Left and Gujarat on the Right. However, this subcontinental, civilisational Republic can only be governed from the political ‘centre’. That political ‘centre’ has been empowered once again by the results of the 2009 general elections.

In 2004, the Congress Party entered the election campaign on a weak wicket because Prime Minister Atal Bihari Vajpayee had tried, fairly successfully, to usurp that ideological ‘centre’ space from the Congress Party. That is why he became the first non-Congress Prime Minister to serve a full term in office.

As a result of the BJP grabbing a bit of that ‘centre’ space, the Congress Party was forced to turn ‘Left’ to regain ground. The problem with the 2004 verdict was that the Left Front and some in the Congress actually interpreted the results to mean India had moved ‘Left’. Local 1

Professor Sanjaya Baru is a Visiting Professor at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at sppsb@nus.edu.sg.

factors had helped the Communist Party of India (Marxist) [CPM] do well in the states of Kerala and West Bengal in 2004. This helped the Left Front win a record 60 seats in the Lok Sabha.

The ideologues of the Left interpreted this ‘regional’ result as an endorsement of its political platform and tried to impose this on the Congress Party through the National Common Minimum Programme. Many in the Congress Party happily walked into this trap because they were so dazed by the result and were so happy to return to government after almost a decade.

In a classic communist party manoeuvre, Prakash Karat took charge of the CPM by staging a virtual coup at the Party Congress in 2005 and tried to push the entire UPA leftwards. He tried to put the Congress Party on the defensive by charging it of abandoning the nationalist platform on foreign policy. The Left painted Prime Minister Singh as a ‘neo-liberal’ economist, knowing full well that he was and has always been a ‘Keynesian’ liberal, and charged him of a pro-United States bias.

Some in the Congress Party fell into this trap and echoed the Left view that the 2004 verdict was in favour of pro-Left policies. This created an ideological confusion within the Congress Party that the Left exploited by seeking to drive a wedge between the Congree Party and the government. The India-United States civil nuclear cooperation agreement was used as an instrument to stage that coup.

Meanwhile, the BJP dumped Vajpayee’s centrism and moved ‘Right’ without reflecting on why Vajpayee had tried to take the party away from its core ideology. Vajpayee was trying to ‘Congressise’ the BJP. Once the BJP abandoned that project under the leadership of Lal Kishen Advani and Narendra Modi, it lost ‘middle India’.

What, therefore, contributed to the revival of the Congress Party? I believe it was the Congress Party’s decision to strike out on its own, unencumbered by the ideological prejudices of the Left, and the caste-based and regional parties. The Congress Party reasserted its independent centrist identity. It remembered that it was, in fact, the original political coalition in India.

Early in the election campaign, Prime Minister Singh hit out at casteism and regionalism, and identified these as equally damaging as communalism to the future of the Republic. Further, by rejecting the Left’s and Third Front’s attempts to give the Congress Party a character certificate on nationalism, the Congress Party regained the centre space that it was trying to take away.

The Left’s stance on the India-United States nuclear deal was motivated by a Bolshevik instinct to hijack the Congress Party’s agenda. By guilt-tripping the Congress Party and accusing the Prime Minister of abandoning ‘an independent foreign policy’, the Left was hoping to shape Indian foreign policy in the manner it sought to shape its economic policy in the past.

If the Congress Party had gone along with the Left and dumped the nuclear deal, it would have once again surrendered ‘its’ political space to the Left. Wisdom lay in asserting its own independence and, above all, in reclaiming the centre space of Indian political life for itself.

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That is precisely what the Congress Party did in 2009. Returning to the ideological centre enabled the Congress Party to return to the centre.

What this means is that India’s economic policy would once again walk the “middle path” of striking a balance between public policy activism and free market economics. The Congress Party believes that its rural employment guarantee programme and the farm loan waiver helped strengthen its rural support base. Thus, such initiatives will not be given up. However, now freed from the Left, the new government would be able to take more pro-market and pro-business initiatives. Stepping up investment in infrastructure through public-private partnerships will be a priority for the government. The core economic agenda of the National Common Minimum Programme, investing in rural and urban development, agriculture, education and health, will continue.

In the field of foreign policy, the government would walk the path it has been doing the past five years of strengthening India’s relations with all the major powers, especially its major economic and strategic partners. We should also expect greater focus on a troubled neighbourhood in which most neighbours are pre-occupied with internal problems. India would hope to be a factor in regional stability and regional prosperity.

The 2009 verdict will help India regain the momentum of growth and play a positive role in global affairs.

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ISAS Brief No. 108 – Date: 19 May 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Two Victories and a Defeat: India, Sri Lanka and the Minority Question Darini Rajasingham Senanayake 1 Spontaneous street parties broke out, fireworks crackled in the air and strangers offered flowers to Sri Lankan soldiers to celebrate the news in Colombo – Asia’s Idi Amin was no more! One of the Indian subcontinent’s longest wars was at an end. The day before, street parties in New Delhi celebrated the victory of the Congress Party in the elections that marked the maturing of Indian democracy and the fact that the Tamil Nadu electorate had a sophisticated view of the situation in Sri Lanka. It is, hence, to be hoped that India, the regional superpower, will play an effective role to ensure peace with justice for the minorities in Sri Lanka.

The victory of the Congress Party was a victory for the whole of India and marks the deepening and strengthening of the roots of democracy as well as dynastic politics. Above all, the victory of the Congress Party was a vote for communal harmony and peaceful coexistence among the diverse religious, ethnic and caste communities in India. The victory of the Congress Party has also ushered in a younger generation with fresh thinking, with Rahul Gandhi as the embodiment of this change.

The victory of the Sri Lankan government, on the other hand, appears to be a Pyrrhic victory.

It has come at great human cost in lives lost and maimed, damage to the international reputation of the country, and the erosion of the island’s centuries old history of multiculturalism and co-existence among diverse ethnic and religious communities as well as damage to its democratic values and institutions.

The leader of the Liberation Tigers of Tamil Eelam (LTTE), listed as one of the world’s deadliest terrorist organisations, Velupillai Prabhakaran, and his right hand man, Intelligence Chief, Pottu Amman, were shot dead by security forces in the morning of 18 May 2009 while trying to flee northeast Sri Lanka. They did not commit suicide or flee the country before the final dénouement, as had been predicted. Earlier, thousands of civilians, held as a human shield by the LTTE in the face of the final onslaught by the armed forces, were released and the organisation “silenced its guns” in the face of imminent defeat. Prabakaran’s son, Charles Anthony, who headed the air wing of the LTTE, and the head of its Peace Secretariat,

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Dr Darini Rajasingham Senanayake is a Visiting Research Fellow at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. She can be reached at isasdr@nus.edu.sg.

Pullithevan, a familiar face from the days of the abortive Norwegian-brokered peace process, were killed hours earlier.

The deaths of Prabakaran, his son and the LTTE’s highest commanders mark the end of an era – the bloodiest quarter century in Sri Lanka’s modern history. The LTTE set the bar on violence very high in Lanka, the land pledged to protect the Buddhist Theravadha doctrine.

The state followed its example, having transformed the conflict into a form of dharma yudhaya (holy war) that legitimised great violence and Sinahla nationalism. While there were spontaneous street parties in Colombo to celebrate the demise of the LTTE, the Tamilpeaking minorities in Sri Lanka will certainly not share the triumph. The violence unleashed by the LTTE has left them more marginalised and traumatised than when the armed conflict began.

The Tamil minority at this time is depleted, scarred and factionalised, having been destroyed from within by the LTTE and without by the fury of the armed forces and the Sri Lanka state.

The organisation assasinated Tamil moderates and used child soldiers and women to wage violence To be sure, the government has tried to distinguish between the Tamil civilians and the LTTE but, all too often in the heat of the battle, they were reduced to the same thing and the Tamils in southern Sri Lanka are constantly racially profiled and, more often than not, have been treated as second class citizens. However, the LTTE was a symptom of a problem that morphed into a greater problem, the marginalisation of the Tamils and Tamil-speaking Muslim minorities by the Sinhala majority state. Sustainable peace in the land of the Buddha will require addressing the root causes of the conflict which is the marginalisation and alienation of the minorities by an ethnic majoritarian developmental state trying to balance competing electoral demands. The devoluton of power to the northern and eastern regions will be essentail to ensure sustainable peace.

It is in this context that the resounding victory of the Congress Party in India may mark a new chapter in relations between the two countries and a new beginning that puts the past behind.

As South Asia’s regional superpower, India has significant leverage over Sri Lanka. It is a major trading partner and has had a long history of engagement with the Tamil question in Sri Lanka. In the early days, India’s Research and Analysis Wing (RAW) funded and trained the LTTE in line with the central government’s policy and, later in 1987, India sent peacekeeping troops to the island.

A post-conflict political solution in Sri Lanka would require India’s involvement. The United States and Britain have condemned the humanitarian catastrophe unleashed by the Sri Lanka armed forces against the civilians caught in the war against the Tamil Tiger separatists, and have warned that Sri Lanka’s leaders, as would have been the LTTE, would be held accountable for the those caught in the violence of the past days. The United Nations High Commissioner for Human Rights, Justice Navanethem Pillay, has called for a special council to investigate “war crimes” in Sri Lanka. India and many of Sri Lanka’s Asian donors have remained largely silent.

The Gandhi dynasty had an intimate connection with the conflict in Sri Lanka. It was Indira Gandhi’s rule that saw the RAW being set up and training the LTTE and other Tamil militant groups. In turn, her son, Rajiv Gandhi, was assassinated in an LTTE suicide attack in Tamil Nadu at an election rally in a classic story of a blowback. It is, thus, the hope of the moderate Tamils in Sri Lanka that Rahul Gandhi’s generation would put the past behind and steer the Sri Lanka government to seek a sustainable peace in the island. It is to be hoped that a strong

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and stable Congress Party government will ensure that the defeat of the LTTE by the Sri Lanka government forces translates into sustainable peace with justice for the minorities in the island.

The Sri Lankan issue turned out to be irrelevant to the outcome of India's election – the Tamil regional parties that played up the plight of their Sri Lankan kin fared poorly in the polls. The world will be watching India and its role in enabling the Sri Lanka government to address the root causes of the conflict and win the peace in Lanka.

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ISAS Brief No. 109 – Date: 29 May 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Pakistan: Finally Taking Ownership of the War against Terrorism?

Iftikhar A. Lodhi 1 Soon after the momentous 9/11 terrorist attacks in the United States, President G. W. Bush told the world, “Every nation in every region now has a decision to make. Either you are with us [in the war on terror], or you are with the terrorists.” Pakistan decided to side with the United States. It remains debatable, though, whether Pakistan’s decision was wholly voluntary or it was made under duress. Whatever the reasons, Pakistan has emerged to become a central figure in the war against terrorism.

For a long time, opinion in Pakistan on the fight against terrorism was divided. While some argued that it is America’s war, others contended that it is Pakistan’s war against the ‘existential threat’ posed by the Islamist militants. This division, however, seems to be fast disappearing. The Pakistan army has begun an all-out offensive against the Islamist militants – Pakistani Taliban – in the Swat valley, 130 kilometers northwest of Islamabad, and extending to the Federally Administered Tribal Areas (FATA), the supposedly ‘safe havens’ of the militants mounting insurgency against the North Atlantic Treaty Organization (NATO) and American forces in Afghanistan.

Earlier this year, the Pakistan government had struck a peace deal after two years of fighting with the Islamist militants. The peace deal was widely supported by the political parties and the public. According to a survey conducted by the International Republican Institute in March 2009, 75 percent of the respondents supported the deal. However, once the peace deal was struck (in which the government promised to implement Sharia [Islamic law] in Swat), the militants began to show their real teeth by refusing to lay down their arms, taking law and order into their own hands, capturing state buildings, imposing their religious demands and expanding their military operations into new territories. The deal increasingly came under severe criticism at home and abroad. Washington equated the deal to ‘abdicating to the Taliban’. Finally, Islamabad decided to wage battle against the militants.

However, an all-out war has led to a humanitarian crisis. Some 2.5 million people have fled the conflict zone and dozens of civilians have been killed. Ironically, once again, the outlawed (terrorist) Islamic organisations have been leading the assistance work for the displaced, which not only raises their public standing but also attracts more funds and recruits for them. The army’s use of artillery and airpower has resulted in heavy losses of life and 1

Mr Iftikhar A. Lodhi is a Research Associate at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be reached at isasial@nus.edu.sg.

property. The Pakistan army remains ill-equipped and incompetent for the 21st century guerilla warfare, particularly an urban one.

The results of the Swat operation have so far been mixed. The Pakistan army suffered dozens of casualties while reportedly killing about 1,000 militants. The army has regained control of the Swat district headquarter, Mingora, after two weeks of fighting, though it still faces ‘stiff resistance’ from the militants. The army has also been pursuing militants retreating into the neighbouring areas. A number of the militants killed or captured are reportedly foreign nationals, mainly Afghans, Uzbeks and Arabs. This, on the one hand, indicates the borderless nature of Islamist militancy, particularly in the Afghanistan conflict. On the other hand, it also vindicates the Pakistan army’s allegations that the militancy in Pakistan is fueled by elements in Afghanistan.

It remains uncertain how far and for how long the Pakistan army would be willing to fight the militants. Would it take the battle to its final conclusion? The United States is certainly hoping that it does and has been urging it on.

However, if history is any guide, the Pakistan army may just be content with fighting the militants in the settled areas and could eventually work out a peace deal after regaining control of the main cities and towns. The government will also be sensitive to the heavy civilian casualties. Prolonged fighting is also likely to exacerbate the crisis caused by the large-scale civilian displacement. There seems to be a consensus among Pakistan’s strategic analysts that a swift and decisive victory against the militants in Swat is an imperative.

On the other hand, Washington has been mounting pressure on Pakistan to continue the Swat battle into the FATA region. Pakistan’s President, Asif Ali Zardari, in an interview with the Sunday Times (London) on 17 May 2009, said that the army would continue the fight into the FATA region. However, the very next day, he backtracked from his statement, saying that he was misinterpreted. The Pakistan army spokesperson said that the Swat operation would continue till the army regains full control of all the areas but he did not comment on any plans for a decisive operation in the FATA region.

The Pakistan government has, so far, avoided taking any decisive action in the FATA region, oscillating between haphazard small-scale battles and peace deals. Although, some 100,000 Pakistan troops are deployed in the Pakistan-Afghanistan border regions, they have mainly been ensuring the safe and smooth supplies to the NATO forces in Afghanistan. This has increasingly frustrated the United States which is mired in the Afghanistan quagmire. This has also raised suspicions about the Pakistan army’s ‘willingness’ and ‘capability’ to fight against the militants.

In the past, the United States officials and lawmakers have voiced their suspicions and urged the Pakistan government to ‘do more’. However, the Barack Obama administration has publicly referred to the alleged links between the Pakistan army/the Inter-Services Intelligence (ISI) and the militants. The United States’ Secretary of State, Hillary Clinton, has dubbed Pakistan ‘a mortal threat to the security and safety of [the United States] and the world’. President Obama has warned Pakistan to ‘demonstrate its commitment in rooting out Al-Qaeda and the violent extremists’. Various statements from American officials seem to indicate that the United States would expand and intensify air and ground attacks on the militants in the Pakistan territory.

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The Obama administration’s new strategy (called Af-Pak plan) includes increasing the number of American troops in Afghanistan and exerting more pressure on Pakistan to fight the militants. The American troop surge is likely to result in more militant activity on the Pakistan side of the border. This, in turn, can only be dealt by the Pakistan army or selective American air and ground operations in Pakistan.

The emerging consensus that the militants pose an ‘existential threat’ to Pakistan provides Islamabad with the opportunity to take the Swat battle to the heart of the militancy in the tribal areas. However, it remains to be seen how far Pakistan would be willing (or would be able) to take the Swat operation forward. If the Pakistan army fails, what would President Obama’s next strategy be? oooOOOooo

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ISAS Brief No. 110 – Date: 11 June 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Global Financial Crisis and Cross-border Mergers and Acquisitions in Developing Asia Ramkishen S. Rajan and Rabin Hattari 1 The global outward foreign direct investment (FDI) stock, which stood at US$14 billion in 1970, increased over 140 times to almost US$2,000 billion by 2007. Of importance also is the fact that a large part of the upsurge in global FDI has been due to mergers and acquisitions (M&As) of existing entities, as opposed to establishing an entirely new entity (that is, ‘Greenfield’ investment). According to the United Nations Conference on Trade and Development (UNCTAD), global cross-border M&A deal in 2006 were valued at around US$880 billion, having peaked in 2000 at almost US$1,200 billion. In comparison, there were a negligible number of deals pre-1980 and a relatively modest US$150 billion worth of M&A deals in the early 1990s. Also noteworthy is the growing significance of developing Asia in these cross-border M&As, both as sources of finance as well as destinations of investments. These cross-border M&A flows have deepened the economic integration of developing Asia with the global economy.

M&As involving developing Asia According to UNCTAD data, the Triad (the European Union, Japan and the United States) continue to dominate, both as sources and destinations of M&A deals. However, it is interesting to note that, in 2003-06, the share of the developed economies’ M&A purchases (sales) declined from 96.5 (95) percent in 1987 to 87 (83) percent by 2006. This decline was largely reflected in a rise in developing Asia’s share. The region is home to more crossborder M&As than any other part of the world, in terms of both value (that is, United States dollar amount) and the number of deals.

At a general level, the buoyant global economic conditions and the liberalisation of most of the developing Asian economies in the early- and mid-1990s led to a signficant wave of M&As globally and regionally. However, there was a marked increase in M&A sales in the region following the Asian crisis of 1997-98, with the average of M&A sales jumping threefold from US$7 billion between 1994-96 to US$21 billion between 1997-99. Clearly, 1

Ramkishen S. Rajan is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore and an Associate Professor at George Mason University, Virginia, United States. He can be contacted at isasrsr@nus.edu.sg or rrajan1@gmu.edu.

Rabin Hattari is affiliated with World Bank Group South Asia PREM, Washington, D. C., United States.

This brief is based on ongoing research on mergers and acquisitions by the authors. The views expressed are strictly personal.

this spike in sales was a combination of fire-sales, possibly due to the depressed asset values compared to the pre-crisis period, as well as the simultaneous liberalisation of foreign ownership regulations in crisis-hit Asian economies. Not surprisingly, purchases rose sharply particularly in the three economies hit by the crisis, viz. Indonesia, Korea and Thailand.

Interestingly, Hong Kong also experienced a significant jump in M&A sales. Apart from purchases by outward bound Chinese companies, Hong Kong’s currency board arrangement (CBA) necessitated that all the adjustment to the external shock took place via domestic prices. Thus, it faced a rather deep domestic asset price deflation. In contrast, M&A purchases by developing Asian firms remained subdued between 1998 and 2004, with Singapore being a notable exception. The city state which came out of the crisis in fairly good condition used the opportunity to aggresively expand its overseas purchase of assets both within the region and extra-regionally. M&A purchases from Singapore averaged just above US$1 billion annually in the first sub-period and close to US$8 billion in the second sub-period. These investments were by Singapore companies, foreign multinationals based in Singapore as well as by Singapore’s sovereign wealth funds (SWFs), Temasek and Government of Investment Singapore. Apart from Singapore, Hong Kong and China have been the top developing economy sources of M&A in recent years. India also shows up prominently as a source of funds, a reflection of the more aggressive stance taken by Indian multinationals with regard to overseas acquisitions and building their global footprints (Table 1).

Intraregional Asian M&A Deals For the purposes of examining intra-Asian deals in more detail we draw on the Zephyr database compiled by Bureau Van Dijk Electronic Publishing and consider all bilateral transactions that conform to the 10-percent threshold to be considered FDI (rather than portfolio flows). For the period 2000 to 2007, our dataset shows an annual average of 643 cross-border M&A deals or 14 percent of total global cross-border M&A deals in developing Asia (i.e. most of Asia excluding Japan) which, on average, are worth about US$350 million.

Of these deals, 295 (worth on average close to US$350 million) originate from developed countries, 290 deals (worth on average US$360 million) are from developing Asia themselves, and the rest are from other developing economies in our country samples (63 deals worth on average almost US$250 million). Interestingly, almost 50 percent is from other developing Asian countries (that is, intra-Asia), followed by the United States and the European Union.

Concentrating on just intra-Asian deals which appear rather large, we see that, on average, over our sample period, China has the highest M&A purchases of above US$600 million while Hong Kong has the highest M&A sales of around US$600 million. In the case of FDI data, a signficant degree of round-tripping is observed. In the case of M&As, it becomes clear that something similar is going on in the sense that a number of mainland Chinese companies have acquired Hong Kong companies. Interestingly, however, we do not observe the reverse (that is, Hong Kong purchases of Chinese enterprises). We can see this from Table 1 which highlights the top 50 bilateral M&A transactions in developing Asia. While China’s purchases of asssets in Hong Kong constitute 17 percent of total M&A deals in Asia in 2007, Hong Kong’s purchases of mainland Chinese assets were relatively modest. This may suggest that while most of the FDI from mainland China into Hong Kong has involved purchases of existing entities in Hong Kong, the flows from Hong Kong to China have involved primarily ‘Greenfield’ investments. This helps to further clarify the types of round-tripping taking place

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between the two economies. This also explains the seemingly large share of intra-developing Asian M&A transactions.

Apart from China and Hong Kong, the other leading investors from the region are Singapore, Indonesia, Malaysia, India, Korea and Taiwan. As for M&A sales, most developing Asian companies within our sample period merged or acquired companies based either in Hong Kong or Singapore. This may be because both economies have been regional bases of many corporations. Apart from these, companies in China, Taiwan, Malaysia, India and Korea were important targets for intra-regional investments.

What Drives M&As? In order to better understand the main drivers of cross-border M&As, we estimated a simple model using panel data comprising almost 3,000 source-host country pairs from 2000 to 2007 involving both developed and developing economies. The aim was to develop a relatively parsimonious model which includes commonly-used determinants as well as to focus on specific financial variables. To what extent does lower liquidity and greater financial risk hurt M&A activities globally and regionally? This is clearly an issue of contemporary relevenace in view of the ongoing global financial crisis.

To examine this, we followed the basic gravity-type framework which argues that market size and distance are important determinants of the choice of location of direct investment’s source countries and then augmented the gravity model with available financial variables as well.

The model fits the data quite well. Greater distance between the host and source country tends to lower bilateral M&As. Despite all the hype about the “death of distance” and the “world being flat”, cross-border economic transactions remain hampered by physical distance which may be proxying transaction costs and/or information gaps. As expected, larger countries experience greater purchases and sales of M&As. The level of liquidity in source country positively impacts the level of M&As in the host country. A one-percent increase in the ratio of broad money supply to gross domestic product in the source country is associated with a two-percent increase of M&As to the host country and this result is statistically signficant, signalling that the sources and/or availability of funds are important. Greater real exchange rate variability appears to deter bilateral FDI flows. With regard to the financial risk variables, market risks in the host country proxied by stock market volatility appears to deter M&As to that country (statistically signficant at the 10-percent level), while the result on the liquidity risk’s impact is statistically significant but not so economically signficant. A host country that is more financially open seems to attract more M&A deals flows, this result being highly significant both economically and statistically. Overall, financial variables – liquidity as well as risk – clearly impact cross-border M&A transactions.

Do financial variables impact intra-Asian M&A flows differently from M&A flows globally in general? Our empirical analysis highlights four findings. First, there is some evidence that real exchange rate volatility hurts intra-Asian M&As relatively less than they do global M&A flows (elasticity in absolute terms decreasing by almost 1), though this result is not statistically significant. This may be attributed at least partly to the fact that most deals in the region tend to be denominated in US dollars. Second, the availability of credit in the source country appears to be relatively more important to intra-Asian M&As, with the elasticity rising by 0.6 and the result is somewhat significant statistically (at the 10-percent level).

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Third, intra-Asian M&As appear to be very sensitive to market risks, with the elasticity in absolute terms rising by almost 1. Fourth, financial openness appears to be particularly important in the case of intra-Asian M&As, this result being highly statistically and economically significant. The last two findings are especially striking. All in all, there is evidence that financial variables (liquidity and risk) impact global M&A transactions in general, but especially intra-Asian ones.

As a result, the ongoing global financial crisis is likely to sharply curtail the extent of crossborder M&A transactions. Besides attempting to ease domestic liquidity sharply and taking steps to boost macroeconomic stability in general, at a time of depressed macroeconomic conditions, Asian governments would be well advised to focus on reviewing possible microeconomic and regulatory factors that may hinder cross-border M&A transactions, particularly intra-Asian ones.

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Table 1: Top 50 Bilateral M&A Deals between Asian Countries Source

Host

Value of M&A deals

China Hong Kong Hong Kong Singapore China Taiwan China Singapore Indonesia Singapore Hong Kong China Malaysia Singapore Singapore China Taiwan Singapore Indonesia Malaysia India Singapore India Malaysia Korea China Singapore India Singapore Taiwan China Malaysia Singapore Malaysia Korea Singapore Thailand Singapore Pakistan Singapore Taiwan Hong Kong Indonesia Hong Kong China Korea India Hong Kong Malaysia Hong Kong Singapore Hong Kong Korea Hong Kong Indonesia Korea Vietnam Hong Kong Thailand Hong Kong Malaysia Korea Hong Kong Malaysia Malaysia Indonesia Philippines Singapore Korea Taiwan Indonesia India Singapore Indonesia Singapore Philippines Thailand India Vietnam Singapore Thailand Philippines Hong Kong Taiwan Malaysia India India Korea China Thailand Korea India Thailand Malaysia Singapore Thailand Taiwan China Thailand Korea Source: UNCTAD and Zephyr.

5,698.6 853.5 849.2 844.7 530.1 526.4 443.2 420.7 222.1 210.2 208.2 187.1 184.6 172.9 150.9 142.0 99.8 97.6 97.5 94.8 91.9 91.2 91.1 85.2 73.1 61.6 52.2 36.5 34.6 30.4 25.6 23.9 23.7 23.4 23.4 22.7 21.4 21.0 19.6 16.3 14.5 14.4 13.8 13.6 13.0 11.4 10.0 9.9 9.6 7.2

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In percent of deals to Developing Asia 17.0 2.6 2.5 2.5 1.6 1.6 1.3 1.3 0.7 0.6 0.6 0.6 0.6 0.5 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

ISAS Brief No. 111 – Date: 15 June 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Foreign Bank Entry Reconsidered 1 Ramkishen S. Rajan and Sasidaran Gopalan 2 Until the mid-1990s, the banking systems in most of Asia remained heavily regulated, and barriers to foreign competition were prohibitively high. However, in the aftermath of the East Asian crisis of 1997-98, financial sector restructuring, including the revamp of the financial regulations, has been an important element in the structural adjustment programmes in Indonesia, Korea, Thailand and the Philippines. Broadly, governments in the crisis-hit regional economies have restructured their financial systems by shutting down commercial banks and finance companies, merging some existing institutions and nationalising others, injecting public funds to recapitalised viable banks, putting in place systematic asset resolution strategies, as well as easing regulatory impediments to foreign bank entry. Other countries in the region such as China and India have also taken steps towards financial deregulation.

This brief examines the economic motivations for and concerns with the introduction of greater foreign competition in the banking sector.

Economic Motivations behind Foreign Bank Entry A commonly-held view is that the policy of banking-sector liberalisation, particularly with regard to easing restrictions on foreign bank entry, was imposed on the regional economies by the International Monetary Fund (IMF) and its largest shareholder as a condition of the 1997-98 bailouts. While this perception may be valid in some cases, it is instructive that even countries relatively unimpacted by the regional financial crisis such as China and India have been taking active steps to promote the internationalisation of their respective banking sectors. A proximate cause has been the World Trade Organization Agreement on Trade in Financial Services which requires gradual easing of restrictions on foreign banks.

However, independent of this, there has been a growing realisation among policymakers in Asia and elsewhere that a policy of easing barriers on foreign bank entry may be beneficial to the host countries. Certainly, one of most immediate motivations for undertaking this policy 1 2

This brief is based on a forthcoming Working Paper by the authors.

Ramkishen S. Rajan is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore and an Associate Professor at George Mason University, Virginia, United States. He can be contacted at isasrsr@nus.edu.sg or rrajan1@gmu.edu.

Sasidaran Gopalan is a Research Associate at the Institute of South Asian Studies. He can be contacted at isassg@nus.edu.sg.

in most of the crisis-hit countries was the much-needed funds that foreign investors would bring in to help recapitalise the banking systems. Beyond the financing issues, however, it is becoming increasingly apparent that foreign competition brings with it additional benefits that may not be likely in the case of domestic competition. For instance, there is a growing body of empirical evidence of the benefits of foreign bank entry in emerging economies by way of reductions in cost structures, improvements in operational efficiency, introduction and application of new technologies and banking products, marketing skills and management and corporate governance structures. In relation to this, foreign banks can enhance the quality of human capital in the domestic banking system by importing high-skilled personnel to work in the local host subsidiary as well as via knowledge spillovers to local employees. Customers ought also to benefit in terms of being able to access new financial services. Bank internationalisation may also create domestic pressures for local banking authorities in the host countries to enhance and eventually harmonise regulatory and supervisory procedures and standards, and the overall financial infrastructure to international best practice levels.

The opening up of the domestic banking sector to foreign participation might also encourage some of the local banks to venture overseas to compensate for the loss of domestic revenue sources or more generally because they have learnt from the experiences of their foreign competitors who have entered the local market. Thus, as Singapore’s domestic banking system has become more internationalised since 1997-98, existing local banks in Singapore have both consolidated their domestic operations and also aggressively expanded their operations overseas and have been active participants in cross-border mergers and acquisitions. Singaporean banks, for instance, have purchased significant stakes in banks in India, Indonesia, Hong Kong, Thailand and the Philippines, just to name a few. Similarly, India’s largest bank, the State Bank of India, has been aggressively establishing ventures overseas in recent years just as the domestic market in India has become somewhat more open to domestic private and foreign banks.

Foreign Bank Entry: Source of Stability or Contagion?

Available data on bank assets, loans, deposits and the like offers some indicative evidence that the liberalisation of entry norms for foreign banks has borne fruit in terms of increased penetration of domestic markets in Asia by foreign banks, particularly in the cases of Indonesia and South Korea. However, it is striking that most of Asia continues to lag behind other emerging markets in Central or Eastern Europe and Latin America The relatively low penetration of banks into Asia is consistent with the fact that while Asian economies have been deregulating their banking systems for reasons noted above, they have approached this process more cautiously than their counterparts in East Europe or Latin America. Apart from parochial protectionist arguments, there are actually some valid concerns with the internationalisation of the banking sector that need to be addressed.

For some time, the conventional wisdom has been that a banking system with an internationally diversified asset base may be more likely to be stable and less crisis-prone.

There is evidence, for instance, that the foreign bank branches have lower non-performing loan ratios than domestic banks in Korea, Malaysia and Thailand. In addition, the domestic branches of foreign banks may be able to obtain financing from the foreign head office which could act as a private lender of last resort during a period of financial stress. Conversely, however, there are are rising anxieties in some quarters that foreign banks might be a source of instability and contagion rather than stability. This appears to have been the case in the recent global financial crisis which hit the Eastern European financial system much harder

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than it has the relatively more closed and regulated Asian financial system. Does foreign bank entry, or more broadly, the internationalisation of the financial sector, make the country prone to international capital booms and reversals?

Many casual observers of financial liberalisation fail to make a distinction between “capital account deregulation” (such an external borrowing) on the one hand and “internationalisation of the financial sector” on the other. The latter is broadly defined as the elimination of barriers to entry and discriminatory treatment of foreign competition and cross-border provision of financial services. The General Agreement on Trade in Services recognises the right of countries to maintain sovereignty over prudential and related regulations of all financial firms resident in the country, including capital account controls. It is more likely that capital account openess in the form of cross-border bank lending makes a country relatively more crisis-prone than when a foreign bank establishes a separate entity in the host country and lends domestically, especially if the mode of entry by the bank is in the form of a fully independent subsidiary (as opposed to a branch or representative office). 3 One would also expect that domestic lending via an onshore foreign bank would more likely be in domestic currency, while offshore lending would be in foreign currency (such as the United States dollar), hence leaving the country more vulnerable to currency mismatches and financial crisis (that is, negative balance sheet effects).

Beyond this, the other broad economic justifications for continued protection of the domestic banking system boil down to the usual “infant industry” and “strategic” industry arguments.

The first essentially argues that time is needed for domestic bank consolidation if local banks are to compete effectively against foreign multinational banks which have much larger and more diversified capital bases. The second maintains that the financial sector, with its intricate linkages to the rest of the economy, is “too important to be left in the hands of foreigners”. While the infant industry argument has merit in theory, as is usually the case, the problem in practice is that most infants take too long to grow up and, many a times, they grow old rather than grow up. The other problem with infant industries is that they often form a dependency on the state to protect them from threats and consequently tend to become fairly inefficient and it is usually the consumer who usually loses out at the end. With regard to the strategic industry argument, one could turn it on its head and suggest that, in view of the importance of the banking and overall financial sector to the rest of the economy and society, everything possible must be done to ensure it is as efficient as possible, and that includes welcoming foreign bank participation. In any event, as with most other industries, the infant and strategic industry arguments appear more valid as grounds for moderating the pace and possibly even the extent of foreign bank entry, rather than opposing the policy in its entirety.

However, one outstanding concern of deregulating the domestic banking system that has gained greater credence recently is that it could weaken the ability of the central bank to use “moral suasion” in times of a crisis. For instance, the ongoing financial crisis has made apparent the lack of effectiveness of conventional monetary policy, due in part to the fact that liquidity infusions by many central banks into the domestic financial system have remained clogged up without being passed on to the real economy in terms of bank lending (hence resulting in a sharp decline in the money multiplier). However, this has been somewhat less 3

This said, much more research is needed on the relative costs and benefits of branches versus subsidiaries, the latter being relatively independent from the parent. For instance, are the former more likely to be supported by their parent in the event of a crisis in the host country but also more likely to “cut-and-run” in the event of a crisis in the source country or a global crisis?

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of a problem is some Asian economies such as India and China with large public sector dominated banks (de facto or de jure) as the central banks in these countries have been able to “cajole� the domestic commercial banks to lower lending rates and increase lending to the private sector. There is also a belief in some quarters that large foreign multinational banks can be difficult to supervise given their complex structures.

The quasi-nationalisation of some major financial institutions in the United States has only fuelled concerns in parts of Asia and elsewhere on allowing unmitigated denationalisation of the banking system of any kind, particularly foreign bank entry. In view of this, it is likely that Asian economies will take steps to ensure that the domestic financial institutions continue to play a crucial role in the financial system. However, it should be reiterated that as long as the internationalisation of the banking sector is properly managed, fears that no domestic financial institutions may survive following foreign bank entry are exaggerated.

Indeed, cross-country evidence suggests that the first-mover and informational or familiarity advantages enjoyed by domestic banks for some business often limits the extent of inroads that foreign banks can make, at least in the short run. This said, it is important to ensure that foreign investments do not largely originate from a single source country as this might actually increase rather than decrease instability.

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ISAS Brief No. 112 – Date: 1 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

America’s New Approach towards Pakistan Shahid Javed Burki 1 America’s sometimes on and sometimes off relationship with Pakistan is set to change. 2 This is likely to happen in three significant ways. The legislations that have worked their way through the two chambers of the United States Congress will place the structure of AmericaPakistan relations on new foundations. The roller-coaster ride will end and greater certainty will be introduced in the way Washington conducts business with Islamabad. The bills that have cleared the House of Representatives and the Senate promise a long-term United States commitment to Pakistan. The House version has a five-year time horizon during which assistance will be provided at an annual rate of US$1.5 billion. In the Senate version, the commitment is for the same annual amount but the time frame is open-ended. The two bills will be reconciled by a conference committee that will be established by the two chambers.

United States’ President Barack Obama has indicated that he wants a deep and durable relationship with Pakistan. He is likely to sign the aid to Pakistan act whenever it emerges out of the Congress which will probably be in September 2009 after the summer recess. 3 The second significant departure from past practice is the clear division – each with its own explicit set of objectives – between economic and military aid. More conditions will be attached to the former; far fewer to the latter. In fact, the Senate version of the bill is practically conditions-free while the bill passed by the House has several conditions attached to the timing of disbursements as well as their amounts. The House bill reflects the work of the various lobbies that have an interest in the outcome. The most active one in this respect is the Indian lobby, made up of non-resident Indians (NRIs), which has emerged as a well organised and well financed endeavour that seeks to advance the perceived interests of the homeland. This lobby worked effectively in getting the Congress to support the administration of President George W. Bush on the nuclear agreement it signed with the Congress party government headed by Prime Minister Manmohan Singh. I will return to the role played by the diasporas in the American political system a little later in this article.

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Mr Burki is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. Mr Burki was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at isassjb@nus.edu.sg.

Pakistan’s relations with the United States have been the subject of academic interest on the part of some of the American diplomats who served in South Asia. The most recent contribution to this genre is Dennis Kux, Pakistan 1947-2000, Baltimore, Md. Johns Hopkins Press, 2002.

See President Barack Obama’s interview with the Washington-based correspondent of Dawn, Pakistan’s premier English language newspaper, Anwar Iqbal, “Beat extremists you can, says Obama”, Dawn, 21 June 2009, pp. 1 and 12.

The third important difference between this approach and those followed in earlier periods is that it is being negotiated with a civilian government in Pakistan rather than with an administration dominated by the military. The three previous periods of large American involvement with Pakistan was when the military was in charge of politics. This was the case during the periods of Ayub Khan (1958-69), Zia ul Haq (1977-88) and Pervez Musharraf (1999-2008) when large amounts of American assistance flowed into the country. A significant proportion of this was used for military purposes. It will be different this time.

Neither of the two bills will actually spend the money – they authorise the maximum spending limit and specify the key purposes and conditions of that spending. The actual spending levels and possible further conditions will be determined by the relevant subcommittees of the Appropriations Committee in each of the two chambers and the final Appropriations Bill. It is the sub-committee process that will be subjected to a great deal of pressure by the interested lobbies active on the Hill.

The Senate version of the bill has the support of the White House. In its original formulation, it was originally proposed by then Senators Obama, Joe Biden and Hillary Clinton. All three are now prominent members of the new administration. The bill passed the Senate by a unanimous vote, a relatively rare occurrence in the American legislative process. The House bill was approved by a narrow margin, reflecting the fact that some of the representatives, more subject to the pressures from their constituents, were not convinced about the form and scope of the aid that was being offered to Pakistan by the United States.

The Senate version would triple non-military aid to Pakistan to US$1.5 billion a year as a long-term pledge to the people of Pakistan. The title given to the bill – the Enhanced Partnership with Pakistan Act of 2009 – reflects the overall objectives of the senators. The bill authorises US$7.5 billion over the next five years (2009-13) with hortatory language for an additional five-year period. It clearly delinks military from non-military aid. In the past, security assistance overshadowed development aid. The Pakistani military could bypass civilian authorities to focus resources provided on its own institutional development. Rather than locking in an amount now for military aid which might not be in line with rapidly changing Pakistani capabilities and commitment, the bill buys flexibility for the United States administration by leaving the quantum and content of military support to be determined on a year-by-year basis. This will provide leverage to the United States in getting Pakistan into line with the American objectives concerning the struggle against Islamic extremism.

Several provisions of the bill focus on the various aspects of social development in Pakistan.

It specifies that funds to be provided by the United States will be used for the projects that benefit the people of Pakistan. There will be money (US$100 million) for just and democratic governance. This includes the development of independent judiciary, political pluralism, the rule of law, human rights, independent media, transparency and accountability of government, anti-corruption efforts, and countering the spread of drugs and the trade in drugs.

Achieving “economic freedom” is specified as a separate category of assistance. It includes supporting policies and programmes aimed at achieving sustainable economic growth by using natural resources and economising the use of energy and water – both under great pressure and getting scarce in the case of Pakistan. The United States funding will support employment generating activities in the country and promote worker rights. Washington, in developing the programmes and projects for its support, will give emphasis to investing in

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people, particularly women and children. And there will be money for public, private, secondary and higher education; microfinance; food security and agricultural development; and public health, including clinics and hospitals.

The United States has not implemented such a comprehensive development programme in Pakistan since the early 1960s when it had a large presence in the country, including a large office manned by the Agency for International Development (AID). A large multi-storey building was constructed in the heart of Islamabad to house the AID staff. It was vacated in the 1990s. It is not clear how Washington will manage the new programme in Pakistan’s current circumstances when, for security reasons, family members of American personnel are not allowed into the country and their movement is highly restricted. It is not only the United States that has imposed these restrictions. The International Monetary Fund, for instance, with a large programme in place, is monitoring it by having the Pakistanis travel to Dubai for meetings.

The final shape of the United States assistance to Pakistan act will be determined by the political process in which the ethnic lobbies will play an important role. It is, therefore, appropriate to discuss the political roles of the various South Asian diasporas in the United States.

South Asia now has a large number of people living and working in several parts of the world. 4 Formed over several decades, these diasporas now have about 40 million people – 23 million from India and 16 million divided almost evenly between Bangladesh and Pakistan. 5 The other countries in the region, including Afghanistan, have a million people living outside their borders in the developed world. The geographic spread of the Indian diaspora is much wider than that of the two other countries.

Given the size of the diasporas and their economic strength, it is not surprising that they have begun to exert their political weight. The Indians have considerable political presence in all the continents of the world while the Pakistani community is better organised in the United States. It is in the United States that the economic presence of the Pakistani community is considerable. Numbering about a million people in Canada and the United States, the immigrants from Pakistan have a combined income of US$50 billion, a savings rate of US$10 billion a year and economic assets of about half a trillion dollars. Some of this income and some of these assets are being put to use for both economic and political purposes. There are some two and a half times as many NRIs as the Pakistani community. And their assets and incomes are proportionately larger. Unfortunately, the two diasporas often clash as they seek to influence the politics of the United States. This has happened in particular with reference to the United States’ approach towards Kashmir and is now happening in the case of the design of American assistance to Pakistan.

It is important for the two diasporas to recognise that the aid to Pakistan legislation as drafted by the Senate is in the interest of both countries since it focuses on the economic and social 4

5

The subject of what I called “diaspora economics” was discussed by me at some length in my most recent book on Pakistan. See Changing Perceptions, Altered Reality: Pakistan’s Economy under Musharraf, 19992006, Karachi, Oxford University Press, 2007.

Several estimates are available of the sizes of the various diasporas. Since no proper censuses have been conducted by the major labour exporting and labour importing countries, there are considerable differences in the estimates. For one set of numbers, see Khalid Koser, “Why immigration matters”, Current History, Vol. 108, No. 717, pp. 147-153.

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development of the country. The main purpose of the United States, as reflected in the draft bill, is to contain the spread of extremism in Pakistan. That should also be the Indian concern.

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ISA S Brief No. 113 – Date: 1 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Booms and Busts in Private Capital Flows to Emerging Asia since the 1990s 1 Ramkishen S. Rajan 2 A decade or so after the financial crisis that hit Asia in 1997-98, the region once again experienced a severe capital account shock in 2008-09. How different has this boom and bust cycle of international capital flows been from the previous one? This brief examines the balance of payments dynamics in emerging Asia to understand the magnitude and types of private capital flows to and from the region between 1990 and 2008. 3 Dynamics of Private Capital Flows in Emerging Asia since the mid 1990s The search for higher returns led to a surge in foreign capital inflows into emerging Asia in the first half of the 1990s, averaging about 2.4 percent of the region’s gross domestic product (GDP), peaking at almost four percent of GDP by 1996 (Figure 1). 4 Structural or trend factors leading to an influx in global capital flows to emerging markets included rapid improvements in telecommunications and information technologies; the proliferation of financial instruments, the institutionalisation of savings; and the internationalisation of investment portfolios (mutual and pension funds) in search of opportunities for risk diversification. The attractive growth prospects, along with stable exchange rates, sound domestic macroeconomic policies (actual or perceived) and progressive financial and capital account deregulation in many of the (East) Asian economies were forces pulling capital flows specifically into the region in general at that time. In terms of the types of capital flows, while foreign direct investment (FDI) grew steadily during the first half of the 1990s, and portfolio flows (bonds and equities) were more volatile, there was a notable jump in the “other” net private capital flows in 1995 and 1996. This component of capital flows included net shortterm lending by foreign commercial banks as well as foreign currency deposits and trade credits.

The subsequent loss of confidence in these economies resulted in a massive turnaround in private capital flows in 1997, that is, the boom was followed by bust. The data reveal that 1 2

3 4

This brief is based on ongoing work on international capital flows in the Asian region by the author.

Ramkishen S. Rajan is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore and an Associate Professor at George Mason University, Virginia, United States. He can be contacted at isasrsr@nus.edu.sg or rrajan1@gmu.edu.

We do not discuss official capital flows such as the International Monetary Fund (IMF) lending.

As defined by the IMF, emerging Asia encompasses China, India, the newly industrialising economies of Hong Kong, South Korea, Singapore and Taiwan, and the ASEAN-5 of Indonesia, Malaysia, Philippines, Thailand and Vietnam.

emerging Asia experienced a sharp reversal in net private capital flows in 1997 and 1998 – net private capital flows dropped by more than half in 1997 (compared to 1996) and then actually turned into outflows in 1998. This reversal was primarily due to the “other” net private capital flows. This component, which peaked at 1.2 percent of GDP in 1996, turned into net outflows by 1998. These outflows accelerated thereafter to -4 percent of GDP in both 1998 and 1999 as international banks became unwilling to roll over existing short-term debts to the region. This sudden reversal in bank lending is often presented as providing strong evidence in support of a bank panic model. However, a less emphasised feature of this period was the decline in portfolio flows (equities plus bonds) following the initial bank panic as investors also tried to scale down their exposures in the region, resulting in a marked slowdown in such flows. In contrast, FDI flows remained remarkably stable throughout the period under consideration. 5 In fact, FDI inflows experienced a jump up in 1998 and 1999, likely driven by fire-sale of assets in the region as well as greater inflows to China.

Looking at total net private capital flows, the region remained relatively unattractive to foreign capital between 2000 and 2002 for various reasons. In 2000, the reason was primarily due to sustained outflows in the other investments component as the deleveraging process in the region persisted from the previous two years. Despite the fact that these bank outflows finally abated and turned into inflows in 2001 and 2002 – as many regional economies, including Korea, China and some ASEAN (Association of Southeast Asian Nations) economies successfully issued bonds internationally6 – overall net private inflows still remained rather modest, largely because of the information technology-induced global downturn in 2001 which led to sharp portfolio capital outflows as well as a slowdown in FDI inflows from its 1998-99 peak.

By 2003, after a prolonged period of restructuring and deleveraging, emerging Asia finally recovered from the Asian crisis of 1997-98. While there was a resurgence in net capital inflows to the region between 2003 and 2005, total net private capital inflows were still well below the pre-crisis period (1990-96) average. This is true even if one excludes the massive booms in 1995 and 1996 where one might reasonably argue there was somewhat of an artificial surge in “other investments” to Thailand and other economies, driven by the “carry trade” phenomenon (that is, borrow in low interest countries such as Japan and invest in higher yielding assets in Thailand). The primary reason for this difference in the magnitude of total net capital flows in the two periods appears to be because of the relative slowdown in net portfolio inflows in the post-crisis period compared to the pre-crisis one. 7 This is despite the surges in equity inflows to such countries as China and India. What was the reason for this relatively disappointing performance in net capital flows to emerging Asia as a whole?

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6

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Three caveats should be noted. One, Indonesia was the only exception, FDI having collapsed due to significant socio-political uncertainties. Two, the implicit assumption is that there is little or no relationship between the various types of capital flows. Three, there appears to have been a shift in the type of FDI from the Greenfield to mergers and acquisitions.

While not readily apparent from the data, it is generally reported that the average maturity of bank loans has lengthened. This, along with the reserve stockpiling, has resulted in the regional economies experiencing declines in short-term debt to reserves and short-term debt to external debt ratios. Another important characteristic of debt inflows to Asia is the growing share of marketable debt instruments (that is, bonds).

This is a result of a deliberate decision by these economies to develop and upgrade their bond markets as a means of diversifying their financial systems and instruments.

Portfolio flows also appear to have become far more volatile post-Asian crisis.

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Asia as a Source of Capital To explain the foregoing seeming conundrum, one needs to go behind the net private capital flows data to consider gross private capital inflows and outflows. It is readily apparent from Table 1A that across all types of capital, the region received more gross inflows post-crisis compared to the pre-crisis period. Notably, however, the region also experienced much greater gross outflows of all types of capital post-crisis. As is clear from Table 1B, these outflows were particularly large in the case of portfolio flows as well as other investments (especially in the form of foreign currency deposits). Clearly some of these outflows might have been recycled intra-regionally, while the rest were invested outside the region.

Importantly, despite these relatively lower capital account surpluses in the region as a whole, 8 emerging Asian economies accumulated foreign exchange reserves at record levels (accounting for about half of the global total of US$6,500 billion), due largely to the persistent current account surpluses run by many of the East Asian economies (Table 2).

While the bulk of the Asian central banks have been channeled into US government securities (typically United States Treasuries), since the mid-2000s, many other capital exporting developing countries consciously began to look for more systematic ways of raising returns on their international reserves on a longer-term basis. Some did so by creating Sovereign Wealth Funds (SWFs) which are broadly designated pools of assets owned and managed by governments and predominantly (but not exclusively) invested globally (Table 3). 9 More aggressive outward investments by emerging Asian economies in 2006 and 2007 is apparent from the data, especially in the case of portfolio flows (Table 1B).

The Global Financial Crisis of 2008-09 and Asia While data are not available, the wave of gross outflows from Asia likely intensified in 2008 as the initial response of some Asian investors, especially SWFs, was to invest aggressively in selected United States and European financial and related assets believing them to be grossly underpriced. However, as the crisis worsnd and the SWFs were being faced with significant capital losses on their investments in the developed world with the collapse of major financial institutions and overall asset prices, these gross outflows from Asia likely tapered off if not reversed completely. However, the heightened risk aversion worldwide, particularly following the Lehman Brothers collapse and near collapse of AIG in September 2008, also led to an abrupt about-turn in gross capital inflows from all emerging economies.

Looking at net capital flows data (Figure 1), while the 1997-98 bust was due largely to the reversal in short-term bank loans, the crisis in 2008-09 has been driven somewhat more so by sharp reversals in portfolio flows, though inevitably there were also retrenchments by many international banks in response to the financial stresses faced in their headquarters in the United States and Europe. 10 Asia has clearly not been buffeted by the global economic slump and dislocations. However, going forward, the large international reserve holdings in Asia, the region’s relatively more flexible exchange rates, the lower levels of leverage especially with regard to external shortterm foreign currency debt in the region, along with stronger balance sheets of Asian 8 9

10

Individual countries such as India and Korea ran current account deficits.

While SWFs have been around since the 1950s, they have only recently attracted much public attention, especially with the creation of the China Investment Corporation (CIC) in September 2007.

The boom and bust faced by some Eastern Europe economies in 2008-09 shares many similarities with East Asia in 1997-98 (that is, the surge in short-term bank lending and subsequent reversal and economic collapse).

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corporates and financial institutions will work in tandem to ensure the capital account shock will not have long-lasting effects on Asia this time unlike in 1997-98. Positive signs – socalled green shoots – are already emerging, with the thawing of credit markets, declining risk aversion, stabilisation of output and trade, and recovery in international capital flows into the region, especially for countries such as India and Korea.

It looks likely that the economic recovery in emerging Asia will outpace the rest of the world.

However, given the prolonged structural changes and deleveraging that must happen in the United States and Europe, if emerging Asia is to hope to return to a period of sustained robust growth, it must place greater emphasis on generating domestic and regional demand. This in turn necessitates significant boosts in consumption and investment which will almost inevitably mean a decline in regional current account surpluses and possibly a recycling of a greater share of external surpluses to the rest of the region. Promising investment opportunities in the region abound, with fast-growing Asian countries such as India needing massive infusions of new investments in infrastructure and supporting facilities over the coming years.

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Figure 1: Net Private Capital Flows to Emerging Asia,1 1991-20102 (percent of GDP)

Notes: 1 “Emerging Asia� refers to China, India, the newly industrialising economies of Hong Kong, South Korea, Singapore and Taiwan, and the ASEAN-5 of Indonesia, Malaysia, Philippines, Thailand and Vietnam.

2 2009 and 2010 are projections.

Source: IMF (2009). Regional Economic Outlook -- Asia and Pacific Global Crisis: The Asian Context, Washington, DC.

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Table 1A: Gross Private Capital Inflows to Asia and other Emerging Economies, 19902007 (US$ billion)

Table 1B: Gross Private Capital Outflows from Asia and other Emerging Economies, 1990-2007 (US$ billion)

Notes:

“Other sectors” comprises non-financial corporations, insurance companies, pension funds, other nondepository financial intermediaries, private non-profit institutions and households.

1 Comprises the regions below plus Russia, Saudi Arabia and South Africa.

2 A minus sign indicates an increase.

3 China, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand.

Source: D. Mihaljek (2008). “The Financial Stability Implications of Increased Capital Flows for Emerging Market Economies,” Bank for International Settlements, mimeo.

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Table 2: Global Current Account Balances (US$ billion)

Notes:

Based on 34 economies tracked by the IIF. Emerging Asia here is limited to China, India, Indonesia, Malaysia, the Philippines, South Korea and Thailand.

Source: Institute of International Finance (2009). “Capital Flows to Emerging Market Economies,�

Washington, DC, 11 June.

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Table 3: Estimated Size of Largest SWFs, End 2007 (billions of US dollars) Country I. Oil and Gas Exporting Countries UAE Norway Saudi Arabia1 Kuwait Russia

Name of Fund

Assets (range) Lower Upper

Libya Qatar Algeria USA (Alaska) Brunei Kazakhstan Malaysia Canada Nigeria Iran Azerbaijan Oman Timor-Leste Venezuela Trinidad & Tobago

Abu Dhabi Investment Authority Government Pension Fund-Global No designated name Reserve Fund for the Future Generations Reserve Fund National Welfare Fund Libyan Investment Corporation State Reserve Fund / Stabilisation Fund Reserve Fund / Reserve Regulation Fund Alaska Permanent Reserve Fund Brunei Investment Authority National Fund Khazanah Nasional BHD Alberta Heritage Savings Trust Fund Excess Crude Account Oil Stabilisation Fund State Oil Fund State General Reserve Fund Petroleum Fund of Timor-Leste FIEM-Macroeconomic Stabilisation Fund Revenue Stabilisation Fund

250 380 289 213 125 32 50 30 43 40 30 21 19 16 11 9 2.5 2 1.4 0.8 0.5

875 380 289 213 125 32 50 50 43 40 30 21 19 16 11 9 2.5 2 1.4 0.8 0.5

II. Emerging Asia Singapore China Singapore Korea Taiwan, P.O.C.

Government Investment Corporation China Investment Corporation Temasek Holdings Korea Investment Corporation National Stabilisation Fund

100 200 108 30

330 200 108 30

15 15 III. Other Countries Australia Australian Future Fund 54 54 Chile Economic and Social Stabilisation and Pension Funds 16.4.

16.4 Botswana1 4.7 4.7 Kiribati 0.4 0.4 Total 2,093 2,968 Memo: Estimate Pension Funds 28,500 Mutual Funds 27,300 Insurance Funds 19,100 Hedge Funds 1,900 Private Equity 800 Source: Based on International Financial Services London (IFSL) (2008). “Sovereign Wealth Funds 2008,” IFSL Research, April and International Monetary Fund (IMF) (2008). “Sovereign Wealth Funds – A Work Agenda,” 29 February.

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ISA S Brief No. 121– Date: 3 August 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Inflationary Pressures in the Indian Economy 1 S. Narayan 2 The recent policy statement of the Reserve Bank of India (RBI) signifies a departure from the stance that it had been adopting in the last three quarters. There are three elements that are different. First, in leaving key policy rates unchanged, it has acknowledged that liquidity is not an obstacle to growth at present, but banks are showing a reluctance to lend. Second, by acknowledging that the growth of money supply at 20 percent is high and needs to be brought down, 3 the RBI is concerned about money growth. Third, in cautioning about inflationary pressures, the RBI is setting its sights on tightening monetary policy in the near term. All these have significant implications for the Indian economy.

The estimates for growth have been increased to 6.5 percent and, even in spite of the monsoon shortfall, the RBI expects that growth will pick up. In the first quarter of the year, most of the manufacturing companies produced good results and the cement, petrochemicals and fast-moving consumer goods sectors have reaped healthy profits. This is in part due to the fact that input costs have come down as commodity prices internationally are ruling at levels far below the peaks of 2007. At the same time, the RBI is not able to pitch for a higher growth rate, for it sees India as a supply-constrained economy and does not see adequate growth in investment portfolios to ease these constraints.

The consequence of these numbers is that if growth is around 6.5 to 7 percent, and money growth is close to 20 percent, the RBI appears to be worrying about inflation. While the RBI’s rhetoric can be interpreted in many ways, its higher inflation, output and money growth forecast can be argued to represent a relatively clearer and more objective signal of its concerns over inflationary pressures ahead. The RBI lifted its inflation forecast for endMarch 2010 to five percent (year-on-year) from four percent and now sees an upside bias to its FY2009 (ends March 2010) growth forecast of six percent (its forecast was ‘around’ six percent earlier). It also judges that the risks to its inflation forecast lie on the upside. It also lifted the indicative targets for broad money to 18 percent from 17 percent, a direct consequence of greater debt monetisation. 4 First, we note that the RBI’s inflation forecast 1

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The author would like to acknowledge the significant reference to and contributions of the DBS Group Research Report, Economics – India: Turning Hawkish, dated 29 July 2009, in the preparation of this brief.

Dr S. Narayan is Head of Research and Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He is the former economic adviser to the Prime Minister of India. He can be reached at snarayan43@gmail.com.

The RBI’s Governor, Dr D. Subbarao, said in press interview on 28 July 2009 that 18 percent is a projection and not a target.

DBS Group Research, Economics – India: Turning Hawkish, 29 July 2009, p. 1.

implies a sequential rate of rise in prices of approximately five percent (MoM, Saar) from July 2009 to March 2010. In other words, inflation would already be higher than the ‘range of 4.0-4.5 percent’ that the RBI wants to ‘condition perceptions’ to. 5 The statement reflects a shift in the RBI’s stance from supporting growth to closely watching inflation.

In any case, the RBI’s task of simultaneously managing the government’s borrowing programme and inflation may be increasingly challenging in the months ahead. Going by new inflation projections (released last week), sequential wholesale price index inflation should average five percent (MoM, Saar) from August 2009 to March 2010 and inflation should cross the RBI’s comfort level of five percent (year-on-year) by February 2010 and reach six percent (year-on-year) by March 2010. 6 This is also higher than the RBI’s new forecast of inflation hitting five percent (year-on-year) by March 2010. This may force the RBI to raise rates as early as October 2009 and take other steps to withdraw liquidity.

Second, if we understand the forecasts with the help of the Quantity Theory of Money equation, gross domestic product (GDP) growth of six percent and broad money growth of 18 percent point to inflation much higher than five percent. The equation spells that money has to be either chasing goods (that is, facilitating a higher transaction volume of output) or chasing prices higher. If money growth exceeds GDP growth by this margin, it is itself likely to be inflationary. 7 Third, an interesting feature of the revised forecasts is that the RBI is forecasting inflation rising to five percent even as it sees growth staying below the seven to eight percent widely seen as potential growth. It is also concerned about inflation rising in the months ahead ‘even without any major supply shock’. Rather, the RBI has attributed India’s constrained growth to supply side factors in the statement, ‘Notwithstanding the temporary hiccups of the crisis period, India is not a demand-constrained economy; it is a supplyconstrained economy’. 8 Finally, if risks of inflation lie to the upside of five percent as the RBI noted, it does suggest that the balance of risks has shifted towards controlling inflation.

Inflation at five percent is not low, and upside risks to five percent inflation naturally tilts the balance of risks towards inflation. It is important to note that monetary policy cannot sustainably lift growth towards the seven percent forecast of the government. Therefore, the RBI’s (still low) growth forecast matters less than its (rising) inflation forecast. 9 The rhetoric also clearly reveals the RBI’s discomfort towards inflation. For example, the RBI noted that its immediate challenge is to ‘balance between the short-term compulsions of providing ample liquidity and the potential build-up of inflationary pressures’.

The other evidence of the shift in stance came in the macroeconomic review released a day ahead of the policy meeting. In the report, the RBI implicitly laid out conditions it believes are necessary for inflation to remain moderate – conditions that are not actually fulfilled and unlikely to be easily fulfilled. It said, ‘Inflationary pressures may remain moderate if the protracted global recession leads to dampened commodity prices, agricultural growth remains unaffected despite the delayed progress of monsoon, and the accommodative monetary policy stance returns to normal levels.’ This is just another way of revealing that it expects inflation to rise if it does not hike interest rates. 10 That said, it remains to be seen if the government’s borrowing programme (and the debt monetisation) makes it difficult for the RBI to hike 5 6 7 8 9 10

Ibid, p. 1.

Ibid, p. 2.

Ibid, p. 2.

Ibid, p. 2.

Ibid, p. 2.

Ibid, p. 3.

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interest rates and raise the cash reserve ratio early. There may be resistance to hiked interest rates until it is obvious that inflation is rising fast, as growth is far from the nine percent rate that the government desires and the seven percent rate that it is targeting. 11 Moreover, the RBI is still supposed to buy back around Rs 460 billion of government debt before September 2009, funding almost half of the remaining amount that the central government borrowed in the first half (April-September) of the fiscal year. This would lead to a further increase in liquidity – contrary to attempts of reducing monetary accommodation a couple of months later. Hence, it may be increasingly challenging for the RBI to simultaneously manage inflation and the government’s borrowing programme. 12 In India’s case, the dual mandate of the RBI to support growth and control inflation, and the lack of clarity on whether output is running above or below potential at any point, has meant that the RBI tends to move rates only after it sees inflation rising. This is what happened in 2008, and will probably happen later in 2009 or early 2010. Going by projections (released last week), inflation should cross the RBI’s comfort level of five percent (year-on-year) by February 2010 and reach six percent (year-on-year) by March 2010. 13 There is another factor that is likely to exacerbate inflationary pressures. Additional allocations for the National Rural Employment Guarantee programme this year are substantially higher compared to last year. Several good monitoring systems have been put in place to ensure that leakages are reduced. There is secondary evidence that the money is reaching those who need it – there is an outcry in the media that the programme is artificially increasing wage rates and thus putting a pressure on manufacturing costs. More importantly, more money in the hands of the poor means that, in instances where they were having one meal a day, they would now be able to have two or at least a meal and a half a day. However, the programme does not focus on agriculture or food production and, hence, there is little or no impact of the programme on agricultural output. This has had an effect on food prices.

While there are adequate stocks of rice and wheat in the public distribution system as well as in the open market, there is pressure on other food articles, most importantly, pulses (these are an important ingredient in the Indian food basket), meat, sugar and vegetables. The consumer price index increases hover around 10 percent on a year-to-year basis and there is likely to be greater pressure on the food articles component of this index. The poor monsoon is also likely to exacerbate this impact. The next few months will see a sharp increase in the prices of food articles. Coupled with the inflationary pressures mentioned previously, it is likely that there may be a fresh bout of high inflation, forcing the government to rein in monetary expansion. This is likely to constrain expectation of growth in the coming year.

Finally, the buoyancy in the financial markets appears to be due to the good first quarter results of corporates just published, coupled with the considerable liquidity available in the economy. The Asian stock markets have recovered to some extent and there is a flow of funds into the Indian markets. However, it is unlikely that this buoyancy will be sustained if there is a threat of high inflation and monetary contraction leading to contraction in growth.

The next few months appear to be quite crucial for the Indian economy.

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Ibid, p. 3.

Ibid, p. 3.

Ibid, p. 3.

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ISA S Brief No. 114 – Date: 2 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Pakistan’s Taliban Crisis – Savaging or Salvaging the State?

Rajshree Jetly 1 Barely 18 months from its historic democratic elections of February 2008, Pakistan is mired in a war against domestic religious extremists. The country’s civilian political leadership and administration is still struggling to find its feet. Its relations with India have also deteriorated with the terrorist attacks in Mumbai by suspected Pakistan-based militants late last year. The increased Unites States military activity within Pakistani territory, especially its drone attacks against suspected Al-Qaeda bases, have added to the pressure on Pakistan’s government visà-vis its domestic constituency. Religious extremism poses a veritable threat to Pakistan from inside and out.

Despite the gloom, there are some signs of hope, as the Pakistani government has finally decided to match rhetoric with action and has launched an all-out military campaign against the Islamist extremist groups within Pakistan. This committed action by Pakistan has given it renewed credibility and the moral authority to seek domestic and international support. The majority of the civilian population in Pakistan has been outraged by the excesses of the Taliban and are supportive of the government’s actions while the international community, especially India and the United States who have been victims of Pakistan-based terrorist organisations, clearly want to see the Taliban and other extremist groups suppressed, if not altogether eliminated, for obvious reasons.

It should be remembered that Islamic fundamentalism and religious extremism are relatively recent phenomena in Pakistan, having been spawned during the Afghan war in the late 1970s and exacerbated by the post-9/11 politics. However, Pakistan is not without blame for this development as it has allegedly been supporting militant organisations such as Jaish-eMuhammad and Lashkar-e-Taiba in its proxy war against India over Kashmir. There has also been clear evidence that Al-Qaeda had many of its training camps in Pakistan and Pakistani madrasas have been churning out young recruits for these terrorist groups. While these terrorist groups have long operated on Pakistani soil, it was only recently that they turned against Pakistan itself by carrying out suicide attacks and bombings.

As the excesses of the extremist groups slowly became evident, highlighted recently by the much publicised videos depicting the flogging of a woman and beheading of captured security personnel, public sentiment turned against the Taliban. The Pakistani state also felt that it had no choice but to take action. A full scale war ensued in Swat and other parts of the 1

Dr Rajshree Jetly is a Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. She can be contacted at isasrj@nus.edu.sg.

Malakand division, including Dir and Buner. The army has now pushed on to South Waziristan in the Federally Administered Tribal Areas in a determined effort to strike at the heart of the Taliban by going into the territory controlled by Baitullah Mehsud, the lynchpin of Tehrik-e Taliban-Pakistan.

This is a difficult war for Pakistan to win for many reasons. First, its army is not adept at this kind of domestic insurgency and there is a great moral barrier to fighting against fellow Pakistanis and fellow Muslims. In fact a number of senior officers are from the tribes with whom the army is fighting. Second, this is a war where all the collateral damage will be domestic – Pakistani civilians and Pakistani property will be the casualties of this war. Third, the scale of this war has created an unprecedented humanitarian crisis with over three million internally displaced people. Although the government has some experience in dealing with this kind of situation with the earthquake of October 2006 in Kashmir and also the Northern areas where an equal number of people were displaced and subsequently resettled, it faces a serious challenge of peaceful resettlement. There is a real risk that desperation, resentment and fear may result in these internally displaced people becoming prime candidates for recruitment by extremist groups. Thus, the crisis will savage itself.

However, with every crisis comes opportunity and Pakistan must seize the moment to salvage itself. Here, there are some positive signs. The state has taken the very difficult, albeit very correct, step in deciding to fight the Taliban rather than succumb to their demands, as it initially did in Swat. Pakistan’s political leadership has also shown maturity in the face of this real threat and has adopted a cooperative and constructive approach. The coming together of leaders of 43 parties and religious organisations for a meeting convened by Prime Minister Yusuf Raza Gillani to seek a consensus on the security operation highlights the willingness of every stakeholder to stand together to defeat a common enemy.

This unequivocal political support for the military action is critical for the army. Unlike its usual ventures on the border, which are guaranteed to win popular support amongst Pakistanis, this war could alienate the army from a significant segment of the populace.

Perhaps the most important development from the strategic and symbolic points of view is the support for the counter-insurgency campaign from many religious clerics and scholars who have denounced the Taliban and supported the military action. Ironically, the Taliban have succeeded in doing the impossible in Pakistan – they have brought together the competing political parties, the religious leaders and the army, and strengthened the resolve of the general public in rejecting extremism and supporting moderate democratic leadership.

It should not be forgotten that the basic ethos and religious outlook of the majority of the people of Pakistan are moderate. This is evident in the political sphere where the Islamic parties have seldom secured more than three to four percent of the votes on their own.

In terms of foreign policy implications, Pakistan, the United States and India have to set aside historical tensions and strategic posturing and do what it takes to ensure Pakistan overcomes this crisis and eliminates religious extremism and related terrorist activities. Coincidentally, both India and the United States have just emerged from general elections where Prime Minister Manmohan Singh and President Barack Obama won resounding victories respectively. Both leaders are widely admired and respected, which will allow them to do what is right and not what is politically expedient.

The Congress government of India is in a much stronger position than before the election and should take advantage of this political strength to extend a genuine hand of friendship to

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Pakistan. Unfortunately, with the conclusion of the general elections in May 2009, India’s new foreign minister, S. M. Krishna, while expressing a desire for both countries to move forward, reiterated that ‘it will become extremely difficult for India to continue the composite dialogue unless Pakistan brings all those perpetrators of that crime to book to justice’.

Pakistan’s foreign ministry, on the other hand, is urging continued dialogue, stating that the ‘breakdown of dialogue only works to the advantage of terrorists. ...we should not walk into their trap. It is important to show statesmanship’.

Not surprisingly, the first meeting after the Mumbai blasts between Prime Minister Singh and President Asif Ali Zardari in Yekaterinburg, Russia in June 2009, on the sidelines of the summit of the six-nation Shanghai Cooperation Organisation, yielded little as India made terrorism a key point in its discussions. India needs to move forward with constructive dialogue and cooperation, and not continue to drag its feet by citing past injustices. Equally, Pakistan can no longer pretend that it has not supported terrorism, including against India, when the chickens have come home to roost in such a big way. Détente with India will remove the need for Pakistan to keep jihadists in reserve to fight against India in case war breaks out again. This strategy has been followed for decades, especially since India began to invest heavily in its military strength.

With respect to the United States, while Pakistan is still clearly seen as an ally, there is a subtle shift in tone from the George W. Bush era when the United States’ foreign policy was overly generous to Pakistan. In his new strategy towards Afghanistan and Pakistan, President Obama made it clear that the increase in aid and training was conditional upon Pakistan demonstrating its commitment in rooting out Al-Qaeda. The United States’ Senate has clearly recognised that ‘Pakistan is facing a critical moment’ and unanimously passed the bipartisan Kerry-Lugar Bill authorising US$7.5 billion in economic assistance to Pakistan over five years.

This Bill is significant as it seeks to reorient the basis of United States-Pakistan aid from an instrumental crisis management model to a more sustainable, strategic partnership. It delinks the military and non-military components and is aimed at rejuvenating Pakistan’s institutional capacity, developing its tribal areas and encouraging multilateral solutions by engaging neighbouring countries such as India and Afghanistan. While this new approach is encouraging, the United States can make a much bigger contribution by adopting a more inclusive approach to combating terrorism. At the moment, security assistance to Pakistan is subject to certification by the Secretary of State that the assistance will be used to fight the Taliban and Al-Qaeda.

If the United States is sincere about developing a multilateral framework, it should not only be concerned with terrorist groups that have attacked the United States, but also with all terrorist groups in Pakistan, including those targeting India. A truly multilateral approach would require Pakistan, India and the United States to sit around a table and work out a clear plan to save Pakistan and bring stability to the region. This is a critical juncture and these three states must act decisively, set aside selfish personal interests and break out of the shackles of the past.

Finally, this crisis could throw out a shining beacon if the Islamic authorities show leadership in rejecting the absolutism that has come to characterise a dominant segment of Islamic politics and reassert tolerance, diversity and progressive policies that were the hallmark of the

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Islam that existed at Pakistan’s birth and cherished by the vast majority of the Pakistani population.

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ISA S Brief No. 115 – Date: 8 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Indian Budget 2009-10: Carefully Crafted but Not Without Risks S. Narayan 1 The budgetary numbers for the year 2009-10 were unveiled by Indian Finance Minister Pranab Mukherjee on 6 July 2009.

For international credit rating agencies and foreign financial institutions, the foremost concern would be the fiscal deficit, which is budgeted to be the highest ever, at 6.8 percent.

Net tax receipts to the central government, at Rs 4.74 trillion, are lower than the estimates for 2008-09, mainly due to a give-away of about Rs 10 billion of personal tax revenues in relief to the middle class. Market borrowings, at about Rs 3.97 trillion, are slated to be the highest ever, and repayment of debt instalments and interest payments exceeds net receipt of revenues to the centre.

On the face of it, the Finance Minister is walking a fiscal tightrope, with the finances strained at close to unsustainable levels. The stock markets have reacted downwards and there have been no announcements about any large ticket reforms or disinvestment in government undertakings. The Business Standard, New Delhi, had this editorial on the budget: The only explanation for the broad calculation underlying the Budget is that the government is more nervous about the state of the economy than it lets on. A fiscal deficit of 6.8 percent of GDP [Gross Domestic Product], up from 5.5 percent postulated in February’s Interim Budget, means an additional stimulus of nearly Rs 80,000 crore. No government, already saddled with a big public debt overhang, undertakes such spending unless it feels compelled by the circumstances. A finance minister who believed that the worst of the economic slowdown was over would have moderated spending, and capped the deficit at last year’s 6.2 percent. To not do that, and to provide for a significant step-up in spending (about Rs 67,000 crore more than indicated in February), implies a lack of faith in the revival of private demand and therefore the need for additional public spending stimulus. It is interesting in this context that the nominal (that is, real plus inflation) GDP growth assumed in the budget numbers is only about 8.5 percent – the slowest in a long, long while. If the economy is indeed stuck in the slow lane and, therefore, in need of turbo-charging, then one cannot quarrel with the budgetary arithmetic. If not, the government has committed a serious error of judgment. Deficit spending on this 1

Dr S. Narayan is Head of Research and Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He is the former economic adviser to the Prime Minister of India. He can be reached at snarayan43@gmail.com.

scale risks an international rating review with consequences for the rupee’s external value, potential inflation down the road, and higher interest rate – which would have the unintended effect of crowding out private sector activity because of the increased cost of money. Admittedly, the money market is ruling easy just now, and the impact of additional government borrowing will be at the long end, not in shortterm rates that affect the cash credit market. Also, inflation is not a live issue; and ratings are fallible and therefore possible to counter. So the government could make a case for what it has done. But one simply has to countenance the scale of the government’s borrowing programme (up an astonishing four-fold from the Budget in February 2008 to this one, to nearly Rs 4 lakh crore) to realise that something extraordinary has happened, and that this is not sustainable. The total spending by the government has increased in the last two years from Rs 7.1 lakh crore to Rs 10.2 lakh crore; almost the entire increase has been funded by additional borrowing.

Suffice it to say that this level of deficit spending will make a lot of people uneasy and eventual correction more difficult. 2 The outlay for the National Rural Employment Guarantee Scheme (NREGS) has been hiked by 144 percent (Rs 39,100 crores). Bharat Nirman Programme has an increase of 45 percent and there is substantial increase for the Rural Health Mission as well. Most people believed that the Budget would significantly increase allocations on highways, railways and urban infrastructure. These happened as well. The National Highways Authority of India has received 23 percent more than last year’s budget; the railways have received a generous dollop of funds; and the Jawaharlal Nehru Urban Renewal Mission has had its financing increased by 87 percent to Rs 12,887 crore.

It is basically an expenditure-driven budget and the promises of fiscal rectitude are for the future. The return to fiscal responsibility and budgetary management, and the introduction of a nutrient-based fertiliser subsidy and a committee to determine how to free up product prices in petroleum are all promises for the future, without any timeline. There is also no clear mention of targets for disinvestments or for the reform bills in the insurance and banking sectors.

It is important to examine the rationale for the budget to try to understand the strategy that is driving these actions. First, there is the need to restore growth and, given the sluggishness of the global economy, growth has to come from domestic consumption and not from sharp growth of export or trade. It is reasonable to expect that, in the next nine months of the financial year, commodity prices and, most importantly, oil prices, will not spike and the consequential costs of imports would be largely under control. However, there is some doubt over the monsoon and this could lead to inflationary pressures, especially in food products, edible oil and vegetables.

There is sufficient liquidity in the economy and little need to revisit interest rates again.

Therefore, the push for growth has to come out of an expansionist fiscal policy and to put more money in the hands of consumers for greater consumption. The lowering of personal income taxes would help in two ways – by leaving behind more money in the hands of the consumers, it would provide a hedge against inflationary pressures that may arise due to the poor monsoon and, at the same time, make available money for consumption expenditure, should that be needed. The recent summer and the sharp increase in sales of air-conditioners, 2

Business Standard, 7 July 2009.

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coolers, fans, refrigerators, water coolers and soft drinks has demonstrated the capability of the Indian citizen to spend on goods and services – it is only necessary to nudge him to expand his consumption portfolio.

Second, there is the need to provide for those that are disadvantaged – the rural poor. These are likely to be affected not only by a poor monsoon but also by the losses in employment in the unorganised sector, including handicrafts, diamond-polishing, glass-making, textiles and carpet-weaving. Over a million jobs have been lost and there is a need to extend the safety net provided by the NREGS. The provisions for this programme have been increased by over Rs 39 billion. There is now sufficient evidence, supported by the balance sheets of fast-moving consumable goods companies, that rural consumption expenditure tends to increase quite sharply with available disposable incomes, and all the major companies are trying to get into rural markets in a big way.

Third, there is the need to provide for capital expenditure for the provision of public goods – most importantly, infrastructure. There is recognition that the private sector plays a very important role in the creation of infrastructure, and there has been an attempt to create new and innovative financial models for this. The Infrastructure Financing Corporation, a government-sponsored special purpose vehicle, has gotten off to a good start by being able to finance a number of infrastructure projects – there is now a proposal to give it greater flexibility. This entity can now refinance up to 60 percent of the bank loans to infrastructure and provide for take-out financing. Incentives for investments in specified sectors and the continuation of the concessional excise and customs duty regimens complete this initiative.

There is a massive increase in the allocations for infrastructure spending within the budget as well.

Fourth, there also appears to be sufficient room in the arithmetic. In nominal terms, the GDP increase is taken to be around eight percent – a low figure. In fact, it is likely that the economy would grow at least by 6 to 6.5 percent in real terms, that is, over 10 percent in nominal terms, giving ample room for fiscal correction. It is also likely, given past experience, that sudden hikes in allocation are not spent. There is stickiness in expenditure in several schemes, especially those that require detailed project preparation, such as the railways and highways, and it is quite likely that there would be savings in expenditure. The removal of the fringe benefit tax is a good incentive for corporate balance sheets, and the flexibility of infrastructure spending is likely to bring back capital investment activity. There is also likely to be receipts from disinvestment to the tune of Rs 100 billion.

Finally, the promises of rationalising fertiliser subsidies, adjusting petroleum product prices, introduction of a new direct taxes bill, and the rolling out of the goods and services tax are steps in the right direction. Even if some of these events occur in the next few months, the economy would be able to stabilise itself.

In short, the Indian budget appears to be a carefully crafted exercise to push for growth. Of course, there are risks and things may go wrong but a correction is possible even in the next budget, which is only nine months away. Chances are, barring a severe drought, these initiatives may succeed.

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ISA S Brief No. 122– Date: 11 August 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Taleban Leader Baitullah Mehsud Dead: Is it the Beginning of the End of Terrorism?

Ishtiaq Ahmed 1 Abstract The reported death of the Pakistan Taleban leader, Baitullah Mehsud, is a major development in the ongoing struggle against terrorism. It undoubtedly carries crucial implications not only for peace and normalcy in Pakistan, but also in South Asia and indeed the wider world. This brief contextualises the events leading up to his death on 5 August 2009. It is suggested that Pakistan should not relent now. It is in Pakistan’s best interest to dismantle the terrorist networks that still exist in its territory, notwithstanding the formal ban on them.

Introduction Taleban leader, Baitullah Mehsud, who was behind scores of terrorist attacks in Pakistan reportedly died on 5 August 2009 after a United States’ drone fired missiles at the house of his father-in-law in South Waziristan, where Mehsud was visiting. Pakistan Foreign Minister, Shah Mehmood Qureshi, could be seen on television manifestly pleased with the outcome of the attack.

It may be recalled that, in recent months, Mehsud was being portrayed as Pakistan’s “Enemy Number One”. Conspiracy theories denounced him as a paid agent of the United States’ Central Intelligence Agency (CIA) and India’s Research and Analysis Wing. However, his death, as a result of missiles fired by an American drone, suggests closer relations between the CIA and Pakistan’s Inter-Services Intelligence and the military because without the sharing of intelligence between them, such an operation would not have been possible.

Although the most “high profile death” attributed to Mehsud (which he had denied) was that of the late Benazir Bhutto on 27 December 2007, he was instrumental in many other outrages. In 2008 alone, 2,148 terrorist attacks took place in Pakistan, with 2,267 fatalities and 4,558 injured. This was a phenomenal increase of 746 percent over 2005. If the total deaths from various types of violent activities in Pakistan were included, the number would go up to 7,997 killed and 9,670 injured since 2001.

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Professor Ishtiaq Ahmed is a Visiting Research Professor at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg.

Rise of Baitullah Mehsud and the Terror Trail The story of Mehsud’s evolution as a fanatical Islamist is not very different from that of thousands of other young men from the tribal areas who were inducted into jihadist activities at a tender age. He was probably recruited after the Soviet Red Army withdrew from Afghanistan in 1989, because Mehsud (born in 1974) was only 15 at that time.

Mehsud attended a madrassa (religious school) in the tribal areas for a few months and was converted to a world view that made any individual or group a legitimate target for liquidation if they did not adhere to a severe and militant version of Islam that he and his followers subscribed to.

Mehsud emerged as a tribal leader in 2004. He swore allegiance to Mulla Omar, who had headed the Taleban regime in Afghanistan from 1996 to the end of 2001, when the United States-led military action forced the Taleban to flee from the capital, Kabul. They sought refuge in the tribal areas on both sides of the Afghanistan-Pakistan border. While Omar continued to lead the Taleban in Afghanistan, by early 2005, Mehsud consolidated his position as the leader of the Taleban in Pakistan.

In the areas under their control in Pakistan, the Taleban carried out punishments such as chopping the hands of alleged thieves and stoning adulterers to death. Moreover, the Tehreeke-Taleban Pakistan declared war on General Pervez Musharraf’s government for joining the United States-led war on terrorism. There is some evidence to suggest that the Afghan and Pakistani Taleban did not always see eye to eye, and Omar’s overall leadership of the entire Taleban was more symbolic than real.

In any event, Pakistan conducted a number of operations against the Taleban and Al-Qaeda in the tribal areas. Several Al-Qaeda operatives were captured and handed over to the United States. In addition, transit routes for the United States and the allied forces, provision of bases in Pakistan and the sharing of intelligence with the Americans, which enabled them to target Al-Qaeda enclaves, earned Musharraf the wrath of the Taleban.

In 2005 and 2006, the Taleban and their sectarian allies in other parts of Pakistan targeted Shias, Christians, Ahmadiyyas and foreigners, inflicting death and injury on hundreds of them. That brought terrorism deep into Pakistani towns and cities outside the tribal belt.

From 2007 onwards, suicide bombings against government functionaries, including ministers, army personnel and police and security forces, escalated and claimed hundreds of lives. On a number of occasions, hotels and restaurants were hit by suicide bombers with a view to kill specifically foreigners who frequented such places.

The February 2008 elections in Pakistan, followed by the formation of an elected civilian government in late March and the exit of Musharraf as President of Pakistan in August, did not convince Mehsud to call off terrorist attacks on Pakistan.

Failure of the Peace Deal In the Swat Valley, the Taleban clashed with Pakistani troops. They blew up some 200 girls’ schools and ordered stoning, whipping, flogging and other barbaric punishments against

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alleged offenders. A peace deal was finally agreed between the Pakistan government and Mehsud, permitting the Taleban to impose the Shariah in areas under their control.

The peace deal foundered soon afterwards because the Taleban made it clear that their movement aimed at the whole of Pakistan. In any case, the United States looked upon the peace overtures between the two sides with considerable consternation, as it was footing the bill for the military operations and did not want the Taleban to consolidate their power.

The attack on the Sri Lankan cricket team in Lahore in March 2009 considerably embarrassed Pakistan. On several occasions previously, targets in Lahore had been hit by Mehsud’s men but the assault on the Sri Lankan team, which left several policemen dead, greatly angered the Punjabis. The Pakistan press also began to mention that many members of the Taleban were criminals and thugs, and not pious Islamic warriors.

For skeptics in the Pakistan establishment who until then were in two minds as to whether the Pakistani Taleban were freedom fighters or terrorists committed to a self-destructive, nihilistic world view, the attack in Lahore proved to be the wake-up call.

To such changes in perception from the inside, the pressure exerted by the United States, which has been handing largesse worth billions of dollars to Pakistan in return for its military hunt for Al-Qaeda and the Taleban along Pakistan’s borders, provided further encouragement for Pakistan’s government to take action against the terrorists. At the same time, in the aftermath of the November 2008 Mumbai terrorist attacks, India had vociferously demanded the dismantlement of the terrorist networks.

Military Action in the Swat Valley Things finally came to a head when, in May 2009, the Taleban in the Swat Valley drove out Pakistani government officials and proclaimed the establishment of Islamic rule. The reign of terror let loose triggered an exodus of more than two million people from their homes, resulting in a gigantic humanitarian crisis.

The Pakistani military chief, General Ashfaq Parvez Kayani, ordered strong and stern action which ultimately proved to be a roaring success. Within a few weeks, Pakistan’s writ was again established in the major towns. Shortly after, most of the Swat Valley had been cleared of the Taleban.

Such accomplishments emboldened the military to go after the Taleban in their stronghold in South Waziristan. However, there have been some unconfirmed reports of the military seeking a deal with the Taleban and thus “scattering them around”.

Conclusion Even if Mehsud is now dead, some 15,000 to 20,000 hardcore Taleban members are still functioning in Pakistan and they are not likely to disband themselves. Other terrorist organisations such as the Lashkar-e-Tayyaba and Jaish-e-Muhammad also remain intact, though they have been outlawed and banned since early 2002.

Pakistan’s security and military forces should capitalise on Mehsud’s death. With the Taleban likely to be in disarray, the time is right to strike a decisive blow on it. However, the

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Pakistani government needs to act fast, as past experiences have shown that indecisiveness boomerangs, sometimes all too soon.

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ISA S Brief No. 116 – Date: 9 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Indian Budget 2009-10: Opportunities for Singapore Investments S. Narayan 1 Key Features of the Budget India’s budgetary numbers for 2009-10 have been unveiled by Finance Minister, Pranab Mukherjee, on 6 July 2009. For international credit rating agencies and for foreign financial institutions, the foremost concern would be the fiscal deficit, which is budgeted to be the highest ever, at 6.8 percent. On the face of it, the Finance Minister is walking a fiscal tightrope, with the finances strained at close to unsustainable levels.

There appear to be two carefully crafted strategies in the exercise. The first is to restore growth and, given the sluggishness of the global economy, growth has to come from domestic consumption, not from a sharp growth of export or trade. It is reasonable to expect that in the next nine months of the financial year, commodity prices and, most importantly, oil prices, will not spike and the consequential costs of imports would be largely under control. At the same time, there is some doubt over the monsoon and this could lead to inflationary pressures, especially in food products, edible oil and vegetables. There is sufficient liquidity in the economy and little need to revisit interest rates again. Therefore, the push for growth has to come out of an expansionist fiscal policy, and to put more money in the hands of consumers for greater consumption. The lowering of personal income taxes would help in two ways – by leaving behind more money in the hands of the consumers, it would provide a hedge against inflationary pressures that may arise due to the poor monsoon and, at the same time, make available money for consumption expenditure, should that be needed.

There is also a thrust on infrastructure spending – most importantly, roads, railways and transportation. There are a number of Metro projects on the anvil and improvements in urban infrastructure through the creation of ‘slum-free cities’. The role of the private sector in creating infrastructure is well recognised and there is a new attempt to create innovative financial models to make this happen. The budget is a carefully crafted push for growth and there are promises of a number of reform measures that will enable development to accelerate. This includes the tax relief given to pension funds and trusts, the removal of the

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Dr S. Narayan is Head of Research and Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He is the former economic adviser to the Prime Minister of India. He can be reached at snarayan43@gmail.com.

Fringe Benefit Tax, the recognition of reducing fertiliser and oil subsidies, and the introduction of the banking and insurance bills.

Singapore Investment Initiatives Against this backdrop, it is possible to revisit opportunities for foreign investments in India and to see where there would be scope for partnership with Indian firms for growth. There appears to be several opportunities that arise from this strategy, which can be of advantage to Singapore investors. In an article in The Straits Times on 19 June 2009, Ambassador Gopinath Pillai, Chairman of the Institute of South Asian Studies, outlined the advantages of investing in India, the difficulties and the rewards, and suggested the need for an iconic project that Singapore could be part of, for example, modernising Mumbai.

Singapore companies that have ventured into India have generally been frustrated at the slow pace at which things are done as well as the bureaucratic obstacles to success. In fact, in the last few years, not many Singapore firms have established any significant presence in India.

There was the expectation of investment in a major Special Economic Zone (SEZ) in South India which, unfortunately, could not materialise due to problems with the SEZ policy, in particular, the resettlement of land holders. Singapore investors expected the local authorities to resolve the land resettlement issues and to hand over the area for development. However, the Indian authorities expected the developers to deal directly with the land owners, which proved very difficult for the Singapore companies. This initiative has not taken off.

There have been smaller investments by a few Singapore companies into information technology parks and real estate, and these are doing very well and providing good returns.

However, most of these investments have been entrepreneur-driven, with the Singapore government a supporter and not necessarily an active participant in these efforts.

India Strategies It is possible to compare the India strategies of some other countries which have, in the last few years, enlarged their India investments considerably. There has been a significant flow of Japanese investments into the pharmaceutical, chemicals and automobile sectors in India.

There has also been a significant increase in the funding of infrastructure projects, such as the Delhi Metro, through soft loans tied to Japanese equipment supply. South Korean manufacturers have done exceedingly well in the Indian market, with Samsung, Hyundai and LG recognised as market leaders in their segments.

An important element of these countries’ success is the involvement of their governments.

During 2003-2007, there were over 80 delegations from Japan, often accompanied by a senior minister. The Japanese government has pushed its overseas development assistance arms – Japan International Cooperation Agency and Japan Bank for International Cooperation – into greater interactions with the Indian government, and the Japanese development aid and loan assistance has increased substantially, along with closer interactions between the two governments. These initiatives have paved the way for Japanese investments into (difficult) infrastructure sectors such urban transportation (Delhi Metro).

Now Japanese firms are aggressively bidding for and participating in other metro rail projects and power projects.

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In a similar way, Chinese delegations invariably are made up of a combination politics and commerce. Interestingly, the United States Embassy in Delhi constantly pushes for the agenda of its corporates. Most of the major participation agreements and contracts that involve the United States are often steered by American government representatives in Washington and New Delhi. Israel is yet another example where the government interactions have proved to be very useful for its commercial firms. This combination of governmental effort and private sector follow up appears to have been successful in many sectors.

Possibilities for Singapore Companies It is possible to conceive of a similar approach for Singapore companies. At present, after the initial introductions by the Singapore government, the companies are often left to themselves to manage the intricacies of the rules and regulation in a non-transparent bureaucratic milieu, often leaving them feeling frustrated.

There is possibly an alternative approach that could be considered. For example, one of the strengths of Singapore is the creation and management of urban infrastructure. In the current budget, India’s Finance Minister has talked about the creation of slum-free cities – a massive urban renewal programme that offers opportunities for Singapore enterprises. There is substantial government funding available for this purpose. However, it is unlikely that the planning, design and execution capabilities are available either in the government or in the private sector in India. This is an opportunity for Singapore.

Among the Indian states, Hyderabad offers the best possibilities in this regard. There is a Congress government in the state of Andhra Pradesh and the Chief Minister, Rajasekhara Reddy, has just won a massive mandate for the second time. The Congress has increased its tally of Members of Parliament during the recent elections from this state. The Chief Minister is also a strong development-oriented administrator and several of his initiatives have been very successful. He also enjoys the confidence of the higher echelons of the party and is keen to ensure that five years down the road, he is able to go back to the electorate on the strong plank of development delivery. There is an opportunity to partner with this government and with its administration to leverage unique skill sets available in Singapore and yet to deliver what is planned for at a national level.

If one were to think through the ways in which this could be done, the following steps could be suggested: 1. A Singapore government-led delegation to meet with the Chief Minister to develop the ideas for the project to be done bilaterally; 2. Creation of a local company that would be anchored by a Singapore investment company, and it would have Andhra Pradesh government entities as well as Singapore companies; 3. Detailed project report preparation where the responsibilities could be allocated between Andhra Pradesh and Singapore players; 4. Assistance in financing debt/equity for the project by the Singapore investment company, leveraging on government funding; and 5. Planning and execution of the project.

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An important point to bear in mind would be that this would be a project that would span several years and that, being an infrastructure project, returns would start only after three to four years. It is important that there is patience to see through the initial steps. However, it is certain that this is an area where India and Hyderabad would welcome Singapore’s participation in terms of ideas, planning and execution.

The above is an example of what could be done. There are several other areas and sectors as well. If there is a lesson to be taken back, it is that private sector companies alone may not be able to handle the processes and bureaucracy, and that the support of the local government as well as the active involvement of Singapore government through one of its investment arms would be necessary to make these projects a success. At the end, as all those who have ventured to invest in India will bear testimony to, the returns are far greater than investments in any other country in Asia, including China.

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ISA S Brief No. 117 – Date: 10 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Indian Budget: A Failure to Confront the Challenges Shahid Javed Burki 1 There are moments in the lives of nations when those who rule can bring about profound changes in the lives of the ruled. In India, 1991 was such a moment when then-Finance Minister Manmohan Singh, facing an economic crisis of immense proportion, chose to break with the past. With a few bold strokes, he demolished the “License Raj” that had been put in place with such tender loving care by Jawaharlal Nehru and his political associates. The Raj had kept India stuck in an economic groove that produced what its own economists called the “Hindu rate of growth” – 3.5 percent a year when the population was increasing by almost two percent a year. That did not leave much room for the poor, and the poor, in whose name the Raj had been established, suffered immeasurably. India became tremendously impoverished, with 40 percent of its population living in absolute poverty. That proportion introduced a new term in economics – the bottom 40 percent.

With the reforms in 1991, India went on a different track. The rate of economic growth more than doubled, the incidence of poverty declined, the middle classes increased in size and some parts of the economy were well integrated into the global economic system. By lowering the barriers on trade and by encouraging the entry of foreign capital, India opened its economy to foreign influences. The Indian brand name became valued in information technology, pharmaceuticals and automobiles, and even in literature, music and movies. The country seemed set to become a global economic power. The slogans “Shining India” and “Incredible India” coined by inventive Indian minds did not seem misplaced. And then the global economy went into a spin and affected India.

For a decade or so, many serious economists, those from India included, had concluded that the global economy had become decoupled, meaning that a number of emerging economies were no longer as much dependent on the markets of the rich countries and on capital flows from them to make progress. These were the factors that produced the miracles in East Asia and turned China into an economic powerhouse. Now a quarter century later, these economies had built strong economic links among themselves. Trade between them had increased and they had accumulated large foreign exchange reserves to protect themselves from the vagaries of international financial markets. If the West was sinking under the weight of its financial folly, emerging markets would not go under with it. However, they did.

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Mr Shahid Javed Burki is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at isassjb@nus.edu.sg.

The decoupling hypothesis held sway during good times. When the times became bad and difficult, it became clear that the decoupling hypothesis stood on shaky grounds. Emerging markets soon found themselves in the grip of a credit crunch. The decision by the United States authorities to let Lehman Brothers sink produced a number of unintended consequences. Among these was the hoarding of cash by the large institutions to prepare for another institutional collapse. Credit froze, including that needed by traders to finance their operations. Turning over fast – typically ranging in terms from 60 to 270 days – the total yearly flows amounted to US$10 trillion. No matter what the destination of these exports is, the countries that relied heavily on exports needed this finance. Its absence badly hurt them.

One of the largest plunges in the gross domestic product (GDP) growth rates occurred in Singapore and Taiwan, two countries for whom trade is an important part of the economy.

The crisis came to India through an entirely different channel. Its banking sector, mostly under the control of the state, was insulated from Western finance. Its trade-to-GDP ratio was relatively low. However, the more vibrant parts of its economy – the information technology sector and health services, for instance, were connected with the West through the links forged over time between its own enterprises and the large corporations in the West. When the latter collapsed or shrank in size, the more dynamic sectors of the Indian economy suffered. India lost close to 2.5 percentage points in its rate of growth, with the GDP increase declining from about nine percent a year in the five-year period before the crisis hit the world economy to 6.7 percent in 2008-09.

Unrelated to the economic and financial collapse in the West, the Indian economy showed another weakness. One consequence of the economic model the country has pursued for the last couple of decades is the widening income disparities, both interpersonal as well as interregional. This was vividly portrayed in a study sponsored by the Asian Development Bank for the Emerging Markets Forum that held its annual meeting in Mumbai in late June 2009.

According to the study, a clutch of domestic billionaires control as much as 20 percent of the county’s GDP and 80 percent of the assets of the firms listed on the Bombay Stock Exchange. 2 A significant part of this wealth was accumulated in the last couple of decades when the Indian economy began to open to the outside world. An important part of this model was to push the state to the backseat of the economy. And a very large proportion of the very rich come from the western part of the country. In other words, the new riches are associated with the Western economic model and with the parts of the private sectors that operate at some distance from the government. In such a situation, what role can the government play and how could the Budget for 2009-10 have signalled a change in the direction of public policy? Before answering this question, it would be useful to look at the way some of the liberals in the country are reacting to the changes in the Indian society and economy.

A vivid portrayal of the problem comes from the novelist Arundhati Roy in her latest book, Listening to Grassroots. She proclaims that, while one arm of the Indian society is “busy selling off the nation’s assets in chunks, the other to divert attention, is arranging a buying, howling and deranged chorus of cultural nationalism”. She discusses the recent economic boom as having merely created “a vast middle class punch drunk on sudden wealth and the sudden respect that comes with it – and a much, much vaster underclass.” 3 She is extremely concerned that unless the state steps in to remedy the situation, the country may have to face a serious socio-political situation.

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Asian Development Bank, India 2009: An Affluent Society in One Generation, Mumbai, 2009.

Arundhati Roy, Listening to Grassroots, New Delhi, 2009.

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In announcing the budget for the year 2009-10, the Manmohan Singh-Pranab Mukherjee team seems to have cocked half an ear to these findings and criticisms, and half an ear to the imperatives of electoral politics. Being sensitive to the unanticipated margin of victory in the elections of 2009, the new Congress government has produced a semi-populist budget. In doing so, it has gambled on the country’s economic future. It is remarkable that a fiscally strapped government faced with a 6.2 percent of GDP budget deficit should have gone for a 36 percent increase in public sector spending. There are two priorities in this spending increase – rural employment, the provision for which has been increased by 144 percent, and defence, with accent on increasing the presence of the navy in the Indian and Pacific Oceans, and improving the sophistication of the weaponry available to the armed forces. The third priority has been recognised but much of the initiative has been left to the private sector. The government will allow the private sector to raise funds from the capital markets for highway construction, and the modernisation of airports and seaports. Its own contribution will be largely limited to making it possible for private builders to acquire land for their projects.

This has proved to be an expensive and laborious process.

In a way, the budget for the year 2009-10 has gambled on India’s economic future. By opting for a major expansion in government lending at a time when the consolidated fiscal deficit – combined fiscal deficits of the federal and state governments – were already very high, the new Congress government has placed its faith in a rapid recovery of the economy. By building in a high growth scenario in its calculations, it has increased the denominator in the calculation of the fiscal deficit. Even then the fiscal deficit will increase to 6.7 percent of the GDP at the central level. When the deficits at the state levels are combined, the consolidated deficit climbs to over 11 percent. This is not a happy situation for the government to place itself in. It has been tried before but with bad consequences. As one Indian commentator wrote after the budget was announced, “Mukherjee is not the first finance minister to pin hopes for revival of growth on government spending. His predecessors have done it many times but the results have not always been the same. It worked in the 1960s and 1970s, but the philosophy of sustaining high growth through deficit financing in the 1980s landed the country in a fiscal mess that eventually grew into a crisis of balance of payments in 1991.” 4 This was the crisis the management of which brought so much fame to Dr Singh. Why would he then have allowed his Finance Minister to take the same course that could possibly lead the country to the same set of unhappy consequences?

The answer to the question lies in the way policymakers learn lessons from history. In the late 1980s when future growth was being sought on the back of large fiscal deficits, there was no precedence in India that such a strategy would yield long-term benefits. And it did not. India was thus plunged into a deep economic and balance of payments crisis. It is different this time. The Indian history reads differently. If the country’s economic growth experience is divided into five-year chunks, we notice the average growth rate increasing constantly from one period to another. Given this record, it may be appropriate to bank on growth coming back fast and making it possible to manage the fiscal deficits as well as the increase in national debt, now estimated at 80 percent of the GDP. All of this may happen but to put so much reliance on it is rolling the dice.

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Rajesh Mahapatra, “India’s gamble with growth”, The Hindustan Times, 7 July 2009.

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ISA S Brief No. 123– Date: 17 August 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Afghanistan Presidential Election 2009: Developments since the Fall of the Taliban Shahid Javed Burki 1 Abstract This is the first of three briefs to be published by the Institute of South Asian Studies to put the forthcoming Afghanistan election in the context of developments in the country since the fall of the Taliban in December 2001.

We can see three phases though which the country has passed in the last eight years. The first lasted for three years, from 2001 to 2004, when the country held its first presidential election.

This was the period of considerable hope; the economy had picked up, the country adopted a new Constitution and an elected president took office. In the second phase from 2004 to 2008, some of the old problems resurfaced. Kabul began to lose its grip on the country as local warlords and drug lords reasserted their authority in the vast countryside which became increasingly ungovernable. The Taliban began to regroup in the southern provinces bordering on Pakistan. The opposition to President Hamid Karzai became vocal and stories about corruption involving the president’s associates and members of his family began to circulate.

The third phase started in late 2008. The international community, having become concerned with these developments, intensified its effort to stop the increasing influence of the Taliban.

In January 2009, with Barack Obama having assumed the presidency in the United States, Washington undertook a review of its policy towards the country that included the incorporation of Pakistan as a part of the Afghan problem. The new approach was called the AfPak strategy and a special presidential envoy was appointed to coordinate the response of the United States and its allies towards Afghanistan.

This series of briefs will use these developments as the background against which to analyse the lead up to the second presidential election scheduled for 20 August 2009, the election itself and what could be expected as a result of the election.

Introduction On 20 August 2009, Afghanistan will hold its second presidential election. The first, held in 2004, brought back Hamid Karzai to the presidency. This time, he occupied that position due 1

Mr Shahid Javed Burki is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

to the will of the people rather than the discretion of the international community, led by the United States. His electoral victory marked an extraordinary moment in the history of the country. The country seemed to be moving towards a situation where it could run its own affairs on the basis of a written Constitution that required the president to face elections every five years.

The economy had begun to recover from decades of drift. The gross domestic product had registered double digit rates of growth. The large Afghan diasporas had begun to invest in the country and its members were providing both the government and the private sector with the skills a developing economy needed. Just one set of numbers would illustrate the amount of progress that was made. As Ashraf Ghani, the former World Bank official who served as Finance Minister from 2002 and 2005 and is a candidate for the election of 20 August 2009, wrote in an article contributed to the Financial Times, “The number of mobile telephones jumped from 100 in July 2002 to more than one million at the end of 2005, and private investment in mobile phones exceeded US$200 million”. 2 There was also progress on the security front. The humbled Taliban seemed to be lying low; some of them had begun to signal their willingness to enter mainstream Afghan politics and economy. The West, heavily involved in the policing of the country and its economic development, was pleased with the results. George W. Bush, then-President of the United States, stood vindicated in his strong belief that even very backward societies – Afghanistan was certainly one of those – could choose democracy as the right mode for governance.

While his nation-building experiment did not seem to be working in Iraq, it appeared to be making some progress in Afghanistan.

Worsening of the Situation However, the situation started to change for the worse, first slowly, then very rapidly.

Karzai’s first term as the elected president did not produce the expected results. The economy began to slide as the cultivation of poppies and the processing and trading of drugs became the most important part of the economy. The discredited Taliban resurfaced, their ranks strengthened by the Pushtuns from the South who felt that the evolving Afghan system was discriminating against them. The anti-state forces, having watched and learnt new tactics from the operators in Iraq, began to gain traction, particularly in the areas bordering Pakistan.

Their operations confirmed what terrorism experts had feared all along – the use of modern communications to form links between different groups whose principal aim was to hurt the working of the state.

This was the situation in Afghanistan when Obama took office as the United States president in January 2009. During the presidential campaign, he had repeatedly said that it was Afghanistan and not Iraq that needed the United States’ attention. Now he was in a position to turn that pledge into public policy.

President Barack Obama’s Approach To bring about change in America’s approach to the Afghan problem, President Obama ordered a review of what had been done in the past, the impact of the approach the United States and its North Atlantic Treaty Organization (NATO) partners had adopted during the 2

Ashraf Ghani, “How Afghans can build a better future”, Financial Times, 13 August, 2009, p. 7.

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Bush administration, and what changes were needed in Washington’s strategy. The review focused on three major changes that needed to be made. These were announced by President Obama at the summit of the NATO leaders in April 2009. By that time he had already taken one of the three steps. Washington was to treat Afghanistan and Pakistan as parts of the same problem. The problem was given a name – the AfPak issue – and Richard Holbrooke was appointed as the President’s special representative for AfPak. Initially, India was implicitly included in the Holbrooke mandate but New Delhi was disturbed by the move, fearing that that would introduce the United States as a player in dispute resolution in South Asia. This has always been resisted by the Indians.

The second major move was to give the countries in the area the sense that the American involvement would be time-bound. The responsibility for fighting terrorism in their countries had to be shouldered by Afghanistan and Pakistan. The United States was prepared to help. In Afghanistan, the focus of American attention was to be on reducing the influence of drugs on the economy and on training and equipping the Afghan National Army (ANA) to assume the responsibility for ensuring security in the country. While the drug policy is still being developed, some progress has been made in making the ANA a viable force. The aim is to expand the ANA from a force of 88,000 to 134,000 over a three-year period. According to one observer, since the push began last year, the Afghan army ranks “have swollen steadily and the desertion rate has fallen from a high of 40 percent in past years to less than 20 percent now. This is partly the result of a large boost in soldiers’ pay to US$120 per month – an officer’s salaries start at US$210 – and partly the result of the ANA’s growing national prestige.” 3 The third plank of the new approach was to systematically address the problem of governance and widespread corruption. This is a difficult area in which rapid progress can be made. This is especially the case in a country such as Afghanistan in which the instruments of the state were destroyed by the struggle that has gone on for 30 years. The work done by economists such as Paul Collier suggests that the best way to reconstruct a state that has had extended periods of conflict is to provide incentives to those who were on the other side of the conflict to switch sides. 4 In the Afghan case, this would mean approaching those elements within the Taliban movement who are not determined to destroy the state.

Conclusion The important conclusion to draw from this brief analysis is that much rides on how the forthcoming election is held and what results it produces. There is considerable nervousness among those who are closely watching the days leading up to the election. They have many fears, among which is the possibility that one of the many candidates contesting the election could be assassinated. If that were to happen, it is the requirement of the Constitution that the election must be postponed. This would serve the purpose of the anti-state groups since they are afraid that a successful election would confer legitimacy on the victor, making it difficult for them to win the hearts and minds of the population. The dissidents seem bent upon creating trouble before the people go to the polls. The purpose is to scare them enough to have them stay at home on the day of the election. This would lower the turnout rate and thus reduce the legitimacy of the election. A bold attack on the heart of Kabul close to the 3 4

Pamela Constable, “Afghan scramble to lead fight”, Financial Times, 3 August 2009.

Paul Collier, The Bottom Billion: Why the poorest countries are failing and what can be done about it, London, Oxford University Press, 2007.

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American Embassy on 15 August 2009 took several lives. It was obviously meant to send a message to the citizenry.

Zalmay Kahlilzad who served as America’s Ambassador to Kabul when the first presidential election was held summed up the situation well. “Five years ago, I had the privilege of representing the United States in Afghanistan as we helped Afghanistan hold successful elections”, he wrote in a newspaper article. “The country still needs our help. President Barack Obama has correctly recognised that success in Afghanistan is an important American priority. It is vital that the United States works actively to enable Afghan voices to be heard and to facilitate reconciliation, unity and stability after the people make their choice.” 5

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Zalmay Khalilzad, “How to make Afghan votes count”, Financial Times, 12 August 2009, p. 7.

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ISA S Brief No. 118 – Date: 15 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Can One Still Do Business in Nepal?

Binod K. Chaudhary 1 The most critical question that comes to the mind of any businessman hoping to venture into Nepal at the present time is: “Can I really do business in Nepal?” This was the sentiment echoed by members of the Singapore Business Federation (SBF), the Institute of South Asian Studies (ISAS), the Singaporean business community and Ambassador Gopinath Pillai, Chairman of ISAS, in his opening address during a workshop organised by the SBF to showcase Nepal on 9 June 2009.

We keep watching and reading about various setbacks in Nepal such as the protests, the obstruction of the Parliament, the recent walkout by the Maoists from the government and the establishment of a new coalition government. These events make one wonder if Nepal really is a safe place to travel to, let alone do business in.

Although we have experienced a 12-year conflict-ridden environment, I must say that the economy, to a large extent, has remained on track during this period with an average growth rate of three percent. In fact, following the peace agreement which took place two years ago, we have seen an unprecedented pace of widespread development in Nepal, with the rate of growth increasing to 5.6 percent in 2008.

As a consequence of the conflict, there have been some critical departures and structural changes, both on the economic and social fronts. One key development was the abolition of the 240-year old monarchy and the birth of a new republic. This transition marked the beginning of a new era for the country and its development.

Just a New Nepal or an Economically Vibrant Nepal?

When the Maoists started their revolution, they spoke about the creation of a “New Nepal”.

At that time, the Nepalese business community questioned the Maoists about their definition of a “New Nepal”. Would it be an “economically more vibrant Nepal” or a Nepal which would once again face some of the dilemmas born out of the age-old orthodox conviction of a communist state? These were crucial questions in determining the future direction of the country.

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Mr Binod K. Chaudhary was the leader of the delegation of the Confederation of Nepalese Industries that visited the Institute of South Asian Studies on 9 June 2009. He is a Member of the Constituent Assembly (Parliament) in Nepal; and the President and Managing Director of the Chaudhary Group, Nepal. The views presented are personal. He can be reached at binod@chaudharygroup.com.

The Nepalese business community, on its part, engaged the Maoists in dialogue over a period of two years even before the latter joined mainstream politics. Furthermore, it was pleased to learn that the Maoists were prepared not only to enter mainstream politics but also support the economic agenda proposed by the private sector.

In this context, the Confederation of Nepalese Industries (CNI) put forward an economic agenda for “Double-Digit Growth” right after the Constitution Assembly elections. In fact, the inauguration of Nepal’s Economic Summit, which was planned, designed and organised

by CNI, was the first formal programme which then Prime Minister Pushpa Kamal Dahal (also known as Prachanda) addressed. This Summit provided an opportunity for the participants to discuss business developments; a plan to achieve rapid, inclusive and sustainable economic growth; and bring about a change in the social agenda.

The Economic Agenda and the Challenges The last government, led by Prachanda, came up with a clear set of guidelines to achieve a 10-percent growth in Nepal in three years’ time. This requires investments of between 175 billion Nepalese rupees (close to US$2.5 billion) to 400 billion Nepalese rupees (close to US$5.5 billion). It means increasing the total investments by over twofold.

To achieve this, Nepal needs a political and economic system which is functional and disciplined. It also needs to be effective in dealing with some of the core issues in the society, in particular, the Maoists, who have always remained outside mainstream politics. The social agendas have to be appreciated, understood and adopted by the people at large, while the Maoists have to show the same commitment towards Nepal’s economic agenda – which deals with the liberal and market economy.

The international business community needs to be given the confidence and comfort that its investments will not only remain safe in Nepal but will grow and give much better returns than Nepal’s neighbouring countries. This is not an easy task.

During the Maoist-led government, then Finance Minister, Dr Babu Ram Bhattarai, clearly defined the direction for growth which was built into the budget. There was a 40 percent growth in the revenue and taxes collected last year. The success of the collection which, by and large, was carried out without the imposition of unreasonable or unsustainable taxes on the people, was due to better compliance. Finally, there was a sense of discipline in the system.

In the Parliament and Constituent Assembly where I take office, almost 500 out of the 601 members belong to communities which previously had not been integrated into the national economic and social mainstream. Social integration in this context refers to the provision of education, healthcare, employment and, above all, food and shelter. These people have been left out of the socio-economic and political system and have been victims of Nepalese politics. However, they have finally their legitimate place in the nation’s polity. I am convinced that no one can make this 50 percent of the Nepalese community revert to their previous condition. The state will have to support the legitimate expectations of these people and give them quality education so that they can engage in healthy competition with the rest of the society.

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The Global Economic Meltdown vis-à-vis Nepal When the economic downturn began in September last year, everyone in Nepal was worried because there are two million Nepalese working in different parts of the world and they remit US$3 billion annually. This is part of the reason why we have a Balance of Payments surplus and that is what has kept Nepalese industries floating and markets growing.

There are sometimes benefits of not being so closely integrated with the world economy – this is precisely what has happened in the case of Nepal. Surprisingly, we saw an increase in foreign remittance rather than a decrease. With Nepal being a low-cost, inexpensive destination, we were able to maintain the flow of inbound tourism in the country. The stock market continues to remain strong and vibrant, as does the real estate market. The enthusiasm of investors remains at an all-time high.

Future Plans and Requirements I have received much advice in the course of my interactions with SBF, ISAS, Singapore Indian Chamber of Commerce and Industries, and other organisations in Singapore that this is probably the best time for Nepalese companies to promote collaborative efforts with Singapore. Singaporean companies are looking for new countries and opportunities, and Nepal has liquidity, untapped potentials and the will of the business community to grow. In addition, Nepalese businessmen have demonstrated that they are a highly resilient group.

What are the areas that Nepalese companies are keen on?

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We are seeking human capital, technology, new ideas and credible companies to work with us in developing Nepal’s infrastructure. This is going to be the next single largest priority for Nepal.

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We have to construct a new airport, highways, new railway linkages and dry ports.

More importantly, we have to build special economic zones to attract not just investments, but also technology, brands and managerial skills. If the Nepalese government invites the private sector to come in and take over the management of Tribhuvan Airport (Nepal’s only international airport), and build another airport outside the valley, and if a company such as Surbana plans, develops, and handles the construction management, with a company such as Changi Airport to operate it, it would prove to be a profitable business partnership because these companies have an impressive track record and an international reputation.

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For the first time in Nepalese history, over 2000 MW of hydropower projects (in the nine months of the Maoist rule) were granted, and survey licenses and a substantial number of Power Purchase Agreements were signed. Now, hydropower projects totalling 7,000 MW are on their way to being licensed.

Nepal has the distinction of remaining on the path of economic growth despite a highly charged political environment. This has been possible because of the deregulation and emancipation of the private sector-led economy which started in 1990. Currently in Nepal, there is a new social agenda with a national consensus. The direction cannot change.

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Regardless of who presents the budget – Dr Bhattarai, Surendra Pandey or Binod Chaudhary – the key components of the budget will remain unchanged. The budget has to address the social agenda, which has more or less been fixed, and it has to address the reconstruction of major infrastructure, for which the projects have been identified and the priorities set.

Of course, there are structural and institutional problems in implementing local development projects in Nepal. However, we have collected 120 billion Nepalese rupees in taxes. This is probably the first time that Nepal has seen a surplus resulting from total revenue and expenditure. Nepal has managed to be self-sufficient without borrowing funds or relying on donor contributions. Nepal is on track, and we have come a long way. The process was definitely painful, but I think it has begun to reap rewards.

Conclusion The stage is set for the Nepalese economy to move in the right direction. However, in all honesty, the speed of its progress may be impeded by divergent politics which Nepal is trying to sort out in the present juncture.

There has been a lack of trust and confidence among the parties in the government and opposition. Some of them were not confident of the Maoists delivering the provisions of the 12-point agreement which included the return of private property, the containment of their unarmed forces, such as the Youth Communist League, and non-interference in critical institutions such as the army. Similarly, the other parties were unable to provide a sense of assurance to the Maoists that, even in the post-integration period of the People’s Liberation Army, the Maoists would be safe and treated like the other members of the society. This crisis of mutual confidence led to the latest ‘army fiasco’, leading to the fall of the Maoist government in a completely untimely manner.

However, the good news is that everyone in Nepal believes that the need of the hour is to write a constitution that would create a positive environment in which the aspirations of the 30 million Nepalese, who have suffered for decades, can be addressed. For this, all Nepalese will have to work together as we did against the erstwhile regime with the help of the seven parties, the Maoists and the international community.

There is, therefore, no option but to bring together all the stakeholders. And they will have to agree that Nepal’s national government must remain stable so that the social and economic agendas are implemented and the constitution is written.

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ISAS Brief No. 119 – Date: 22 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

India and Pakistan: The Message from Sharm-el-Sheikh S. D. Muni 1 Abstract The Indo-Pak Joint Statement on 16 July 2009 marks a significant concession on India’s part on two points – i) the delinking of action by Pakistan against perpetrators of the Mumbai terrorist attacks from the Indo-Pak Composite Dialogue; and ii) the inclusion of Balochistan in future Indo-Pak discussions. India’s Prime Minister, Dr Manmohan Singh, has been criticised at home for the statement but his stand lies in the larger interest of improving relations with Pakistan and addressing the concerns of the international community (with respect to the war on global terror). In doing so, Dr Singh has not compromised any of India’s basic interests.

Introduction Ali Sardar Jafri, a renowned Indian Urdu poet who was dedicated to India-Pakistan peace, wrote, “Guftgu band na ho baat se baat chale…” (Continue talking, one word will lead to another). This is the crux of the message from Sharm-el-Sheikh where the Indian and Pakistan Prime Ministers met on the sidelines of the Non Aligned Movement Summit on 16 July 2009. In the Joint Statement issued after their talks, the two Prime Ministers committed themselves to fighting terrorism and cooperating in that fight, including sharing “real time, credible and actionable information on any future terrorist threats”. Both of them considered ”development and the elimination of poverty” as the real challenges before them and affirmed their “intention to promote regional cooperation”.

Two Issues Two issues that stood out in the Joint Statement were – i) the delinking of “action on terrorism” and “the Composite Dialogue process”; and ii) the inclusion of the “threats in Balochinstan and other areas” in the bilateral talks. On both these issues, India has accommodated Pakistan’s position. Following the terrorist attacks on Mumbai in November 2008, India stopped the Composite Dialogue process until Pakistan took “visible and credible” action to bring the perpetrators of that act to book and ensure that Pakistani territory was not used to launch terrorist activities against India. The delinking of the action on 1

Professor S. D. Muni is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassdm@nus.edu.sg.

terrorism from the Composite Dialogue was a reversal of India’s position in this respect.

Similarly, for quite some time, Pakistan has been blaming India for supporting militancy in its western province of Balochistan and in the northwest region, for example, the Swat Valley where the Taliban have consolidated themselves. The inclusion of “threats in Balochistan and other areas” in the agenda for Indo-Pak talks at the behest of Pakistan’s Prime Minister Yousaf Raza Gilani, by implication, underlined that India was answerable to Pakistan with regards to these threats.

While the Joint Statement has been received as a diplomatic victory in Pakistan and Prime Minister Gilani has been hailed a hero, in India, Prime Minister Singh has been blamed for capitulating to Pakistan and received widespread criticism for these compromises. He has come under fire for deviating from India’s stated position on terrorism and the Composite Dialogue since Pakistan has not taken any ‘credible and visible’ action against the perpetrators of the Mumbai attacks. On the contrary, the Pakistani courts let off the chief of Lashkar-e-Toiba, Hafiz Mohammad Saeed, due to lack of sufficient evidence, and Pakistan’s provincial Punjab government and the federal authorities have withdrawn the case filed against him.

The Indian opposition leader, L. K. Advani, described Dr Singh’s position in the Joint Statement as a “big retreat by the government on its own stated position”. Later, he saw “intense disquiet and concern among all thinking Indians, including a section of the Congress Party itself”. Other political parties, both supporters and opponents of the ruling alliance, have disapproved of Prime Minister Singh’s stand at Sharm-al-Sheikh. Even the Congress Party has indirectly expressed its unease with the Joint Statement. India’s security agencies and defence establishments are particularly upset on the inclusion of Balochistan that gives advantage to Pakistan to counter India on the charge of Pakistan-sponsored “cross-border terrorism” and rubbish Balochistan’s nationalist movement simply as foreign inspired terrorism.

In Perspective For a proper assessment of the Joint Statement, the issues involved have to be looked at from a balanced perspective. To begin with, India has not given a diplomatic blank cheque to Pakistan either on the ‘delinking’ issue or the inclusion of Balochistan. Pakistan has already submitted a dossier on the action taken so far, howsoever inadequate and half-hearted, against the terrorists involved in the Mumbai attacks. The use of Pakistan’s territory and the involvement of Pakistani nationals have been admitted, the role of Lashkar-e-Toiba has been acknowledged, five of the Lashkar operatives have been arrested and will be charge-sheeted, including the commander of the Mumbai attacks, Zakiur Rahman Lakhvi. The Pakistan InterServices Intelligence Chief has been in consultation with the Indian High Commission officials in Islamabad on the action being taken in relation to the Mumbai case. To proceed further, Pakistan is seeking more information from India.

In no way does ‘delinking’ mean that the Composite Dialogue would continue irrespective of Pakistan not doing anything on the Mumbai case or letting similar attacks be repeated on India. The Joint Statement is a political document and not a legally-binding unconditional international commitment. Dr Singh told the reporters in Sharm-el-Sheikh that Prime Minister Gilani was keen to resume the Composite Dialogue ‘here and now’ “but I said that the dialogue cannot begin unless and until the terrorist acts of Mumbai are fully accounted for and the perpetrators are brought to book”. Unless this happened, he stressed, “I cannot agree

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and our public opinion will not agree”. This aspect was later elaborated at length in his statement in the Indian parliament, saying that even when the foreign secretaries of the two countries continue to talk, no substantive dialogue can take place if concrete action on Pakistan’s part is lacking. The idea of a ‘delink’ was incorporated to avoid a stalemate, “engage Pakistan” and deny it any excuse for not doing anything on the front of ‘cross-border terrorism’. In the latest twist to the interpretation of ‘delink’, India’s Foreign Secretary Shivshankar Menon has asserted that Pakistan has to continue its action on the terrorism front without waiting for the Composite Dialogue to start. Menon, however, accepted that the drafting of the Joint Statement might have left this aspect vague.

The inclusion of Balochistan in the agenda for bilateral talks certainly gives Pakistan a diplomatic advantage but, at the same time, enables India to raise the question of the suppression of human rights and freedom of the Baloch people by the Pakistan army, as Pakistan has been doing in Kashmir. It is ridiculous to assume that India can cut its own nose to spite its face by supporting the Taliban- and Al-Qaeda-led insurgency in Balochistan and “other areas” such as the Swat Valley. Not only India, but keen international observers have also denied repeatedly that India has any role in Balochistan. Therefore, it remains to be seen as to what credible evidence Pakistan can produce of Indian involvement in Balochistan and the frontier region.

There is also the question of the Congress Party-led government’s traditional approach towards Pakistan. The Congress Party regimes have generally not favoured breaking the dialogue to punish Pakistan for acts of hostility or terrorism. Former Prime Ministers Indira Gandhi and Rajiv Gandhi knew of Pakistani involvement in the Punjab and Kashmir insurgencies but engagement with Pakistan continued. It was the same case with Prime Minister Narasimha Rao’s regime. Dialogue has been continued even during and after military hostilities initiated by Pakistan. India took a tough stand during the National Democratic Alliance government by mounting “Operation Parakram” and deploying full military strength on the borders with Pakistan but then what did it yield? “Parakram” was withdrawn unceremoniously and the credit for initiating the Composite Dialogue process in early 2004 was claimed by Prime Minister Atal Bihari Vajpayee.

Before the Mumbai attacks, there were several acts of terrorism in India where Pakistan’s involvement was suspected but no precipitate action was taken. The post-Mumbai decision to stall the Composite Dialogue was, in a way, a deviation from the traditional course of Congress Party-led regimes. It was driven not only by the horrendous nature of the Mumbai attacks but also by the exigency of the then-forthcoming parliamentary elections. In retrospect, it would have been in the interest of consistency for Dr Singh’s government (in the first United Progressive Alliance) to package its post-Mumbai anger and reaction against Pakistan without staking the Composite Dialogue. Those who are opposing ‘delinking’ now may not have any viable alternative to offer when military action against Pakistan is not a real and effective option. Between the stalemate and engagement, the latter is certainly a better response. It is clearly possible that this may still not yield any effective or satisfactory results in the long run but it keeps hopes up and secures wider international endorsement for India’s position.

Much would depend upon how Pakistan resolves its internal challenges and decides to relate to India. There surely exists a sharp and deep strategic divide within Pakistan on the India question. There are civil society groups, and political and business constituencies that want to build Pakistan’s future through a constructive engagement with India. However, there are

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also those in Pakistan’s security establishments and among extremist forces that do not see India in any other light except being an enemy state. Jihadi outfits have been created and nurtured by the latter’s vested interests as confessed recently, even by Pakistan’s President Asif Ali Zardari. Indian diplomacy must be geared to strengthening those forces in Pakistan that have stakes in cooperative relations with India and this is what the Sharm-el-Sheikh statement is aimed at. Pakistan has a civilian government and there is no harm in strengthening the civilian Prime Minister in the hope that he would be encouraged to nudge the security establishments towards a positive relationship with India. It is believed that Prime Minister Gilani, as compared to President Zardari, has a better rapport and more effective and amicable channels of communication with Pakistan’s security establishments. It may be useful to recall that Prime Minister Gilani, in answer to the question of letting off Hafiz Saeed, confided in Dr Singh (as disclosed by him) that a “common consensus” within the Pakistani establishment was “being evolved” (emphasis added) for taking action against Saeed.

United States Pressures?

Prime Minister Singh was charged by some of the Indian political leaders and media analysts for conceding undue ground to Pakistan under pressure from the United States. There has been a stout denial by the United States, including by Secretary of State Hillary Clinton, who landed in India the day after the signing of the Joint Statement, that any pressure was exercised. There is, however, no denying the fact that a constructive engagement between India and Pakistan is critical to the success of the Barack Obama administration’s Afpak strategy. Recall President Obama’s remarks last month in his interview to the Dawn (Pakistan, 21 June 2009) made after the brief talks between Prime Minister Singh and President Zardari: I believe that there are opportunities, maybe not starting with Kashmir but starting with other issues, that Pakistan and India can be in a dialogue together and over time to try to reduce tensions and find areas of common interest…And we want to be helpful in that process, but I don’t think its appropriate for us to be the mediators in the process…we can’t dictate to Pakistan or India how they should resolve their differences, but we know that both countries would prosper if those differences are resolved…I think dialogue is the best way to reduce tensions…

India and Pakistan are more than acutely aware of the United States position. There was considerable interest in the United States and all its allies fighting the war in Afghanistan that the India-Pakistan Prime Ministerial talks yielded positive results. The outcome of the Sharm-al-Sheikh meeting was accordingly welcomed by them.

On its own, India is keen to see that the United States wins the war on global terror in Pakistan and Afghanistan. Any prospects of the Taliban and Al-Qaeda victory in this war would spell a spectre of disaster for India’s security and stability. Accordingly, by opening the way to re-engagement with Pakistan, India has not only responded to the United States expectations and concerns, but also created room for further American pressure on Pakistan to deepen its commitment in fighting terrorism. Refusing to restart the Composite Dialogue process with Pakistan would have put India at odds with the United States and marred the process of reinforcing Indo-US strategic partnership under the Obama administration.

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Conclusion On the whole, therefore, the initiative for the resumption of Composite Dialogue between India and Pakistan bodes well not only for their bilateral relations, but also for the overall regional security. India could easily avoid taking the Balochistan issue on board but it will still have the initiative to calibrate the tone and temper of this dialogue if Pakistan reverses or even refuses to move forward on the question of punishing the perpetrators of the Mumbai attacks and curbing the activities of the so-called ‘non-state’ jihadi forces from its territory against India. Jafri had hoped that the talks, even if started in the darkness of night, may eventually lead up to the breakout of a bright and pleasant dawn. India and Pakistan have resolved at Sharm-al-Sheikh to get into a process that may, hopefully, lead them to breaking out into a dawn of mutual trust and peace in their relationship.

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ISA S Brief No. 124 – Date: 18 August 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

‘Silence is Golden’: India’s Current Position on Myanmar Sinderpal Singh 1 Abstract There has been increasing international and regional criticism of Myanmar’s military regime in the wake of Aung San Suu Kyi’s recently-completed trial. The Indian government’s position, however, has been prominent for its silence on this issue. This paper points to three major factors for India’s silence – the China factor, its energy needs and the situation in its northeastern region – and concludes that this Indian position will persist into the near future.

Introduction On 11 August 2009, a court in Rangoon found Suu Kyi guilty of breaching the terms of her house arrest and sentenced her to three years imprisonment, a term that was commuted to 18 months of house arrest by Myanmar’s ruling military regime.

Exactly two months before this, in the midst of Suu Kyi’s trial, the United States-based nongovernment organisation, Freedom House, issued a press release, urging the Indian government to “break its silence over the sham trial of Burmese pro-democracy leader Aung San Suu Kyi and to pressure Rangoon to unconditionally release the Nobel peace laureate immediately”. Just the day before, 110 Indian members of parliament signed a petition, initiated by the Indian Parliamentarians Forum for Democracy in Burma, urging India’s Prime Minister Manmohan Singh to secure the release of Suu Kyi and support the reinstatement of democratic governance in Myanmar.

To add to this pressure on the Indian government, several member states of the Association of Southeast Asian Nations, who have traditionally advocated a softer “constructive engagement” approach to the regime in Myanmar, publicly called upon Myanmar to release Suu Kyi and to hold free and fair elections in the country as soon as possible. In addition, even China, seen as Myanmar’s most vocal and steadfast ally in the face of constant international criticism, saw it fit to endorse the United Nations Secretary-General Ban Kimoon’s trip to Myanmar in July 2009 to seek a meeting with both Myanmar’s military rulers and Suu Kyi (the latter request was rejected by the military regime).

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Dr Sinderpal Singh is a Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassss@nus.edu.sg.

Despite this seemingly growing sense of frustration amongst Myanmar’s traditional allies, India has stuck to its policy of silence on Myanmar and Suu Kyi’s trial. In fact, it went even further than keeping silent – in 2009, it refused to formally continue its participation in the multilateral Focus Group on Myanmar (formed in early 2008 under the United Nations auspices, comprising India, China, Indonesia, Myanmar and the United Nations), one of the few international forums that Myanmar agreed, at least symbolically, to engage with. The Indian government cited “national interests” as the reason for its pullout. For many, this silence is frustrating as well as difficult to comprehend.

There are three major reasons why silence serves as the most appropriate policy for the Indian government on this issue. The first is the perception of growing Chinese influence over the military regime in Myanmar, with its attendant political and strategic implications for India. The second factor relates to issues of energy security and India’s growing need for new sources of fuel to feed its ever-increasing energy requirements. The third set of factors is chiefly concerned with India’s border security in the context of insurgent groups in the country’s northeast and cross-border trade.

The China Factor Since 1992-93, there has been a decided shift in India’s attitude towards Myanmar because of the perceived failure of its Myanmar policy prior to this period. There was a perception that India’s policy in the pre-1992 period, which was one of being publicly sympathetic and supportive of Myanmar’s democracy movement, had been detrimental to India’s strategic and political interests. While the Indian government was being openly vocal on human rights and democracy in Myanmar during this phase, China was seen as increasingly entrenching its dominant position with the ruling regime in Myanmar by acting as the leading defender of the country in forums such as the United Nations, in the face of fierce international criticism against the regime’s human rights record.

From the Indian perspective, China has gained, and India has lost, significant strategic space as a result of such engagement. A key strategic space in this regard is the Indian Ocean Region (IOR). Myanmar’s ruling regime has invited China to help modernise and develop Myanmar’s naval bases at Hanggyi, the Coco islands, Akyab and Mergui. There is a lingering belief among Indian officials that China is using or will, in the future, use these bases, especially the Coco Islands, as listening posts to conduct surveillance on Indian military activity and bases in the Bay of Bengal (which is the northeastern part of the IOR), the most important amongst which is the Indian tri-services facilities base at Port Blair on South Andaman Island.

Besides the obvious negative implications with regards to surveillance, Indian officials are also concerned about the longer-term implication of the Chinese navy establishing its naval presence in the wider IOR via naval bases in Myanmar. Competing with China for strategic space and, thus, strategic influence in the Bay of Bengal and the wider IOR is a worrying prospect for Indian leaders. The fact that an estimated 40 percent of the world’s offshore oil production comes from the Indian Ocean and that it carries a significant amount of petroleum traffic from the oilfields of the Persian Gulf and Indonesia explains the strategic importance India attaches to the IOR. Despite repeated assurances from Myanmar’s military that it has not leased any of its naval bases to China and the Indian military conceding, in 2005, that reports of Chinese bases in

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Myanmar were incorrect, all is not well as far as Indian officials are concerned. The dominant opinion in New Delhi is that Myanmar might, in future, be convinced into providing its naval bases to China, especially if China remains the country’s most important defender in the face of increased international pressure and criticism. Keeping silent over Myanmar’s domestic troubles seems to be the best policy at the moment for India. Joining international criticism will just drive Myanmar closer to China, with its associated impact on Indian strategic interests, according to this perception.

India’s Energy Needs Much has been written about India’s search for new sources of energy, specifically oil and gas, to feed its growing economy. In this regard, Myanmar’s proven gas reserves of 2.54 trillion cubic metres and oil reserves of 3.2 billion barrels are not something the Indian government can easily ignore. Since the early 1980s, Myanmar has been inviting foreign companies to explore for oil and gas in its territory and, since 2005, it has been awarding offshore blocks for gas production to foreign companies. In late 2008, Myanmar and China signed an agreement in which the China National Petroleum Corporation would construct a gas pipeline transporting Myanmar’s offshore gas from the latter’s west coast port of Kyaukpyu to China’s Yunnan province. The contract to produce the gas itself has been given to a consortium comprising Daewoo International (South Korea, 60 percent stake), ONGC Videsh, the overseas arm of India’s state-run Oil and Natural Gas Corporation (20 percent stake), Gas Authority of India Limited (10 percent stake) and KOGAS (South Korea, 10 percent stake).

There were hopes that, despite this pipeline, because of the Indian stake in this consortium, some of Myanmar’s gas might still find its way into India. However, attempts to build a gas pipeline from Myanmar to India via Bangladesh ran into difficulties from the start in the face of larger bilateral difficulties in the India-Bangladesh relationship. The alternative of building a pipeline that will pass through India’s northeastern region to reach West Bengal was officially shelved in July 2009, with the economic viability of this project deemed not feasible.

It is obvious to Indian officials that India has missed this first opportunity of securing the passage of Myanmar’s gas to India. This notwithstanding, India is hopeful, given the untapped amount of both gas and oil reserves in Myanmar, that another opportunity will arise in the near future. It is, however, also mindful of the fact that astute diplomacy will have to be the basis of the Indian approach towards Myanmar for such an opportunity to present itself again. It is widely understood that an important part of such astute diplomacy involves staying on a friendly footing with the military regime in Myanmar.

India’s Northeastern Region India’s northeastern states – Arunachal Pradesh, Nagaland, Manipur and Mizoram – are home to tribes that have ethnic links to their brethren on the Myanmar side of the Myanmar-India border. Separatist violence has been on the rise within India’s northeastern states, especially since the 1990s, led chiefly by groups claiming to represent these ethnic groups. This has added an important dimension to the way in which the Indian state has recently sought to approach its relations with Myanmar.

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Besides the obvious need for co-operation with Myanmar’s government in dealing with violent insurgent groups, who have camps located within the Myanmar side of the border, Indian officials also see trade and development as important issues in its Myanmar policy visà-vis its northeastern states. There is an acknowledgement in New Delhi that dealing with insurgency in the northeast requires measures that go beyond mere military approaches. Since April 1995, when the First Border Trade Agreement between the two countries was implemented, there was hope that increased border trade would bring increased investment, development and prosperity to the northeastern states. There were also hopes that building greater connectivity to Myanmar from the northeast will help connect the further reaches of mainland Southeast Asia to India. Thus far, such hopes have not been realised. Due to a number of factors, trade at the border is at the moment effectively down to only two or three items (compared to the 40 items listed in the trade agreement).

Indian officials have, however, pushed on with building connectivity between the northeastern states and Myanmar. One initiative is the Kaladan Multi-Modal Transit Transport Facility which aims to establish connectivity between Indian ports on its eastern side and the Sittwe port in Myanmar through a network or rivers and roads. For such initiatives to develop and deliver the type of connectivity and related development sought by the Indian government, it realises that long-term diplomatic engagement with Myanmar’s government is essential.

Conclusion Three major factors shape India’s present policy towards Myanmar. In all likelihood, these factors will continue to dictate Indian policy towards the military regime into the near future.

However, the tipping point for India’s Myanmar policy might arrive if or when continued domestic resistance to the regime in Myanmar spills over the border into India, with increasing numbers of refugees, and large amounts of narcotics and small arms making their way across the shared border. Till such a scenario presents itself, it appears that ‘silence is golden’ for India’s Myanmar policy.

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ISA S Brief No. 120 – Date: 23 July 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Hillary Clinton’s Visit to India Differences Remain despite Positive Outcomes Sinderpal Singh 1 Abstract Four major issues dominated United States Secretary of State Hillary Clinton’s visit to India from 17 to 21 July 2009. These were India’s future role as a global player; Pakistan’s commitment to fighting terrorism; defence and nuclear energy cooperation; climate change and caps on carbon emissions. Overall, the visit was significant as a signal of United States President Barack Obama’s determination, moving forward, to build a broad-based political, economic and strategic relationship with India.

Introduction The recent visit to India by United States Secretary of State, Hillary Clinton, has been closely watched in various quarters. This is not surprising, given that this is the first visit by a senior member of United States President Barack Obama’s administration to the country. It also sets the stage for Indian Prime Minister Manmohan Singh’s visit to the United States, scheduled for 24 November 2009, with President Obama making his first visit to India as United States President sometime next year.

Four major issues dominated Mrs Clinton’s recent visit. These are issues that will, in all likelihood, dominate discussions between Prime Minister Singh and President Obama when they meet twice over the next year or so.

India’s Place in the United States’ Global Political-Strategic Matrix The first issue is the concern of many Indians about their country’s place within President Obama’s wider global political-strategic matrix. There is a feeling in certain Indian circles that, in comparison to the George W. Bush administration, President Obama has relegated India to a lower rung of importance within the United States’ global strategies and goals.

More specifically, some detect a ‘tilt’ towards China by the Obama team, with suggestions of a nascent G-2, comprising the United States and China, taking shape. This idea of China being part of a new global duumvirate is of great concern to New Delhi given the history of strained relations between the two neighbours.

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Dr Sinderpal Singh is a Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassss@nus.edu.sg.

On this point, the United States has been keen to reassure India that the latter retains the same importance for America’s global strategies and goals as it did during the Bush era. By repeatedly speaking of an “enhanced United States-India strategic partnership”, of India as being one of the few nations that the United States saw as a “global partner” and of the need to foster a greater role for India in “solving global challenges”, Mrs Clinton has sought to reassure the Indian government on India’s strategic relations with the United States.

In addition, both President Obama and the Chinese government have sought to downplay any notions of an emerging G-2. There are also several influential voices of opposition concerning the G-2 within the United States itself, ranging from the Pentagon to the United States trade representative groups. To that extent, Mrs Clinton’s visit will serve to assuage Indian concerns, at least for the time being.

However, some differences on political-strategic issues still remain. One of these concerns the relations with Iran. Given India’s long history of warm relations with Iran and the negotiations currently underway to build a gas pipeline from Iran to India via Pakistan, India favours a relatively softer approach towards Iran. However, both India and the United States agree that Iran’s acquisition of nuclear weapons would be a negative development and that seems to be the minimum level of agreement between them on Iran for now and both sides seem to be content with this position at this moment.

Pakistan and the War on Terror Not surprisingly, the second issue concerns Pakistan. The Indian government wants the United States to keep its pressure on Pakistan to demonstrate a genuine commitment to combat terrorist elements on the latter’s soil. More specifically, it would like the United States to push the Pakistani government into apprehending specific individuals India believes are complicit in the recent Mumbai terrorist attacks. On this issue, the United States is broadly sympathetic to the Indian position but it does not wish, at least publicly, to go as far as India would like. Mrs Clinton’s public statements of an “evolving commitment” from the Pakistani government in fighting terrorism on its soil and the way in which the Pakistani army has fought against domestic terrorist elements has been “sincere, effective and committed” may not mirror India’s sentiments. However publicly, at least, the Indian government has not responded strongly to Mrs Clinton’s comments.

On its part, the United States is likely to privately try to nudge India towards resuming some type of direct dialogue with Pakistan, with the aim that the two countries restart peace talks sometime soon. This stems from the United States’ belief that tensions with India do not help Pakistan in its domestic war against terrorist elements, with the immediate spillover effect felt

by United States troops in neighbouring Afghanistan. On this issue, the Indian government has stuck to its official line that it is, in principle, ready to talk directly to Pakistan but its concerns over terrorism need to be addressed if any genuine dialogue between the two countries is to take place.

India-United States Defence Cooperation The third issue concerns defence cooperation and civilian nuclear trade. At the last G-8 Summit in Italy from 8 to 10 July 2009, the United States persuaded the grouping to ban the transfer of nuclear enrichment and reprocessing technologies to countries that have yet to sign the Nuclear Non-Proliferation Treaty (India being one of these countries). Many in India

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saw this as a sign that the new United States administration was going back on the civilian nuclear deal (the 123 Agreement) signed during the Bush tenure. However, the public announcement of India’s approval of (and the United States’ acceptance of) two sites for setting up United States-made nuclear reactors has signalled that the United States administration does indeed want to move forward on the 123 Agreement. These two reactors could result in as much as US$10 billion worth of potential exports for United States companies such as General Electric and Westinghouse Electric. Formal negotiations on nuclear reprocessing between the two sides commenced on 21 July 2009, with positive signs that an agreement on “arrangements and procedures” will be reached within a year.

On defence, a military End User Verification (EUV) agreement was reached during Mrs Clinton’s visit which allows for the procurement of sensitive technologies for military purposes from the United States to India. Although the details of this deal have yet to be worked out and, despite huge opposition in India on the implications of this deal, this agreement is highly significant. This deal potentially allows major United States defence firms (under United States law) to sell military equipment to India as well as opens up the possibility of closer military-to-military ties between the two states. United States defence firms will now be able to compete with Russian, French and Swedish companies for a lucrative US$12 billion tender to provide 126 fighter jets to the Indian Air Force. The Indian government would be relatively pleased with developments in this third issue.

Climate Change and Carbon Emission Caps The fourth main issue concerns climate change and carbon emission caps. The United States position is that India should be persuaded to accept some form of legally binding caps on its carbon emissions as a basis for drafting a new global treaty on climate change and carbon emission cuts. India maintains that it produces less carbon emissions per capita than the developed countries, and that any attempts to place legally binding caps on it will adversely impact its economic growth and attempts at poverty eradication.

In a joint press conference with Mrs Clinton, Indian Environment Minister, Jairam Ramesh, strongly asserted India’s stand on the issue of legally binding caps and expressed displeasure at the looming “threat of carbon tariffs” on Indian exports to the United States. The United States House of Representatives passed a bill last month that could allow import taxes on products made in countries that do not have statutory curbs on greenhouse gas emissions. For the United States, the timing of Mrs Clinton’s visit is especially crucial given the forthcoming meeting in Copenhagen in December 2009, where 180 countries will meet to broker a new treaty on global warming, which would replace the Kyoto Protocol. On the United States’ side, there were hopes that Mrs Clinton’s visit might perhaps soften India’s position to some extent. The fact that Todd Stern, President Obama’s special envoy on climate change, accompanied Mrs Clinton on this trip underscores the importance this issue holds for the United States government.

However, there seems to be a fair amount of distance between the two countries on this issue and this trip did not make any significant inroads. The Indian government stuck to its ‘per capita’ stand and it does not seem that it will move from it in the near future. The only probable area of minimal agreement on this issue is the development and transfer of green technologies. However, the issue of who will bear the major cost of such technology development and transfer is yet to be agreed upon. Therein lie the future potential battlegrounds on this issue.

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Conclusion Mrs Clinton’s trip to India has had important ramifications for India-United States strategic relations. The Obama administration has signalled that it wants to continue and even strengthen India-United States ties that were forged during the Bush era. Mrs Clinton’s use of the term “strategic dialogue” to represent India-United States ties speaks of the genuine importance that the United States administration places on India’s role as a global player.

The signing of the EUV agreement and the proposed setting-up of two United States nuclear reactors in India is an affirmation of this commitment, although several details pertaining to both these agreements remain to be hammered out.

There is some disagreement between India and the United States on Pakistan and climate change. However, on a more holistic and strategic level, Mrs Clinton’s visit will assuage Indian concerns about its place in global politics in the near future. The two forthcoming meetings between Prime Minister Singh and President Obama will likely further reassure India about its projected role in global politics in the near future. oooOOOooo

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ISA S Brief No. 125 – Date: 19 August 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Afghanistan Presidential Elections: Dangerous Portends? 1 Shakti Sinha 2 Introduction The Afghanistan Presidential elections, scheduled for 20 August 2009, are interestingly poised. Unfortunately, the adjective ‘interesting’ also has negative connotations as in the traditional Chinese curse, “May you live in interesting times!” The reason is that the election results, far from leading war-ravaged Afghanistan towards peace and stability, may set the stage for further confrontation and increased instability.

This brief looks at three plausible scenarios and how each is expected to contribute to this gloomy forecast. These are i) President Hamid Karzai winning in the first round; ii) no candidate winning a plurality, with the top two candidates, a Pashtun (President Karzai) and a non-Pashtun (Dr Abdullah), squaring off for a runoff; and iii) Dr Abdullah emerging as the top candidate, even if he does not win a plurality of votes in the first round. 3 The Current Situation Before we go into the implications of these potential situations, an assessment of the current situation would help underpin the central theme of this brief.

In order to win the Presidential elections, a candidate must win a clear plurality of votes (50 percent). In the event that no one is able to win outright in the first round, the elections will go to a second round, scheduled for 1 October 2009, and they will be contested by the top two vote-getters in the first round. The preliminary results are expected by the first week of September 2009, with the Independent Elections Commission (IEC) anticipated to formally certify the vote only on 17 September 2009, after the Electoral Complaints Commission has dealt with all complaints of vote rigging, fraud and irregularities.

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A detailed background to the Afghanistan Presidential elections is available in the author’s paper on “Presidential Elections in Afghanistan: Unintended Consequences?”, ISAS Insights 73, 1 July 2009 – available at http://www.isasnus.org/events/insights/74.pdf.

Mr Shakti Sinha was a Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from February to August 2009. He can be contacted at sinha.shakti@gmail.com.

The author is thankful to a close Afghanistan colleague, who cannot be named at present, for initiating these ideas during their extensive and continuing discussions.

Along with the Presidential elections, simultaneous elections to the 34 Provincial Councils will also take place on 20 August 2009. However, these representative bodies have little relevance in the present governance arrangements. To make matters worse, the scheme of the Provincial Council elections is also highly flawed, with single non-transferable votes treating the whole province as a single electoral district (constituency), with only individuals being allowed to contest and the existence of a no-list system. These deficiencies need to be rectified in the larger interest of inclusion and improved governance.

There are 41 candidates, including two women, contesting the Presidential elections. The incumbent President Karzai’s main challengers are the ex-Foreign Minister and official candidate of the opposition United National Front Dr Abdullah; ex-Planning Minister and ‘basher’ of international non-government organisations (NGO) Ramzan Bashardost; and exFinance Minister and favourite of the international community Ashraf Ghani Ahmedzai – the last-named gave up his United States citizenship just before filing his nomination. The others include Wolesi Jirga’s (Lower House of the National Assembly) Deputy Speaker Mirwais Yasini; Communist-era Defence Minister Shahnawaz Tanai, who later defected to Pakistan after his failed coup attempt; ex-Mujahideen Abdul Salam Rocketi, who is now a member of the Wolesi Jirga, and ex-Vice President Hedayat Amin Arsala, who is a well-connected eastern Pashtun from Nangrahar.

While President Karzai is expected to be the leading vote-getter, his ability to win the elections outright in the first round is increasingly being questioned. The Independent Republican Institute (IRI), a United States institution active in Afghanistan, commissioned two surveys in May and in July 2009. Though the IRI numbers may not be accurate, the trends they indicate are more likely to be correct. While President Karzai remains the most popular contestant, he is still short of the 50 percent mark, even though his support has increased from 26 percent to 44 percent. During the 2004 elections, President Karzai won in the first round itself, polling over 55 percent of the votes. On the other hand, the support for Dr Abdullah has dramatically improved from six percent to 26 percent. Bashardost’s support has increased from three percent to 10 percent, and Ashraf Ghani’s support has doubled to six percent. According to the surveys, 57 percent of the voters had already made up their minds on who they would vote for, while another 32 percent were almost sure that they had decided on their preferred candidate. Critically, 45 percent of the respondents thought that President Karzai would be re-elected regardless of which candidate they were supporting. Clearly, President Karzai has turned the tables on the detractors who were writing his political obituary not so long ago, cleverly dividing the opposition by dangling hopes of office, threats of prosecution, meeting minority demands and taking on the United States on civilian casualties. He has also been helped by the perceived hostility of the Barack Obama administration towards Afghanistan and by the voters’ fears of the unknown.

Election Challenges The effect of insecurity and irregularities, acting singly and jointly, could also have a major bearing on the presidential results. The IEC expects that around seven to ten percent of the polling stations would be dysfunctional and, in some cases, the insurgents would prevent voters from exercising their franchise. On the one hand, individual Taliban commanders have negotiated ceasefire deals with local authorities that would allow elections to proceed, and on the other, some have warned that the fingers of those found marked with the indelible ink associated with voting would be cut off. Unlike most western observers, the Taliban do not see the elections as a ‘make or break’ opportunity. Until the time of writing, other than one

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dramatic suicide bomb blast in Kabul near the North Atlantic Treaty Organization headquarters and a few assassination attempts on certain leading figures, the Taliban have been far less active in disrupting the elections process than expected. However, the insecure conditions prevailing in the south and the east have cast doubts on the voter registration process. Carried out over four stages (October 2008 to February 2009) and covering all 34 provinces, over four million new voters, of which 38 percent were women, were registered.

This is in addition to the more than 12 million voters already registered the last time around (2004-05). There is suspiciously a high registration of female voters in the south-east of the country (Paktiya, Khost, Paktika and Ghazni) – it is regarded as the only region where oldstyle tribalism is still strong and regarded as most conservative.

According to a report in the New York Times, a well-regarded NGO, Fair and Free Elections Foundation of Afghanistan, found that in the registration centres it monitored, about 20 percent of the cards were issued to underage boys and another 20 percent were duplicate cards. These would reflect not just corrupt practices but also the relative inability of the Afghanistan state to carry out routine administrative functions. 4 A number of observers have estimated that around three million voting cards of the 17 million floating around are duplicates. Since voters are not attached to specific polling stations and can vote anywhere in the province, multiple voting using duplicate cards is relatively easy. Adding to the suspicion of unfair elections are reports of large scale buying of voter cards and the use of government staff for electioneering purposes. There will be a large number of independent Afghanistan and international observers during the elections but the logistical challenge of the country, insecurity and even language difficulties would pose considerable problems in ensuring free and fair elections in the best of times.

This combination of political, security and weak institutional arrangements means that whatever the outcome of the elections, they are bound to be challenged not only by the defeated candidates but also by neutral observers. This is the essential background that underpins expectations that the elections are likely to lead to increased insecurity in the country, at least in the short run.

The Three Scenarios If President Karzai wins the first round decisively, a repetition of the Teheran demonstrations cannot be ruled out, challenging not just the credibility of the government but even its legitimacy. Other than in Kandahar and Jalalabad, President Karzai is relatively weak in the non-Pashtun dominated major urban areas of Kabul, Mazar and Hirat, as well as in most of the north and east of the country. The Hazara-dominated Central Highlands (Bamiyan, Daykundi and parts of Ghazni and Uruzgan), which are the most peaceful parts of the country may go along with President Karzai, as their top leadership has endorsed him, but these areas are remote, lightly populated and dispersed. Worse, it would further convince the nonPashtun, Farsi-speaking Sunnis and not just the Tajiks, that they would always be excluded from power. This would improve Iran’s standing among them and make the opposition less amenable to allowing the government to negotiate with sections of the Taliban that may be agreeable to joining the political mainstream. 5 4

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The last elections in 2004 (Presidential) and 2005 (National Assembly and Provincial Councils) were conducted by the international community. This time around, it is the Afghans who are doing it, but with extensive logistical support of the international partners.

The Tajik-dominated Northern Alliance, particularly the Panjsheris of Ahmad Shah Masoud’s Shura-I Nazar-Shomali, had a disproportionate share of the government in the period immediately following the

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In the second scenario, ethnic tension, which has been quite muted until now, is likely to strain the national fabric in the event of the elections going to the second round with President Karzai and Dr Abdullah as the top two candidates. This would be the consequence of political mobilisation on purely ethnic lines. Despite the years of war and ethnic-base rule (of the Taliban), there have been no demands for either secession or changing Afghanistan’s borders despite ethnic linkages across the northern borders with Tajikistan, Uzbekistan and Turkmenistan. However, a close fight between President Karzai and Dr Abdullah, despite the latter’s father being a Pashtun from Kandahar, would lead to deep polarisation between the Pashtuns and the main minorities, especially the Farsi-speaking Sunnis, potentially strengthening the de facto role of the Taliban as the protector of Pashtun interests.

The third scenario of Dr Abdullah polling more votes than President Karzai, unlikely as it is to be, would only exacerbate ethnic tensions mentioned above. However, if the Taliban are able to seriously disrupt voting in the Pashtun areas, then this possibility and its dangerous consequences cannot be ruled out. Insurgencies often welcome the victory in elections of those most opposed to them on the grounds that this would shore up support for the former among its target group. In Sri Lanka, Prabhakaran’s enforced boycott in the Tamil areas of the north and east during the last Presidential elections to the defeat of the moderate Ranil Wikremasinghe, who favoured talks with the Liberation of Tamil Tigers of Eelam, is a case in point. The consequences of this are too well-known to be repeated here.

Conclusion The forthcoming elections, while very important in determining how Afghanistan would move ahead on trying to establish conditions for peace, stability and economic development, is not likely to lead to positive developments in the short run. In fact, it is likely to lead to increased insecurity, resulting from heightened ethnic tensions. Nevertheless, the elections have the potential of forcing the Afghanistan elite and its international supporters to think differently of the nature and structure of the Afghanistan state, one in which the citizens, local communities and what a prominent Afghanistan scholar has called ‘micro-societies’, would form the pyramid on which an inclusive state could be created, and where the election of one individual, at whatever level, does not seriously impact the stability of the system.

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overthrow of the Taliban, but over the years have been considerably marginalised, replaced significantly by members of the hard-line Hizb-i-Islami of Gulbudin Hekmatyar.

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ISA S Brief No. 126 – Date: 31 August 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Afghanistan Elections 2009: The Day of Reckoning Shahid Javed Burki 1 Abstract In my second brief of the series on the evolving situation in Afghanistan resulting from the presidential election held on 20 August 2009, I will look at some of the preliminary indications of what appears to have happened while the formal announcement of the outcome is awaited. The hope that the people will give a clear indication of their preferences was not realised. The country seems headed towards a breakdown of the social order essential to govern a multi-ethnic state. It appears that the hope that the election would contribute to political progress in South Asia is proving to be untrue.

Preliminary Indications Afghanistan held its second presidential election under the new constitution on 20 August 2009. The first, held five years earlier, confirmed Hamid Karzai as President. He had earlier been placed in that position by the coalition of western powers who, under the leadership of the United States, had defeated the Taliban regime in December 2001, following a brief but bloody war. The second election was meant to confirm that, in spite of the many problems Afghanistan faced, the country was set on the right track. It was also meant to confirm the new approach adopted by the young American administration of President Barack Obama that had promised military effort in the country, aimed at decisively defeating the Taliban, while setting it on a course to long-term development. If the election was to confirm that the new strategy was working, that did not happen. Instead, it did more to underline the many challenges the country faces in spite of the heavy involvement of the international community in trying to find some solutions. Three of these problems were highlighted by the election.

The first, of course, is the strengthening grip of the Taliban in the south of the country – in the provinces bordering on Pakistan. The Taliban continued to assert their control over large swathes of land by carrying out acts of terrorism not only in the south but in and near Kabul as well. There were more than 200 rocket attacks in southern Afghanistan on the election day.

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Mr Shahid Javed Burki was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from May to August 2009. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

The Taliban were successful in intimidating people and forcing them to stay indoors in large numbers on the day of the election.

Preliminary estimates gathered from informal sources indicate that there was a very low turnout rate in the southern provinces. In the broad southern region – in provinces such as Kandahar, Helmand, Oruzgan and Zabul – election officials reported a turnout as low as five to ten percent, effectively disenfranchising the region viewed as the most crucial in the American-led military operation. This was the objective of the Taliban and they appear to have realised it. Their campaign of intimidation was meant to deny Karzai any legitimacy among the Pushtun people who constitute the vast majority of the population in the southern provinces. Karzai had governed without much Pushtun support, having relied heavily on such minority ethnic groups as the Tajiks and the Uzbeks in the country’s north. These groups now had a candidate of their own in Dr Abdullah Abdullah who had served as Foreign Minister in an earlier Karzai administration.

The low turnout in the south fed into the second problem, the deep ethnic divide in the country that has always been an issue but has worsened since 2001, when American forces dislodged the Taliban, a basically Pushtun force, with the help of the Northern Alliance made up of the Tajiks, Uzbeks and other minority groups. If a reading of Afghanistan’s history teaches anything, it is that the country has achieved stability only when it was led by a Pushtun leader who had the support of the minority ethnic groups. In selecting Karzai, a Pushtun, to lead the country, the western alliance had sought to repeat that formula but the way the President governed did not increase his support among the Pushtuns. His desperate attempt to shore up his support by selecting Marshal Fahim Khan, a Tajik, as a running mate compounded the problem and posed a serious challenge for the United States. I will deal with this issue in greater detail below. Karzai also brought on board Dustam Khan, the despised Uzbek warlord, who had been accused of the massacre of the Pushtuns during the 2001 war.

That did not endear the President to his own people.

The third is the absence of good governance in the country. Karzai’s increased reliance on the warlords, many of them with blood on their hands and some of them deeply involved in the drug trade, did not help the President create a following among those in the country who wanted a relatively clean and effective government in place. This sentiment was particularly strong among the Afghan diaspora whose members had come back to lend a helping hand, providing the struggling country with both the capital and human skills it needed. This group also had a candidate in the field. Ashraf Ghani, their representative who had once served at the World Bank and was the country’s Finance Minister, seemed not to have done well in the polls.

What may Happen in the Immediate Future Ballot counting proceeded much more slowly than was indicated at the start of the election period. Then there was an expectation that the results would be announced on 25 August 2009, five days after the polls were held. That did not happen. There were reports of widespread fraud in the balloting, including allegations that Karzai’s supporters had stuffed ballot boxes in the south where the turnout rate was exceedingly low. The Election Commission said on 28 August 2009 that it had received more than 2,000 complaints of fraud. Dr Abdullah, who had posted thousands of agents to watch the polls, showed a video of people stuffing the ballot boxes. On the same day, preliminary results with just 17 percent of the votes counted gave Karzai 44 percent of the total and Dr Abdullah 35 percent. If no

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candidate won an outright majority of the votes cast, a run-off election must be held between the two top contenders. If that happens, the Afghans will have to return to the polls in midSeptember 2009.

The American Reaction Is there disappointment in Washington with the election results? A little over 24 hours after the polls closed, President Obama stepped out on the White House South Lawn to pronounce the election as something of a success, saying “This was an important step forward in the Afghan people’s effort to take control of their future, even as violent extremists are trying to stand in their way. I want to congratulate the Afghanistan people on carrying out this historic election.” This was about the fact that the election was held, but what about its outcome?

“Our only interest was the result, fairly, accurately reflecting the will of the Afghan people”, said President Obama, as he prepared to leave for his August vacation.

However, to secure victory, Karzai seemed to be playing a dangerous game. There were conflicting reports about the manner and content of the meeting between Karzai and an American team that visited his office soon after the election was held. The United States team was led by Richard C. Holbrooke, President Obama’s special representative for Afghanistan and Pakistan, and included General Karl W. Eikenberry, the United States Ambassador to Afghanistan, and his deputy, Francis J. Ricciardone Jr. The Americans said that it was a routine exchange. However, the Afghans let it be known through selective releases of the exchange that the discussion was “explosive”, with the Americans demanding that a run-off election was necessary in order to bestow legitimacy to the electoral process.

According to one interpretation, “Mr Karzai, in a feat of political shrewdness that has surprised some in the Obama administration, has managed to turn the growing disenchantment with the United States to an advantage, portraying himself at home as the only political candidate willing to stand up to the dictates of the United States.” 2 How Karzai is likely to Govern if he takes Office?

If Karzai is able to get himself installed as Afghanistan’s President without going through a run-off election, he would create a large number of problems for his country, for the United States, for Pakistan and for South Asia. The absence of legitimacy will further alienate the Pushtun population in the south that is already restive and where the Taliban seem to be gaining strength in spite of the increase in number of American troops in the area. By bringing in Marshal Fahim as his running mate, Karzai would have given a position of considerable authority to a person the United States has said was corrupt and made use of the trade in drugs to accumulate enormous wealth. When he served as Defence Minister in an earlier Karzai administration, he was known to use military planes to transport drugs to Russia to feed the drug route to Europe and bring back suitcases full of cash. By law, the United States is obliged to take action towards a person against whom there is evidence of drug trafficking.

Restiveness among the people in Pakistan’s north would compound the country’s problem with extremism and deal a blow to its ongoing efforts to cleanse its own territory of this 2

Helene Cooper, “Karzai using rift with US to gain favor”, The New York Times, 28 August 2009, pp. A1 and A9.

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highly disruptive force. And, finally, the failure of the electoral process to produce a legitimate government would have gone against the trend in South Asia where three elections – in Pakistan, Bangladesh, and India – in 2007-08 had demonstrated that this region was turning a corner, a conclusion I had advanced in an earlier paper for the Institute of South Asian Studies. 3

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Shahid Javed Burki, Visiting Senior Research Fellow, ISAS, “Three Elections and Two State Actions – Has South Asia Finally Turned the Corner?”, ISAS Insights No. 70, 28 May 2009. Available at http://www.isas.nus.org/events/insights/71.pdf.

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ISA S Brief No. 127 – Date: 4 September 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The New Irritant in United States-Pakistan Relations: The Harpoon Skirmish Sajjad Ashraf 1 Abstract The New York Times report on 30 August 2009 on Pakistan’s alleged illegal modification of “United States-supplied Harpoon missiles to expand its capability to strike land targets” has become a source of tension between the United States and Pakistan. While the Pakistanis have rejected this claim, it has raised concerns in Washington and New Delhi. This brief argues that the latest dispute could delay or even derail the United States’ legislation to provide aid to Pakistan. It concludes that, given the nature of mistrust between the two South Asian neighbours, Pakistan will continue to find ways and means to match India’s superiority in weaponry.

Introduction The recent United States press reports alleging that Pakistan has “illegally modified the United States-supplied Harpoon missiles to expand its capability to strike land targets” (New York Times, 30 August 2009) has caused another irritant in United States-Pakistan relations as well as with neighbouring India. Senior American officials claim that this modification can be a potential threat to India.

The Harpoon missile provides the Navy and Air Force with a common missile for air, sea and submarine launches. Its low-level, sea skimming cruise trajectory, active radar guidance and warhead assure high survivability and effectiveness. Once fired, the missile flies to the target location, switches on its seeker, locates the target and strikes it without further action from the firing platform.

Whatever their origin, these missiles would be a significant new entry into Pakistan’s military arsenal. They would enable Pakistan’s small navy to strike targets on land, complementing the sizeable land-based missile arsenal that Pakistan has developed. That in turn, security analysts suspect, is likely to spur another round of an arms race with India that the United States has been trying unsuccessfully to halt.

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Mr Sajjad Ashraf is a Consultant for the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the former High Commissioner of Pakistan to Singapore. He can be contacted at sashraf1947@gmail.com.

The United States’ Position The United States press reports suggest that the charge which set off the new round of tensions between the two was made in an unpublished diplomatic protest in late June 2009 to Pakistan’s Prime Minister Yousaf Raza Gilani and other top Pakistani officials.

The United States dministration is reportedly concerned at the speed at which Islamabad is developing a new generation of conventional and nuclear weapons. The United States supplied 165 of these anti-ship Harpoons during the Ronald Reagan Administration as a defensive weapon during the Cold War. The United States intelligence seemingly detected a test – never announced by Pakistan – on 23 April 2009 that the former claims apparently gave Pakistan this modified weapon offensive capability.

Within two days of the news by the New York Times, the United States Assistant Secretary of State for Public Affairs disclosed that the United States Administration had taken up the matter with Pakistan and that Islamabad had agreed to “mutual inspections” of the weapons system. If the allegations are proven to be correct, the United States Administration officials suspect that Pakistan could be in violation of the United States Arms Control Export Act. Rob Hewson, Editor of Jane’s Air Launched Weapons, dismissed the United States’ accusations, claiming that testing was part of the efforts by Pakistan to develop a range of conventional weapons that could be fired from the air, land or sea to address “India’s much more formidable missile arsenal”.

Pakistan’s Denial Pakistan was quick to react with its Foreign Office spokesperson rejecting the accusation claiming that, “no modification has been made to the missile under reference”. Pakistan’s Ambassador in the United States, Hussain Haqqani, vowed to fight back the “periodic efforts to falsely blame Pakistan”. Haqqani, instead, called upon the United States media to help Pakistan secure the assistance it needs to fight terrorism. A senior Pakistani official, speaking to the New York Times on the condition of anonymity, also rejected the accusation, claiming that the missile tested was developed by Pakistan, just as it had modified North Korean designs to build a range of land-based missiles that are believed to have strike capability on land targets in India.

India’s Reaction India’s outgoing Naval Chief of Staff Admiral Sureesh Mehta, claiming that India has been telling the United States that whatever they gave Pakistan will not be used in self-defence, called the development “against India’s national interest”. An Indian government spokesperson said that India is “closely monitoring all the developments bearing on national security” and India “will take necessary steps” towards guarding India’s interests.

Earlier, reacting to plans to provide more military aid to Pakistan, the Indian External Affairs Minister, S. M. Krishna said that, “we have told the United States that, particularly in the case of Pakistan, whatever aid in whatever form has been given to them is invariably directed against India and this has been emphatically registered with the United States government”.

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Possible Impact on United States-Pakistan Relations The latest United States accusation comes at a delicate time when the United States Administration is about to ask the United States Congress for a US$7.5 billion aid package for Pakistan for the next five years. The latest dispute has the potential to delay or possibly even derail the legislation sponsored by Senators John Kerry of Massachusetts and Richard Lugar of Indiana to provide Pakistan with this aid package. An aide to Senator Kerry underplayed the news, saying that “there have been irritants in the United States-Pakistan relationship in the past and there will be in the future”. The United States Congress is expected to vote on the aid package when it returns from recess next month.

Security and diplomatic commentators in Pakistan say that the timing of this accusation fits in the pattern of almost all such aid considerations when Pakistan’s detractors leak information causing difficulties for the aid passage to go through smoothly via the United Sattes Congress. They also argue with some justification, that while making the passage difficult, such out of context disclosures inevitably lead to the addition of several conditions in the aid package, making it possible for the United States Administration to switch off the aid or even extract a heavy price from the rulers in Islamabad, who remain dependent upon American goodwill.

This latest United States-Pakistan spat again highlights the level of mistrust that remains between the two countries. While the United States would like to portray Pakistani armed forces as an increasingly reliable partner in the war against terror both within Pakistan and in Afghanistan, such incidents, if true, indicate that Pakistan’s focus remains on India, which is considered as the main threat to Pakistan’s security by Islamabad.

During the Afghan War of the 1980s and 1990s, the United States turned a blind eye to Pakistan’s covert nuclear programme, allowing the development of nuclear weapon capability. The moment the Soviet forces crossed Amu Darya, the American President refused to certify to the peaceful nature of Pakistan’s nuclear programme to the United States Congress. Military analysts believe that Pakistan wants to use the current United States engagement in Afghanistan to its advantage before time runs out and develop the next generation of weapons to maintain a minimum level of deterrence against India.

Conclusion Given the nature of mistrust between the two South Asian neighbours, Pakistan will continue to find ways and means to match India’s superiority in weaponry. Both countries will continue to accuse each other of triggering an arms race. Considering the experience, as most Pakistanis believe that the United States has let them down, each country will try to pursue its interests within the relationship for the short- and medium-term at least.

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ISA S Brief No. 128 – Date: 7 September 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Japan Joins Changing Asia Shahid Javed Burki 1 Abstract The elections in Japan on 30 August 2009 are likely to take the country in an entirely different direction from the one it has pursued since the end of World War II. Then, it had allied itself closely with the United States, the country that gave it a new Constitution and promised it security against foreign aggression. It also gave an enormous amount of authority to the bureaucracy that wielded power much greater than that exercised by the elected representatives of the people. All that is set to change. When the opposition leader, Yukio Hatoyama, forms the government, he will set the country on a path that will begin to deviate significantly from the past. Change will come but it will arrive slowly. Since it is coming at a slow pace, it will perhaps endure over a long time. What the world may see is a significant restructuring of the global political and economic order, particularly in Asia. There will be changes in five areas, all of them significant for the world. Japan will begin to address the problem posed by a rapidly ageing population, it will redirect public money towards the less advantaged segments of the population, it will reduce the power of the bureaucracy, it will redefine its relations with the United States, and it will get closer to its Asian neighbours, in particular China.

Introduction Asia is changing rapidly and change is coming from several different directions. With the exception of China, it is the exercise of democracy through elections that is producing the change. That happened in South Asia in 2007-08, with elections in Pakistan, Bangladesh, and India. Another change, not entirely anticipated, was produced by the elections held in Japan on 30 August 2009. The Japanese voters threw the Liberal Democratic Party (LDP) out of power for only the second time in the country’s post-war history. The LDP had governed for more than 60 years and its rule was briefly interrupted by the narrow victory of the opposition a couple of decades ago. Then, the opposition was able to govern for only 11 months. It was too fractious to rule and the coalition fell apart, bringing the LDP back to power. This time, the change is likely to last since the Democratic Party of Japan (DPJ) won massively in the recent elections. It has captured 308 of the 480 seats in the Lower House of the Parliament.

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Mr Shahid Javed Burki was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from May to August 2009. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

Working with the smaller parties, it has enough of a presence in the Lower House to pass important bills which need a two-third majority. When the opposition leader, Stanford University graduate Yukio Hatoyama, forms the government in Tokyo, he will set the country on a path that will begin to deviate significantly from the one the country has followed since its defeat in World War II. During the past 60 years, the LDP government ruled conservatively with the help of the bureaucracy.

Change in Japan will come but it will come slowly. Coming slowly, it will endure over a long time. What the world may see is Japan making a significant contribution to the restructuring of the global political and economic order that is already underway. There will be change in at least five areas, all of them significant for the world. Japan will begin to address the problem posed by a rapidly ageing population. Its demographic problem is more severe than in other developed countries. It will redirect public money towards the less advantaged segments of the population, thus breaking the bond that has existed between politics and the owners of large assets. It will reduce the power traditionally wielded by the powerful civil service, which maintained continuity in governance as political administrations changed with great frequency. It will redefine its relations with the United States, reducing its dependence on the United States for providing it with security. And it will get closer to its Asian neighbours, in particular China. I will briefly discuss each of these likely changes.

Ageing Population Demographic change is coming to all parts of the world. In the West and Japan, it is taking the form of fertility rates falling well below 2.1 children per woman, the minimum needed to keep the population at the same level. The most dramatic change is occurring in Europe and Japan. In the case of Japan, the population, currently estimated at 127.6 million, is expected to decline to 115 million by 2030 and may fall below 100 million by the middle of the century. The DPJ placed the demographic problem at the centre of its economic programme.

Unlike the United States, and to a lesser extent Europe, the Japanese are not prepared to let the problem of declining population be resolved by allowing migration. Instead, the DPJ has promised to use public policy to increase the rate of fertility. To ease parenting costs and encourage more women to have babies, the party proposes giving families 26,000 yen ($275) per month per child until the child reaches junior high school. This will add up to a significant amount of subsidy for couples who decide to have more children than they had planned. Would this work? The experience of other countries that have pursued pro-natalist policies suggests that demographic trends are not easy to reverse.

Taking Care of the Less Advantaged The DPJ is also promising to redirect the state’s support from helping the richer segments of the population and supporting those that the system has neglected in the past. Currently, the rate of unemployment is at 5.7 percent, a historical high. It is proposing to provide free education, income support for relatively low-income farmers, monthly allowances for job seekers, training for the unemployed, and a higher minimum wage. Recognising that those with incomes less than the national average live away from city centres where most of them work, the DPJ proposes to eliminate tolls on highways. This programme, if fully implemented, will cost 16.8 trillion yen (US$176 billion), starting in the fiscal year 2013.

This will have the added advantage of providing stimulus to the economy which has stubbornly resisted many attempts at revival. This programme, given the size of the DPJ’s victory, has the support of the population, not withstanding its cost. The Japanese electorate

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does not seem to be worried by the fact that the programme would increase the debt-to-gross domestic product (GDP) burden beyond the already high 100 percent. On the other hand, a large fiscal deficit and growing debt burden in the United States has become a major political issue in spite of the fact that the debt-to-GDP ratio will not touch the Japanese levels.

Taking Power Away from the Bureaucracy For most of the time that the LDP dominated the Japanese political scene, it was happy to let the bureaucracy steer the nation, which it did spectacularly well and was credited with producing the economic miracle, the first in East Asia. In fact, the other miracle economies of East Asia borrowed liberally from Japan, using the state under the control of powerful civil servants to guide the economy.

The civil service’s stellar performance in the early post-war years notwithstanding, recent prime ministers have tried to reduce the bureaucracy’s power after corruption scandals and a failure to end the country’s long stagnation. The civil servants became the target of growing populist ire, a sentiment successfully exploited by the DPJ. The big question is whether the party will succeed. Even before formally taking office, it has challenged the appointment at the consumer affairs agency by the outgoing government headed by Prime Minister Taro Aso. Of the 308 Democrats elected to the Parliament, 143 are first time lawmakers; and of the rest, only a few have held cabinet or sub-cabinet positions. On the other hand, there is an enormous amount of experience in the bureaucracy. The civil servants will no doubt attempt to control the new breed of politicians as they did during the days of Prime Minister Junichiro Koizumi, who also came to office with some reformist zeal.

Redefining Relations with the United States If the Prime Minister-designate Hatoyama begins the process of disengaging his country from the United States, it will not happen suddenly. The first series of adjustments will concern the positioning of American troops in the island of Okinawa, which has become a contentious issue. The DPJ had pledged in its manifesto that the agreement with the United States would be renegotiated, and this allows the United States to keep 50,000 soldiers on the island. The other change would be Tokyo’s withdrawal from another agreement that has the Japanese ships providing fuel to the American fleet in the Pacific. This is controversial in Japan – it has been vigorously opposed by the left especially when the refueling involves the fleet engaged in active operations, as has been the case in the Iraq war. As Japan begins to pull back from a close military relationship with the United States, Washington may get even more dependent on India as a friend in the Asian region.

Getting Closer to Asia Under the Democrats, Japan is likely to get closer to China and South Korea, two countries with which it has had uneasy relations in the past. One reason for this is the reluctance of the Japanese leaders to accept that its troops committed numerous extremely violent acts during the Second World War in the countries they occupied. This was particularly the case in Korea and China. The governments in Japan have gone to the extent of rewriting the history of the war in school textbooks to gloss over the behaviour of its troops in the occupied lands. This may change and the Democrats may come to terms with their country’s past. There is a likelihood of a serious realignment under the Democrats. This development will not go unnoticed by the United States. Washington may form a close working relationship with

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India while China, Japan, Myanmar, Bangladesh and Pakistan – the last three countries nervous about India’s hegemony in the region – may form some kind of an alliance of their own.

The main point to be underscored here is that the election in Japan has produced a dynamic of considerable consequence for Asia, including the southern part of the continent. This will need to be watched carefully as the newly-elected DPJ settles down in office.

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ISA S Brief No. 129 – Date: 16 September 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

India, Pakistan and Bangladesh: ‘Trilateralism’ in South Asia?

Iftekhar Ahmed Chowdhury1 Abstract This paper argues that, within the context of South Asia, India, Pakistan and Bangladesh have commonalities and potentials that could be positively developed through a policy of ‘trilateralism’. It would imply an informal process of identifying and categorising divisive issues into separate but not water-tight boxes and addressing them with a view to resolving them. Unlike the South Asian Association for Regional Cooperation (SAARC), it would not avoid disputes but confront them. The idea would be to create a strategic ‘problem-solving’ partnership that could complement, and not supplant, the SAARC. Introduction In South Asia, there is a great deal that its three largest countries, India, Pakistan and Bangladesh, share. Much more than others in the region, they have had a similar historical experience. Prior to 1947, they constituted a single political entity. As Jaswant Singh’s book on Muhammad Ali Jinnah underscores, the debate over it notwithstanding, they had common leaders. Mohandas Karamchand Gandhi, Jinnah, Jawaharlal Nehru, and Sheik Mujibur Rahman were all united in their aspiration to free India of British domination. Their efforts eventually found fruition in the emergence of three separate independent and sovereign states, which is an established historical fact. Their pluralist values make them three of the world’s largest democracies. Unfortunately, certain colonial legacies fed conflict into their intramural relationship. It is a paradox that these countries are known to the world not for their amity, but for the animosities among them.

However, this situation need not be constant. It is an eternal law of nature that everything is in motion. One never steps into the same Indus or the Ganges twice, as those rivers are in constant flux. The flow of history is no different. How can it then be channelled in a way that we move forward, inexorably even if meandering, from conflict to harmony? It will call for a modicum of ingenuity which undoubtedly the peoples and the leadership of the three countries are capable of. As the entire world acknowledges, their intellectual resources are their source of pride. They must be able to muster and press these into their service at a time

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Dr Iftekhar Ahmed Chowdhury is a Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the (Foreign Advisor) Foreign Minister of Bangladesh from 2007 to 2009. He can be reached at isasiac@nus.edu.sg.

when they need them more than ever to make that quantum leap from poverty to progress, from protests over each other’s behaviour to peace among themselves.

In the recent past, all three countries have experienced successful elections. New governments have emerged in Pakistan and Bangladesh. In India, the electorate returned the same party into power but in a strengthened ‘avatar’. Newness accords impetus to the will to change. The challenge is always to make this change better and more desirable. This should also be the case even if it were to involve a break with the past. The three capitals, and the new leaderships, including the one renewed in India, should perhaps focus on this phenomenon. In this they are certain to have the support of their peoples, important for democracies (which all of them are), who are exhausted from decades of strife. In this they will also receive the support from the rest of the world.

Indo-Pakistan Relations There are positive signals emerging from India and Pakistan in this regard. The relationship between the two powerful nuclear states is key to this desired stability. Pakistan’s owning up to a number of its citizens’ responsibility for the mayhem in Mumbai was a welcome departure from the traditional behaviour-pattern of the past. Indeed, it offered the scope to turn a tragedy into an opportunity, and to the credit of both sides, they were able to seize upon it.

It is a good thing too that in all these cases the initiatives made soft beginnings during the period of the immediate past governments. Nothing buttresses the new as an element of continuity, which lends the change a greater degree of robustness.

In the case of India and Pakistan, there was the Pervez Musharraf-Manmohan Singh agreement to strive for a “final settlement” on the Kashmir issue, and not to “allow terrorism to impede the peace process”.

These, together with the bus links, the proposed pipelines to carry Iranian and Central Asian oil and gas to India and Pakistan and the reactivation of the Joint Economic Commission, have led both countries to describe their growing understanding as “irreversible”. Some recent pronouncements by President Asif Ali Zardari and the Singh-Syed Yousaf Raza Gilani talks in Sharm el-Sheikh have taken the process forward. Given the nature of their past relationship, even a rhetorical advance on some of these highly sensitive subjects can be considered “progress”.

Indo-Bangladesh Relations Similarly, in terms of India-Bangladesh ties, during the period of the caretaker government in Bangladesh, some hot bilateral issues were brought to the discussion table and the ‘apolitical’ nature of the Bangladesh government allowed for a functionalist approach to some of these subjects, such as water-sharing, transit and connectivity, and the alleged provision of s ‘safe haven’ to Indian insurgents in Bangladeshi territory. The many meetings held between them led both sides to declare that the relationship was on an “irreversible trajectory”.

India was not unhappy when power was transferred through elections to an Awami Leagueled government in January 2009, a party known to be better understood in New Delhi. The then-Indian Foreign Minister, Pranab Mukherjee, was the first high-ranking foreign official to

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visit the new government in February 2009. The stage is now fully set for a visit to India by Prime Minister Sheikh Hasina, in the course of which it has already been stated that the Indian side will not raise issues that might embarrass her.

Pakistan-Bangladesh Relations The Pakistan-Bangladesh relationship is in some ways less challenging. The two countries share no borders and, therefore, have no such issues that usually tend to bedevil relations between neighbours in post-colonial settings such as undemarcated boundaries or the sharing of river waters. Being Muslim-majority countries, both, of course, share many common values.

However, while Pakistan is battling terrorism and fundamentalism, Bangladesh is quite happy to maintain and underscore a distinctiveness that allows it to tackle such problems, far less menacing in that country to start with, through poverty alleviation and women empowerment.

Thus far, the great value each saw in the other was the possibility of a linkage that could develop into a counterpoise vis-à-vis India, but as their relationships with India improve, this will require replacement by more positive features.

Developing ‘Trilateralism’ As this set of relationships evolves, India will need to play a critical role. Because of its size, power, influence and endowments, it has to bear a disproportionate responsibility, even if, at times, it is to be without immediate reciprocation. As I have said elsewhere,2 it should be the ‘elder’ and not the ‘big’ brother; not only the largest country in the heart of South Asia, but the country with the largest heart.

In terms of politics and economics, India, like China, is a country on the rise in the global scene. It seeks not just regional pre-eminence but also the recognition of a wider international role that it feels it deserves. This can come more easily with the endorsement of its neighbours. Thus, how best can the three countries go about developing this ‘trilateralism’ between them, such that they will find it rewarding both individually and collectively?

First, they should perhaps work out a “matrix” detailing the problematic aspects of their relations with a view to solving them. This could involve dividing bilateral issues into categories – those that can be resolved with a bit of effort or ‘green-box issues’; those that will require some dedicated effort or ‘orange-box’ issues and those whose resolution for now will be difficult or ‘red-box’ issues. The ‘lower hanging fruits’ of the ‘green-box’ may be focused on at the outset, graduating thereafter to the ‘orange’ and ‘red’ boxes, hoping that the resultant generation of goodwill from forward-movement in one box could positively impact the others.

Second, an informal ‘strategic partnership’ could be evolved between them. It is distinguishable from the more formal ‘classical alliance’. A strategic partnership seeks to increase the power of the states involved in absolute terms. In this sense, it is different from a classical alliance, which is security-oriented (such as the North Atlantic Treaty Organization), and even from political and economic integration processes (such as the European Union, the 2

“Post-Election India: How the Neighbours View the Elephant”, ISAS Insights No. 68, 22 May 2009 – http://www.isasnus.org/events/insights/69.pdf.

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Association of Southeast Asian Nations and the African Union). While classical alliances seek a balance of power against a perceived adversary, a strategic partnership is not directed against a common rival but instead aims at a general accretion of influence. Also, while security pacts and political integration tend to sacrifice an element of national defence, monetary and fiscal policies, a strategic partnership, on the other hand, is based upon the mutual goal of increasing individual power and independence, thus allowing for the preservation of national sovereignty.

This is exactly why this ‘trilateralism’ and strategic partnership is more likely to succeed in forging a political entente than the SAARC. This is a formal body in which the fear of any erosion of sovereignty precludes political discussions of a serious nature. Moreover, the agreed structure rules out bilateral issues from the agenda, which leads to a ‘Catch-22’ situation because as long as the problems characterise mutual relations, progress on even functional areas can be rendered difficult. ‘Trilateralism’ will turn this over its head and seek to identify the problems first with a view to resolving them. Nonetheless, the purpose of this ‘trilateralism’ would not be to supplant the more formal SAARC process. Indeed, it should complement and help strengthen it.

The process could begin with a Summit of the leaders of India, Pakistan and Bangladesh. If it succeeds, it would radically alter the course, not just of regional, but of international relations. It is not necessary to resolve all or even some of the problems. However, the mere agreement to do so, with a structure put in place (the ‘boxes’) as a demonstration of the political desire, will make a huge difference. This will not only facilitate the rise of India, but will also enable Pakistan and Bangladesh to follow in a ‘flying geese’ formation, to the benefit of all their peoples.

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ISA S Brief No. 130 – Date: 22 September 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Afghanistan Presidential Election 2009: Inconclusive Results a Dilemma for the United States Shahid Javed Burki 1 Abstract Serious doubts about the fairness of the Afghanistan presidential election held on 20 August 2009, increased casualties in the escalating fight, and some weakening of the European support for the war in Afghanistan have posed a serious dilemma for the administration of United States President Barack Obama. Washington had hoped to follow a classic counterinsurgency strategy which seemed to have succeeded in Iraq. This had three elements – to split the opposition, to economically develop the areas in which the insurgents were active, and to use great force against those who continued to resist. However, for such a strategy to succeed, it required an Afghan government that is credible and legitimate, both to get the Afghans to support it and to get Americans and their allies to help. What is placed on hold is any kind of political reconciliation and attempting to split the Taliban. It is very difficult to do this without an Afghan government as an effective partner. The election of 20 August 2009 did not produce such a government. At the same time, the resolve of the American people and their allies in Europe to continue with the fight seems to be weakening.

Introduction The second presidential election in Afghanistan under the country’s new constitution was held on 20 August 2009, five years after the first election that reconfirmed Hamid Karzai as the President. Under the constitution adopted by Afghanistan after the overthrow of the Taliban regime in December 2001, elaborate election machinery was set up to ensure that the election was fair and transparent. Two commissions were established, one – the National Election Commission (NEC) – was appointed by the Afghan authorities, and two – the Electoral Complaints Commission (ECC) – was established by the United Nations. The NEC could not issue the final results without the sanction of the ECC. By the time the counting of votes began after the elections and serious complaints began to be received by the ECC, it was clear that, amid the charged atmosphere in the country, the identification of a clear winner would become highly contentious.

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Mr Shahid Javed Burki was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from May to August 2009. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

Preliminary Vote Count The vote count proceeded slowly. On 16 September 2009, the NEC released preliminary data, according to which, 5,662,758 votes were cast, of which 3,093,256 were in favour of Karzai, 1,571,581 for Abdullah Abdullah and 520,627 for Ramazan Bashardost. Ashraf Ghani, the West’s favourite candidate who had once served at the World Bank and was Finance Minister under Karzai for two years, came in fourth, winning only three percent of the votes. This meant that, according to the official count, the sitting president was a clear winner with 54.6 percent of the vote while Abdullah received 27.8 percent. According to the NEC, voter turnout was 38.17 percent and about three of five voters were men. Under the constitution, any candidate receiving 50 percent plus one vote would be declared the winner. A run-off election would be held if no candidate received a clear majority.

The NEC’s announcement resulted in an immediate challenge from Karzai’s rivals as well as from an important segment of the international community. Abdullah’s campaign had maintained that more than one million votes were fraudulent and needed to be excluded from the vote count. If that happened, Karzai’s proportion would fall below 50 percent and a new election would have to be ordered between the two front runners. The opposition to Karzai was pleased by the doubt cast by European observers and some members of the ECC about the accuracy of the official count. “Their job is to observe the election process and announce what they had seen,” said Fazal Sancharaki, a spokesman for Abdullah.

According to one newspaper account, European Union monitors said moments after the NEC released its count “that about one-third of the votes cast for President Karzai in the 20 August election were suspicious and should be examined for fraud. Their assertions were a more serious indictment of the election’s already marred integrity than those of other foreign monitors and only deepened the political crisis here. President Karzai’s campaign office angrily dismissed the European Union assertion, which came as the latest preliminary tally of votes showed that he had won – if the suspected ballots are included.” 2 The ECC seemed to indicate that votes from 10 percent of the polling stations should be recounted. According to one assessment, “If some votes were invalidated, that could push [Karzai] below the 50 percent threshold.” 3 However, Karzai continued to dismiss the Western concerns about the quality of the elections, saying he was “surprised and rather shocked” that the European Union election monitors had warned that 1.1 million of his 3.1 million votes were suspicious.

Western governments, he said, should “respect the people’s vote”.

Fissures among the Allies The European doubts about the fairness of the election were shared by some of the senior American members of the ECC. Deep fissures developed in the foreign-staffed EC as well as in the Office of the United Nations Special Representative in Kabul. This led to the hasty departure of Peter W. Galbraith, the Deputy Representative in the United Nations Mission.

Galbraith and his Norwegian boss, Kai Eide, differed on how to handle the delicate situation that had arisen from the disputed election. “I suggested to him, and he agreed, that it would be best to leave the country”, Galbraith said in a newspaper interview. “It’s fair to say [Eide]

2

3

Richard A. Oppel Jr. and Sangar Rahimi, “Europeans say one-third votes for Afghan leader are suspect”, The New York Times, 17 September 2009, p. A6.

Mark Landler and Helene Cooper, “Afghan ballot uncertainty creates dilemma for U.S.”, The New York Times, 18 September 2009, p. A10.

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didn’t have confidence that I would follow his policy line on this, and I had disagreements with his policy that were best resolved by leaving.” 4 The differences among foreign officials in Kabul were not with regards to the degree of fraud in the elections – there was a broad consensus that the government had massively interfered in the elections – albeit about the remedies available to deal with the evolving situation.

According to one analyst writing from Kabul, “the question that has increasingly divided Afghan experts and international officials here is whether to pursue the time-consuming fraud investigations to the end – leaving a weakened Karzai, estranged from Afghanistan’s international backers in power during months of political drift and potential violence until a possible spring run-off, or to seek an unlikely political compromise among Afghans to avoid a second round…In the post-election dispute, sources close to the United Nations said Galbraith represented the view that the fraud probe must be fully carried out along with a partial recount that the complaints panel ordered, even if that leads to a delayed run-off. That view jibes with the vision of Grant Gippen, the Canadian who heads the ECC, that building a democratic process matters more than who wins the elections...But another, more pragmatic school of thought, which Eide has publicly endorsed in the past, argues that a run-off may be too difficult and dangerous to hold. The urgent need to establish a new government while Afghanistan and its Western Allies are fighting a war against Taliban insurgents, as this line of thinking goes, requires a political solution such as a compromise between Karzai and Abdullah.” 5 Following this approach, foreign officials began earnest efforts to constitute a coalition government in Kabul. Both the American and United Nations officials began secret discussions with the Karzai and Abdullah camps to see whether they would be willing to work together in a coalition government. While the President appeared to show some interest, Abdullah was less willing to play second fiddle in a Karzai-dominated administration. He suggested splitting the executive authority given to the President into two parts, leaving mostly ceremonial powers with the President and creating a new office of the chief executive – effectively a Prime Minister. Under this scheme – not acceptable to Karzai – Abdullah was prepared to serve as the chief executive.

Increase in Violence Taking advantage of the confusion that prevailed, the Taliban intensified their activities.

Violence over one weekend – the weekend of 11-13 September 2009 – claimed the lives of 50 civilians, members of security forces and at least three American soldiers. There appeared to be a method in the way the insurgents were carrying out their attacks. They were concentrating in the areas outside their stronghold in the country’s southern provinces – those bordering on Pakistan – and they were systematically targeting the United States’ North Atlantic Treaty Organisation allies. This strategy was to send a strong message to the foreigners that the Taliban could reach all corners of the country while weakening the political will of the United States’ European partners. For instance, the devastating attack on the Italians in the heart of Kabul on 17 September 2009 was designed to reduce the willingness of Prime Minister Silvio Berlusconi’s government to stay in the fight. The attack claimed at least six Italian lives and prompted an immediate response from the Italian Prime Minister, which is believed to have satisfied the Taliban. He said that he had begun planning 4

5

Pamela Constable and Karen DeYoung, “Diplomat in Kabul leaves in dispute”, The Washington Post, 17 September 2009, p. A14.

Ibid.

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to “bring our young men home as soon as possible”. The Italians have 3,100 soldiers in the country. On the same day, Umberto Bossi, the leader of the Northern League, the most powerful party in the Prime Minister Berlusconi’s coalition, reiterated his calls for an immediate Italian withdrawal. “I hope by Christmas, everyone can come home”. The Prime Minister could not possibly ignore this sentiment. The same pressure on him to withdraw from Iraq in 2006, which he had disregarded at that time, cost him the election that year.

The American Dilemma Serious doubts about the fairness of the elections, increased casualties in the escalating fight, and some weakening of the European support for the war in Afghanistan pose a serious dilemma for the administration of President Barack Obama. The difficulties faced by Washington are well summarised by Bruce Riedel, a senior fellow at the Brookings Institution, who had helped develop the new administration’s policy towards the region that came to be called the AfPak – Afghanistan and Pakistan. “The strategy requires an Afghan government that is credible and legitimate, both to get Afghans to support it and to get Americans and their allies to help. The strategy can’t work around a South Vietnamese-style government…What is placed on hold is any kind of political reconciliation, of trying to split the Taliban. It is very hard to do that because you need an Afghan government as your partner”, he said. It is clear that the election of 20 August 2009 did not produce such a government. Therefore, uncertainty persists in an important part of the world.

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ISA S Brief No. 131 – Date: 5 October 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Kerry-Lugar Bill: Difficult Choices for Pakistan Sajjad Ashraf 1 Abstract As the United States Administration seems poised to engage effectively with the South Asian region, at least in the short run, the Kerry-Lugar Bill is meant to pursue these interests with support from Pakistan’s beleaguered government. While the Pakistani government declares the aid passage as a triumph of its diplomacy, the critics claim that it is a sell-out of national sovereignty. They point to some of the ‘degrading’ conditions which Pakistan may be obliged to accept before aid can be disbursed. Given the track record of its aid disbursements, the United States Congress will perhaps not acquiesced to anything less. The aid will most likely continue with conditions as long as interests converge.

Introduction The Kerry-Lugar Bill that cleared the United States House of Representatives on 30 September 2009 has already caused a lot of controversy in Pakistan since its passage last week by the American Senate. The bill authorises US$1.5 billion of annual aid to Pakistan for the next five years. When authenticated by the President, it will become a law. The passage of this bill has seemingly reopened old wounds in the already-delicate United States-Pakistan relationship.

The United States Senate’s ratification of the bill was appropriately timed with President Asif Ali Zardari’s visit to the United States for the United Nations General Assembly session. The President’s supporters hail the passage of the bill as a triumph of the current government’s policies. They suggest that the bill is a vote of confidence for the new democratically-elected Pakistani government. They claim that the bill will bring much needed economic stability to the country.

The bill underscores the development challenges facing Pakistan and the need to assist a vital ally. It is a well-crafted document that makes no secret of its underlying purpose – the pursuit of the United States’ interests in the region.

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Mr Sajjad Ashraf is a Consultant for the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the former High Commissioner of Pakistan to Singapore. He can be contacted at sashraf1947@gmail.com.

The Controversy and its Backdrop The mechanics of aid disbursement itself brings another brigade of already-stretched American bureaucracy into Pakistan, with its attendant need for security and maintenance costs. There is already chagrin in the Pakistani media that over hundreds of houses are being acquired by the United States in Islamabad and other Pakistani cities, causing serious issues in the neighbourhood.

The informed opinion within Pakistan is one of discontent over the conditions that Pakistan needs to satisfy before American aid is released. They protest that the government would be well advised to trace its history on the subject. Pakistanis who have particularly sore memories of earlier American legislation often cite the infamous Pressler Amendment during the Ronald Reagan-George Bush era when similar egregious conditions were a pre-requisite to aid. It was then that President Bush (Senior) refused to grant a waiver as soon as the Soviet forces withdrew across the Amu Darya (River) at the Afghan-Soviet Central Asian border.

Such United States opportunism is not lost on the Pakistani body-politic. Most Pakistanis felt betrayed when they witnessed its ally, the United States, turn its back on the region once its near-term objective of Soviet withdrawal was achieved. Most experts today agree that this short-sightedness set the stage for a chain of events that started with an Afghan civil war and resulted in the September 11 attacks in the United States and a renewed clash of civilisations.

In Pakistan, the debate rages over the ownership of the war. Is it Pakistan’s war or an American war? Many in the country are suspicious that the United States is using Pakistan’s weak and dependent political leadership to fight its proxy war. While most Pakistanis are relieved at the defeat of the Taliban forces in Swat and its surrounding districts, ongoing concerns remain over the operation’s motives in the Federally Administered Tribal Areas (FATA).

Opinion in Pakistan is also deeply divided over the question of Pakistan’s sovereignty being violated by the passage of this bill. The opposition, led by the newly-resurgent Pakistan Muslim League-Nawaz, along with much of the independent opinion-makers, believes that accepting aid under these conditions is tantamount to accepting American dictates into Pakistan’s domestic policy sphere.

Main Objections The provision of aid under this bill is conditional upon an annual fiscal year certification by the United States Secretary of State “under the direction of the President” before much of the aid is released.

The main criticism relates to the following certification requirements: a.

that Pakistan continues its cooperation with the United States in its efforts to dismantle supplier networks relating to the acquisition of nuclear weapons-related materials, such as providing relevant information from or direct access to Pakistani nationals associated with such networks;

b.

that Pakistan (during the preceding fiscal year) demonstrates a sustained commitment towards combating terrorist groups;

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c.

the extent to which the Government of Pakistan has made progress on matters such as ceasing support, including by any elements within the Pakistan military or its intelligence agency, to extremist and terrorist groups, particularly to any group that has conducted attacks against the United States or coalition forces in Afghanistan, or against the territory or people of neighbouring countries;

d.

that Pakistan prevents Al-Qaeda, the Taliban, and their surrogates, such as Lashkar-eTaiba and Jaish-e-Mohammed, from operating in Pakistan. This would include carrying out cross-border attacks into neighbouring countries, closing terrorist camps in FATA, dismantling terrorist bases of operations in other parts of the country, including Quetta and Muridke, and taking action when provided with intelligence about high-level terrorist targets;

e.

the strengthening of counter-terrorism and anti-money laundering laws; and

f.

that security forces are not materially and substantially subverting the political or judicial processes of Pakistan.

Different Perceptions It is no secret that the United States has been demanding direct access to Dr A. Q. Khan, the father of Pakistan’s nuclear bomb, who has been accused of running supplier network of nuclear weapons-related technology to North Korea, Iran and Libya. Given his hero status in the country, this is an emotional issue for most Pakistanis and any government in Islamabad will find itself in a bind should it ever contemplate offering the United States access to its electorate’s national hero. Should the Pakistani government refuse to cooperate with the United States’ pre-conditions under the bill, it could run the risk of having its aid cut off.

American policy-makers have continuously accused Pakistan’s military and intelligence agencies of supporting the militants, a charge vehemently denied by Pakistan. The bill attempts to safeguard against this fear by making Pakistan’s government accountable in its fight against the militants. It is a perfectly legitimate expectation that conforms to international civil norms. However, the use of strong words relating to Pakistan’s national institutions provides opportunity for chauvinistic rhetoric to the bill’s opponents in Pakistan.

Pakistanis resents such claims of not doing enough and point to the four major offensives launched by former President Pervez Musharraf against the militants, in addition to the current offensive in Swat. They argue that these offensives were carried out at the behest of the United States and resulted in massive destabilisation which has manifested in an all-out civil war in the northern areas. Yet, the language in the bill suggests continued suspicion of Pakistan’s motives.

Political and foreign policy analysts in Pakistan remain puzzled that, despite having a long history of patronising Pakistan’s military dictators, the United States seems to have suddenly changed its mind, now being in favour of democratic governments. Given the historical backdrop, the clause is hypocritical. Opposition members in the Pakistan parliament have publicly accused the Pakistani government, seemingly dependent upon American patronage of prompting the inclusion of such a clause in the conditions. The inclusion, nonetheless, underscores the United States’ comfort level with the current civilian leadership against the Pakistan army, which is widely rumoured to be skeptical of the excessive and growing American presence in Pakistan.

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The opponents of the bill claim that these conditions represent an overt American dictate in areas of Pakistan’s domestic jurisdiction. They argue that no self-respecting nation should accept aid with so many pre-conditions stapled to it. Unfortunately, aid is an elective right of the donor and there is hardly such a thing as unconditional aid.

Answering the critics, Sherry Rehman, a Pakistan Peoples Party member of the parliament and former Minister for Information, claims they should understand that the passage of the bill by the United States Congress “is not an agreement” between the two governments. The choice, therefore, is with Pakistan to accept American aid with these conditions.

The United States legislators justifiably see a need to put these conditions as a quid pro quo for the approval of this bill. Successive Pakistani governments have not exhibited a strong track record of acting as responsible custodians of donor aid. Pakistan’s ranking of 134 (out of 180 countries surveyed) on the corruption index in 2008 makes it virtually impossible for elected representatives of the American public to approve donations of its tax dollars to Pakistan without the appropriate safeguards and assurances in place.

Conclusion The controversy over the Kerry-Luger Bill underscores the contesting viewpoints over United States-Pakistan relations. On one side sits the government, typically assuming what critics believe is its subservient role to an American patron, while on the other sits the public and the intelligentsia, who portray themselves as the national conscious and who remain wary of the United States’ designs and intentions in the region.

Many analysts agree that the United States’ experience in Afghanistan will follow the path currently underway in Iraq. As casualties mount, like they have in 2009, American public pressure will compel the withdrawal of American forces from the South Asian region.

Pakistan’s support for the pursuit of United States policies, therefore, remains critical.

There is a broad-based public consensus in Pakistan that it needs to have its very own conditions on helping the United States-sponsored intervention in the region. They lament that Pakistan has been bearing the cost of misguided American policies in Afghanistan since 1988. As such, Pakistan needs to see gains that are accretive and measureable before the Pakistan government continues its blind support for someone else’s objectives in Afghanistan.

It appears that the United States will continue to nudge the Pakistani government to support its objectives in the region, and certification will be forthcoming as long as there is progress in achieving American goals. The United States will overlook some minor or even major shortcomings as long as Pakistan’s support is needed. Once the United States’ objectives are achieved, Pakistan should start worrying and counting the days to when these certifications are held back.

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ISA S Brief No. 132 – Date: 13 October 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Suffering Terrorism but Flirting with Populism: Pakistan’s Current Predicaments Ishtiaq Ahmed 1 Abstract The Taliban-Al-Qaeda nexus has, in recent days, mounted a number of bloody terrorist assaults in Pakistan, including the nerve centre of the Pakistan armed forces and general headquarters in Rawalpindi, causing several fatalities and injuries. Disappointingly, the national debate in Pakistan has instead focused on the Kerry-Lugar Bill that will provide economic and military aid worth US$7 billion for the next five years, alleging that it compromises Pakistani sovereignty. This paper argues that the real threat to Pakistani sovereignty is posed by the terrorists.

Introduction The recent few weeks in Pakistan have been full of activism. While the chattering classes have been overly vocal about the perceived threats to Pakistan’s sovereignty posed by the Kerry-Lugar Bill, the Taliban-Al-Qaeda activism has been directed at concretely and incontrovertibly undermining the same sovereignty through the use of terror. Once again, the real threat to Pakistan’s existence seems to have been eclipsed by a discourse laced in populism, debating issues of technical sovereignty. We begin with a review of the TalibanAl-Qaeda activism and then discuss it in the context of the controversy over the Kerry-Lugar Bill.

Recent Suicide Attacks On 10 October 2009, Taliban militants donning military attire drove into the compound of the Pakistani army’s general headquarters in Rawalpindi. When the security guards challenged them, they began shooting and throwing grenades at them. The security personnel returned fire and, in the shootout which ensued, six security guards and four terrorists lost their lives.

Some of the Taliban, however, managed to enter the general headquarters premises and took dozens of people hostage. Sporadic shooting continued throughout the night. By early morning, Pakistani commandos from the elite Special Services Group had succeeded in freeing most of the hostages. Four more terrorists were killed and one, believed to be their 1

Professor Ishtiaq Ahmed is a Visiting Research Professor at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg.

ringleader, Aqeel, also known as Dr Usman, was captured. Among the Pakistani army personnel who lost their lives were a brigadier and a lieutenant-colonel. Eight security personnel, nine terrorists and three civilians – altogether 20 people – were killed.

It is undoubtedly the most audacious and daring assault by the Taliban-Al-Qaeda nexus.

Questions will be asked about any intelligence lapse that may have occurred, because security arrangements around the general headquarters are supposedly the most stringent and impregnable. The latest reports suggest that the conspiracy to attack the general headquarters may have links even to Punjab where, in the southernmost districts, fanatical Islamists have been growing by the day. However, it is difficult to believe that complete outsiders plotted the attack – help and assistance from rogue elements either serving or retired, or a combination of both, must have played some role in it.

The assault on the general headquarters was preceded by two other vicious attacks in the same week. On 5 October 2009, a suicide bomber, dressed up in a Frontier Constabulary uniform succeeded in entering the premises of the United Nations Food Programme Office and blowing himself up. Five people were killed, including a United Nations diplomat and three female employees. The culprit was able to deceive more than 20 security guards who were on duty at that time. Then, on 9 October 2009, another suicide bomber blew himself up in a very busy and central part known as the Soekarno Square of Peshawar, the capital of the North-West Frontier Province. Among the dead were many schoolchildren who were on a bus. More than 50 people were killed and over 100 injured. Most recently, on 12 October 2009, a suicide bomber detonated a car packed with explosives in a crowded market in the northwest Shangla district. Aimed at a military convoy, the strike killed at least 40 people.

Reasons for Suicide Bombings What is the reason for this recent spate of coordinated and calibrated outrage? Quite simply, the fact is that from May 2009 onwards, the Pakistani military launched an all-out offensive against the Taliban which has resulted in the latter suffering serious reverses. They have been more or less driven out of the Swat Valley where, in early 2009, they had announced the establishment of a so-called Islamic emirate, which in practice, had meant a reign of terror that particularly targeted women and religious minorities.

In any case, the Islamic emirate collapsed within days of the attack by the Pakistani military.

The Army Chief, General Ashfaq Parvez Kayani, did not order the cessation of the offensive as had happened in the past when several ill-planned and poorly-motivated military operations had failed to dent the Taliban’s fighting ability. This time, the resolve of the military seems to be of a very different nature. It went in pursuit of the Taliban in their stronghold in South Waziristan. It is widely believed that the military is planning a massive operation against the Taliban in the days ahead. The conflict has entered a critical stage and if the military carries out its operation as planned, and successfully, a crippling blow will be inflicted upon the Taliban.

Therefore, the renewed attacks are without doubt meant to deter the military from executing its operation. In the days and weeks ahead, the nerve and resolve of the two combatants will be put to the test. The military spokesperson, General Athar Abbas, declared that the attack on the general headquarters has by no means weakened the resolve of the military to crush the Taliban.

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Controversy over the Kerry-Lugar Bill It is unfortunate that, just at a time when patriotic Pakistanis should be fully backing the campaign against terrorism, a futile controversy has erupted over the Kerry-Lugar Bill. It provides economic and military aid worth more than US$7 billion to Pakistan over a period of five years. There is no doubt that the Bill primarily seeks to extract optimal output from the Pakistani civil and military elites in the fight against Al-Qaeda and its Taliban allies.

However, the Bill is much more ambitious than that. It is an undertaking in political engineering as well. It aims to establish civilian supremacy over the military in the interest of democracy. Moreover, it introduces specific rules and standards for monitoring the use of money so that corruption and embezzlements are kept to a minimum.

The loudest and shrillest critique has come from right-wing parties and leaders who, in the past and with very few exceptions, had no qualms of conscience in receiving huge amounts of United States money and arms to conduct jihad and/or to keep an unrepresentative government afloat. Now when the same superpower, led by President Barack Obama, wants to change course and return to the pristine United Nations Charter of creating a world order anchored in collective security, Pakistan’s reactionary politicians are worried about the country’s sovereignty being compromised.

There is, of course, a critique of the same Bill from another quarter in Pakistan – the military.

The Bill provides amply for the military being trained and equipped for fighting terrorism, a goal it has itself adopted with great determination and courage. There are some clauses requiring the dismantling of terrorist outfits such as the Lashkar-e-Tayyaba and Jaish-eMuhammad and not just Al-Qaeda and the Taliban. However, more importantly, the Bill seeks to prioritise civil control over the military. A number of clauses in the Bill have admittedly been phrased awkwardly. It is these portions of the Bill that have probably irked the military establishment.

The response of the military is, therefore, partly a reflection of its anxiety about a new balance of power coming about in Pakistan, in which civilian institutions may gain greater clout and prestige at its expense. It is also partly a response calculated to not appear too obliging towards the Americans. Considering that democracy is still very vulnerable and fragile in Pakistan, it is important that the civilian sector is kept in good humour, even as the military remains the country’s dominant institution. The Bill has yet to be passed by the United States Congress. It is going to be debated in the Pakistan National Assembly, where the legitimate concerns of Pakistan will hopefully be put forth, and addressed in the final Bill.

Conclusion On the whole, however, the Bill is good for Pakistan, as well as its political and military establishments. There is now a chance to undo the distortions and deformations that afflicted the body politic of Pakistan during the Cold War and the Afghan Jihad. Now is the time to aim for peace, prosperity and democracy within Pakistan and in the South Asian region. It is also time to develop a national consciousness that can distinguish between a United States that is committed to peace and peaceful resolution of conflicts, and one that believed, until very recently, that its will must prevail simply because it is the most powerful nation on earth.

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ISA S Brief No. 133 – Date: 19 October 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

South Waziristan: The Beginning of Pakistan’s Military Campaign Shahid Javed Burki 1 Abstract In this first of a series of briefs that will follow Pakistan’s military campaign to oust the Taliban from the South Waziristan tribal agency – one of the seven that constitute Pakistan’s Federally Administered Tribal Areas – I will provide some details about the background of the ongoing conflict between the Pakistani state and the stateless Islamic insurgents. The army’s operation in South Waziristan began on 17 October 2009 when 30,000 soldiers began to slowly move into the area inhabited by the fiercely independent Mehsud tribe. The tribe formed the backbone of the Tehrik-e-Taliban Pakistan (TTP), now led by Hakimullah Mehsud. The new leader took over when an attack by an American Predator killed Baitullah Mehsud, who was accused of ordering a number of murderous attacks on various targets in Pakistan. He was also alleged to have been the mastermind behind the assassination of Ms Benazir Bhutto on 27 December 2007. The military had declared its intention of a major assault on the Mehsuds in the area. It began after a week of terrorist attacks for which the TTP took responsibility. The attacks, including one on the army headquarters in Rawalpindi on 10 and 11 October 2009, took 175 lives. It was reported that the move into South Waziristan by the military had the full support of the United States which is rushing in supplies needed by the Pakistani forces.

Background South Waziristan is the southern-most tribal agency in the seven-agency region that constitutes Pakistan’s Federally Administered Tribal Areas (FATA). The FATA is the most impoverished part of Pakistan with per capita income about one-half of the national average.

It borders Afghanistan in the north and the province of Balochistan in the south. It is home to the fiercely independent Mehsud tribe that, in recent years, has supplied men, material and leadership to an Islamic insurgency movement that went under the name of Tehrik-e-Taliban, Pakistan (TTP). The TTP was loosely aligned with the larger Taliban movement led by Mullah Muhammad Omar, who had headed the government in Afghanistan when the AlQaeda launched a terrorist attack on the United States on 11 September 2001 (9/11). The United States retaliated by invading Afghanistan with ground support provided by the forces 1

Mr Shahid Javed Burki was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from May to August 2009. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

of the Northern Alliance. The Northern Alliance was dominated by the Tejiks whereas the Taliban drew their support entirely from the Pushtuns, the dominant ethnic group in the country. The United States’ invasion led to the installation of a new government in Kabul under President Hamid Karzai, a Pushtun from Kandahar. Supported by the United States and its North Atlantic Treaty Organisation (NATO) allies, President Karzai was able to write a new constitution for Afghanistan. The country was given a presidential form of government.

The first presidential election was held in 2004 and supervised by the United Nations. Karzai won. The second election on 20 August 2009 was alleged to have been corrupted by a number of frauds, mostly committed to ensure the incumbent president’s win in the first round. Although Karzai won 54 percent of the vote, the result was disputed by the opposition, in particular by Dr Abdullah Abdullah, his main rival. 2 The dispute over the elections added to the uncertainty that plagued Afghanistan. In the meantime, the administration of United States President Barack Obama began an intensive review of the policy towards Afghanistan. The review followed a request by General Stanley McChrystal for the deployment of an additional 40,000 American troops to pursue a counterinsurgency strategy. This strategy involved the use of force to expel the insurgents from a given area, hold the area and work with the people to develop it. Those opposed to this approach contended that while it may have worked in Iraq, it will not succeed in Afghanistan where the socio-political conditions are very different. Several senior members of the Obama administration instead suggested the pursuit of a counter-terrorism approach that use military force to eliminate the leadership of the insurgency while concentrating resources on economic development. This strategy was championed by United States Vice President Joseph Biden who also contended that, in recent years, Pakistan had emerged as the epicentre of organised terrorist activity. Given appropriate support, Pakistan had the capability to use the counter-insurgency approach against the insurgents operating from its area.

It was South Waziristan that had become the stronghold of the Taliban. It was also the area where Osama bin Laden and other leaders of the Al-Qaeda were thought to have taken refuge. The Biden approach was embedded in the “Enhanced Partnership with Pakistan Act of 2009” that was signed by President Obama on 13 October 2009. The Act was based on the bill originally tabled by Biden when he was Chairman of the Foreign Relations Committee of the United States Senate. The Act committed the United States to providing US$7.5 billion of economic assistance to Pakistan over a period of five years (2010-2014) under its “Title I” and an unspecified amount to strengthen the country’s security forces under “Title II”. There were several conditions for this support. The two that mattered were the vigorous campaign against eliminating terrorist groups that had found haven in the country, and instituting improvements in the social and economic situation of the people.

The Islamic insurgents were in violent opposition to the close ties that had developed between Washington and Islamabad after 9/11. These involved Pakistan’s support to the United States in Afghanistan as well as the commitment to move against the groups that had carried out acts of terrorism not only in Pakistan but also in India. Pakistan’s Lashkar-e2

The Afghan elections were the subject of three ISAS briefs which I wrote. See Shahid Javed Burki, “Afghanistan Presidential Election 2009: Developments since the Fall of the Taliban”, ISAS Brief No 123, 17 August 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/124.pdf); “Afghanistan Elections 2009: The Day of Reckoning”, ISAS Brief No. 126, 31 August 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/127.pdf); and “Afghanistan Presidential Election 2009: Inconclusive Results a Dilemma for the United States”, ISAS Brief 130, 22 September 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/131.pdf).

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Taiba, headquartered in the town of Muridke 15 miles north of Lahore, was held responsible for mounting the attack on Mumbai, India, in November 2008. A number of terrorist acts actually committed or thwarted in Britain were carried out by men who had received training in camps located in Pakistan. There was a consensus among terrorism experts that action had to be taken by the Pakistani authorities if the problem of Islamic extremism was to be seriously addressed.

That the war against terrorism was not only a war involving the West, in particular the United States, was driven home by a series of attacks on targets within Pakistan for which the insurgents took responsibility. These included the assassination of Ms Benazir Bhutto on 27 December 2007 after she had addressed an election rally in Rawalpindi’s Liaquat Bagh. A number of polls had suggested that her organisation, the Pakistan Peoples Party, would win the elections scheduled for later that year and that she would go on to become Prime Minister for the third time. Both the administrations headed by President Pervez Musharraf and Asif Ali Zardari alleged that Bhutto’s assassination was masterminded by Baitullah Mehsud, a Mehsud tribesman who had formed the TTP. While Mehsud denied any involvement in the Bhutto murder, he was happy to accept responsibility for a number of acts of violence, including the attack on the Marriott Hotel in Islamabad on 20 September 2008 that killed 60 people. Mehsud went on to become Pakistan’s most wanted man. He was killed on 5 August 2009 by a missile launched from an unmanned United States aircraft, the Predator. 3 The TTP announced that it would avenge their leader’s killing by attacking Pakistan’s security forces.

This threat was carried out once Hakimullah Mehsud, previously an aide to the slain leader, had established control over the TTP movement. His organisation took responsibility for more than 10 attacks launched on various targets in Pakistan in the 10-day period before the beginning of the campaign by the military. Among these was the audacious attack on the General Headquarters, the army headquarters in Rawalpindi on 10 and 11 October 2009. The army establishment was under siege for 22 hours by 10 terrorists who were able to penetrate the perimeter. Some two dozen people were killed, including nine terrorists. These attacks had claimed the lives of 175 people by the time the military began its campaign in the hills of South Waziristan.

The Beginning of the Campaign Early on 17 October 2009, 30,000 Pakistani troops launched a major ground offensive in South Waziristan. It followed months of airstrikes intended to soften up militant defences in the area. During this period, the army had encouraged the people living in the area to move out and take refuge in the camps that were being hurriedly set up. Some 90,000 to 150,000 people had left the area. In an interview with the Associate Press, Major General Athar Abbas, the army spokesman said that, “The assault would be limited to the holdings of Mehsud, the slain leader – a swath of territory that stretches roughly 1,275 square miles…The plan is to capture and hold the area where Abbas estimates 10,000 insurgents are headquartered and reinforced with 1,500 foreigners, most of them of the Central Asian origin.

There are also Arabs, but the Arabs are basically in the leadership, providing resources and expertise and in the role of trainers”. 4 The United States was supporting the effort by the

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Baitullah Mehsud’s killing was the subject of an ISAS Brief by Professor Ishtiaq Ahmed. See “Taleban Leader Baitullah Mehsud dead: Is it the Beginning of the End of Terrorism?”, ISAS Brief No. 122, 11 August 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/123.pdf).

Kathy Gannon, Ishtiaq Mahsud, and Hussain Afzal, “Ground offensive begins in Pakistan al-Qaeda haven”, Associated Press, 17 October 2009.

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Pakistani army by providing equipment such as night-vision goggles, laser-guided munitions and possibly also helicopter gunships.

The army seems better prepared and equipped this time around. It has sealed off many supply and escape routes which may become difficult to travel once the snow comes, which will happen in three to four weeks time. The army believes that winter and snow will hurt the militants more than it will hinder its own efforts. The insurgents may find it difficult to hide in the caves and crevices that punctuate the area once it becomes uncomfortably cold. The army has also been conducting negotiations with the tribes and clans that have been traditional Mehsud rivals, in the hope that they will be induced to switch sides and work with it or, at least, stay neutral.

Will the Army Stay this Time?

This is the fourth time since 2001 that the army has ventured into South Waziristan. On the previous three occasions, it withdrew after making some inroads and following the conclusion of peace deals with the insurgents. The militants went back on the deals as soon as the military withdrew. Having learnt a lesson from these experiences, the army has said that it is determined to stay this time – a strategy it has followed with some success in the Swat district. The Taliban were virtually killed, captured or expelled from Swat and the army has stayed on to help with the rehabilitation of the more than two million people who were displaced together with the long-term development of the area. The same strategy is likely to be repeated in South Waziristan if the military campaign succeeds.

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ISA S Brief No. 134 – Date: 26 October 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Afghanistan Presidential Elections 2009: The Run-up to the Run-off Shahid Javed Burki1 Abstract In my fourth brief on Afghanistan’s presidential elections held on 20 August 2009, I explore the consequences of the findings by the independent, United Nations-managed Electoral Complaints Commission (ECC) about the irregularities committed in the elections. The ECC’s revised tally of votes gives President Hamid Karzai less than 50 percent of the total.

Its findings were accepted by the Karzai government under pressure from the West, in particular the United States, Britain and France. As a result, 7 November 2009 has been set as the date of the run-off election between Karzai and Dr Abdullah Abdullah, Minister of Foreign Affairs in an earlier Karzai administration. The findings were anticipated but they have complicated the United States’ mission in Afghanistan. They have come at a time when the administration of President Barack Obama is reviewing Washington’s strategy, not only in the country but also in the region the policymakers called ‘AfPak’ – Afghanistan and Pakistan. The prospect of another election has created even more uncertainty and has coincided with an intensive campaign of terror by Islamic insurgents across the border in Pakistan. The Pakistani government has responded with a full-fledged military assault on South Waziristan that started on 17 October 2009. It is clear that what happens in one country will profoundly impact on the other.

The Run-up to the Run-off On 16 October 2009, the United Nations-backed ECC issued its findings about the alleged fraudulent ballots in Afghanistan’s troubled presidential elections of 20 August 2009.2 The Independent Election Commission, in spite of its name, was responsive to the government and gave Karzai 54.6 percent of the total vote and Dr Abdullah, his main rival, 28 percent.

The ECC, following petitions lodged by Dr Abdullah and evaluation done on the basis of a 1

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Mr Shahid Javed Burki was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from May to August 2009. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at isassjb@nus.edu.sg.

These elections were the subject of inquiry by me in two earlier ISAS Briefs. See Shahid Javed Burki, “Afghanistan Presidential Elections 2009: Developments since the Fall of the Taliban”, Brief No. 123, 17 August 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/124.pdf), and Shahid Javed Burki, “Afghanistan Elections 2009: The Day of Reckoning”, ISAS Brief No. 126, 31 August 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/127.pdf).

sampling of the contested vote, determined Karzai’s portion of the vote at 49 percent. Since the constitution prescribes a run-off vote in case none of the candidates received a majority of the cast votes, it became clear that the Afghan population would have to go back to the polling stations again. The Karzai administration had anticipated such an outcome. A couple of days before the ECC made known its findings, it was revealed that preparations had begun to hold the run-off election. The run-off election was ordered to be held on 7 November 2009.

Anticipating that a run-off was the most likely consequence of the investigation by the ECC, the Karzai administration began to accommodate itself to the change in its circumstances.

Said Tayeb Jawad, Afghanistan’s Ambassador to the United States, addressed the developing situation faced by Kabul. In a speech at the United States Institute of Peace in Washington, the Ambassador said that a second round of election was likely but that it would be impossible to hold a run-off within two weeks of certification as required by the constitution.

However, “to delay until spring is a recipe for disaster”, adding that a new vote will have to be held within a month to avoid prolonging the uncertainty. Some other members of the Karzai administration seemed less inclined to accept the ECC’s verdict. Afghanistan’s Foreign Minister Rangin Dafdar Spanta said in an interview that a run-off would cause problems for his country. “How can the second round be desirable for Afghanistan?”, he asked. “The international community loses security forces, we lose our security forces, we have to spend a significant volume of money. The security situation will be worse.” Karzai had stated earlier that he had little confidence in the work of the ECC and that it was under the influence of foreign powers interested in their own objectives and not concerned about Afghanistan’s long-term development.

There was a view that an understanding should be reached between the two contending parties before the run-off vote was held. To this end, Zalmay Khalilzad, former United States Ambassador to Afghanistan and an Afghan by birth, arrived in Kabul on 14 October 2009 “and has been speaking to both candidates in an attempt to find a way out of the impasse…But even with a deal, the fraud-scarred polls are likely to damage the Afghan government’s credibility. In a country where support for the regime is already low amid accusations of rampant corruption and abuses of power, such credibility is already in short supply.”3 Although Khalilzad was joined in his efforts by Senator John Kerry, Chairman of the United States Senate’s Foreign Relations Committee, and the French Foreign Minister, there was no indication from Kabul that the two opposing sides were prepared to work together.

These doubts notwithstanding, the international community concluded that it needed a government in Kabul that is seen as legitimate by most of the population. That would not be the case if the elections of 20 August 2009 were allowed to stand and were to be the basis of a new tenure for Karzai and his associates. Not only is another round of election desirable, it also has to be conducted with greater attention paid to fairness and openness.

The United States and its North Atlantic Treaty Organization partners agreed in September 2009 that if there were to be a run-off, it would have to be held by the first week of November 2009 to avoid a turnout that would almost certainly be low because of the harsh winter in most regions of the country. According to one report, “ballots listing both Karzai and his closest challenger, Abdullah Abdullah, and printed in London in anticipation of a run3

Anand Gopal and Jay Solomon, “Runoff called more likely in Afghan vote”, The Wall Street Journal, 16 October 2009, p. A6.

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off, have arrived at the United Nations mission in Kabul…while indelible ink is on hand and polling station kits are expected to be packed for distribution this week.”4 In addition to the poor weather, security will be a big issue for the next round of elections.

While General Stanley McChrystal, the top American commander in Afghanistan, said that his forces had begun preparations for providing protection during the vote, he was conscious of the fact that this would deflect him from his main mission. What that mission is remained uncertain as President Obama and his team of advisors continue to debate the various aspects of the developing situations in both Afghanistan and Pakistan.

The United States’ Evolving Strategy Even after a prolonged debate and deliberation, the Obama administration has not decided on its policy stance with respect to the AfPak region. The President had already held five meetings by the time the United Nations-supervised ECC in Kabul issued its verdict. There was intensive debate within the administration about the options being considered. The military, including General McChrystal, backed the counter-insurgency approach that would expel the insurgents by the use of force, hold the areas cleared of the enemy and protect the local population. This strategy would require the dispatch of additional troops to the field. It was well known that General McChrystal had asked for an additional 40,000 troops that would bring the number of men and women in uniform from the United States serving in Afghanistan to over 100,000. United States’ Secretary of States Hillary Clinton supported this approach while Defense Secretary Robert Gates seemed inclined to go down that route as well. General McChrystal warned that the United States could fail in Afghanistan if it does not quickly adopt his proposed strategy.

The other approach has the strong backing of Vice-President Joseph Biden whose influence on policymaking has increased in recent months.5 This was a narrow counter-terror approach that would aim to kill or capture individual militants, especially those playing leadership roles. This approach would not require a large build-up in the size of the American contingent already in place in the country. Vice-President Biden wanted a much larger concentration of American resources on Pakistan which was where, in his view and that of many others in the administration, the real problem was located. The Bill that he had initially sponsored when he headed the Foreign Relations Committee in the Senate to provide high levels of sustained economic support to Pakistan was eventually passed under the stewardship of Senator John Kerry, his successor as Chairman. The bill was signed into law by President Barack Obama on 13 October 2009.

A third approach gained some traction as the discussions proceeded within the United States administration. Democratic Senator Carl Levin, Chairman of the Armed Services Committee, emerged as a pivotal player in the debate. His proposal was directed at speeding the training of Afghan security forces, bringing them to a total of 400,000. To take the Afghan force to that size would need the deployment of 10,000 to 15,000 new troops earmarked specifically for an expanded training mission. “You can talk to people who believe in counter-insurgency, counter-terrorism, a blend of the two, a fourth approach, and every single one says build up the Afghan army faster”, Senator Levin told The Wall Street Journal. “It is a common 4

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Karen DeYoung and Joshua Partlow, “Runoff expected in Afghan election”, The Washington Post, 16 October 2009, pp. A1 and A14.

Newsweek put the Vice President on the cover of its 12 October 2009 issue.

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thread”.6 Many of the United States’ key allies are also calling for devoting more attention to the Afghan security forces. Gordon Brown, British Prime Minister, told the Parliament on 14 October 2009 that his country would set up a new centre that would train around 900 junior officers each month as part of a broader move toward “Afghanisation”.

The approach being followed by the Obama administration was very different from the one pursued by President George W. Bush, his predecessor. The new administration was much more open about the content of the debate. The public was being kept fully informed about the meetings that were held in the White House and the issues that were being discussed. The Bush White House had taken most of its “war decisions” in great secrecy. The Obama administration had come to the conclusion that it was politically wise to send the message out to an increasingly skeptical populace that any action which was to be taken was based on careful review by a large number of people who were well informed about the situation in the region, as well as with the experience of the United States in other conflicts in which it had participated since the Second World War. A well-timed analysis of the decision-making during the years of President John Kennedy and President Lyndon Johnson was published by The New York Times in its widely read Sunday Opinion section as the debate in the Obama White House was reaching the decision point. According to this, while Kennedy viewed the advice he got from his military advisors with considerable skepticism, Johnson was much more receptive to what he heard from the senior men in uniform. According to Gordon M. Goldstein, the author of “Lessons in Disaster: McGeorge Bundy and the Path to War in Vietnam”, in 1961, a few months after he had assumed office, “Kennedy was shocked by the half-baked recommendations of his generals to use tactical nuclear weapons against the communist Pathet Lao movement in Laos, a proposal he decisively dismissed. In this context, Kennedy was deeply skeptical when his most senior advisers argued in the fall of 1961 that only a substantial numbers of American forces could prevent the collapse of the government of South Vietnam. Kennedy, nonetheless, rejected the deployment of combat troops. However, he also rejected the notion of abandoning Saigon. Instead, he chose to chart a middle course.” Johnson, on the other hand, listened to the hawks in his administration and “combat forces soon poured in, approved and progressively enlarged with staggering speed.”7 It was clear what the liberal media in the United States was counselling President Barack Obama as he approached his moment of decision. The next phase in the Afghan conflict and America’s involvement in it will begin not only with the Obama decision with respect to the level of troops deployed by the United States in the country but also with the holding of the run-off election on 7 November 2009.

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Yochi J. Dreazen, “Sen. Levin crafts Afghan compromise”, The Wall Street Journal, 16 October 2009, p.

A6.

Gordon M. Goldstein, “From defeat, lessons in victory”, The New York Times, Sunday Opinion, 18 October 2009, p. 9.

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ISAS Brief No. 135 – Date: 3 November 2009 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Indian Assembly Elections 2009: Another Blow for the Bharatiya Janata Party Tridivesh Singh Maini ∗ Abstract This paper examines the results of the recent assembly elections in three Indian states – Maharashtra, Haryana and Arunachal Pradesh. The Congress Party won in all three states while the principal opposition party, the Bharatiya Janata Party (BJP), suffered another defeat at the hustings. Apart from outlining the results of all the three states, this paper analyses the reasons for the Congress Party’s victory and the BJP’s defeat. A key observation of the election results is that, apart from Arunachal Pradesh, the Congress Party’s successes in Maharashtra and Haryana were not entirely convincing. What unequivocally emerged, however, was that the BJP’s lacklustre campaign contributed to the Congress Party’s victories. The BJP, bereft of any leadership, virtually lost the elections even before they began.

Introduction The results of the recently-held assembly elections in Maharashtra, Arunachal Pradesh and Haryana were declared on 22 October 2009. The Congress Party won in all the three states while the opposition BJP was, once again, left licking its wounds. Why did the BJP perform so badly in all three states? Were the Congress Party’s victories really convincing? How did the other regional parties fare and how did they affect the performances of the Congress Party and the BJP? The Election Results The verdict in Arunachal Pradesh, where the Congress Party won 42 of the 60 assembly seats, was not surprising, as there was no real opposition to the Congress Party. Dorjee Khandu was retained as Chief Minister and sworn in on 25 October 2009. 1 The same, however, cannot be said of the outcome of the elections in Maharashtra and Haryana. In Maharashtra, the ruling Congress Party-Nationalist Congress Party (NCP) retained power by winning 144 of the 288 assembly seats. This also happens to be the third ∗

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Mr Tridivesh Singh Maini is a Research Associate at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He can be reached at isastsm@nus.edu.sg.

The Hindu, “Dorjee Khandu sworn in for second term”, 26 October 2009.

consecutive triumph for the alliance. The Maharashtra results baffled the opposition BJP-Shiv Sena combine as well as the political analysts who were predicting a change this time round.

The ruling combine was viewed to be inefficient in the state, and it was believed that farmer suicides and increasing inflation would bring about its downfall. 2 Yet, the Congress managed to win, with the BJP-Shiv Sena combine witnessing a decline in seats.

A decisive factor which swung things in favour of the Congress-NCP alliance was the role of the Maharashtra Navnirman Sena (MNS), led by the Shiv Sena supremo Bal Thackeray’s nephew, Raj Thackeray, as a spoiler. 3 The MNS, with 13 seats, will make its debut in the Maharashtra assembly. One of the important outcomes of this result which would please the Congress Party is that it has won more seats than its partner, the NCP. In the 2004 assembly elections, the Congress Party won 68 seats while the NCP won 71 seats. This time around, the Congress Party won 82 seats while the NCP’s tally decreased to 63 seats. 4 Ashok Chavan of the Congress Party, who was appointed Chief Minister in the aftermath of the 26/11 terror attacks, has once again been entrusted with the onerous responsibility of leading the state.

In Haryana, the Congress Party emerged as the single largest party, winning 40 of the 90 assembly seats. The fact that the Congress Party failed to secure a simple majority on its own came as a surprise as it had expected a comfortable majority on its own. In the Lok Sabha elections, the Congress Party won nine of the ten parliamentary seats in the state. Chief Minister Bhupinder Singh Hooda, who was sworn in on 25 October 2009 for a second consecutive term, was quick to admit that the Congress Party could have done better if not for infighting and faulty ticket distribution. The reasonable showing by the main opposition in the state, the Indian National Lok Dal (INLD), led by Om Parkash Chautala, which won 31 seats, surprised not only the Congress Party, but also the BJP which severed ties with Chautala some time before the polls. 5 Key Issues for the Parties The results in the Maharashtra and Haryana elections highlighted some key issues for the parties involved. Firstly, the BJP clearly needs to device an agenda which can strike a chord with the Indian middle class and the young voters. At the moment, the BJP lacks a decisive programme and authoritative leadership, both of which are imperative for an effective election campaign. In Maharashtra, for example, while the Congress Party’s track record on the governance front was far from flattering, the opposition could not corner the government on its failures. 6 Furthermore, the strategists within the BJP need to sit back and introspect on decisions deemed as ‘suicidal’, such as contesting alone in Haryana rather than having a pact with a strong regional player such as the INLD. While hindsight is always 20-20, the stiff fight put up by INLD clearly showed that, with a united opposition to the Congress Party, the outcome in Haryana could have been different. 7 The second point emerging from these assembly results is that while the Congress Party may have emerged the victor, the verdict in Haryana makes it unequivocally clear that there is no space for complacency or hubris of any sort. Using the results of the parliamentary elections 2 3 4 5 6 7

The Hindu, “Hat-trick of triumphs”, 22 October 2009.

The Financial Express, “Congress-NCP score hat-trick in Maharashtra”, 23 October 2009.

Ibid.

The Financial Express, “No joy for Hooda as Cong tally falls”, 23 October 2009.

The Hindu, “Hat-trick of triumphs”, 22 October 2009.

The Financial Express, “No joy for Hooda as Cong tally falls”, 23 October 2009.

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as a benchmark of popularity, the Congress Party was predicting a clean sweep. However, it ended short of even a simple majority in the state. According to The Times of India, “Hooda's colleagues complained that complacency on his part almost did him in. The Congressmen acknowledged that they had underestimated the discontent over power shortage (and) price rise…” 8 Conclusion Anyone familiar with Indian politics would know that it is naïve to write the political obituary of any leader or party. In Haryana for instance, the INLD managed to put up a reasonable show despite facing an ignominious defeat in the Parliamentary election less than six months ago. The BJP would do well to keep this in mind. Some serious introspection with regards to its organisational set-up and genuine intellectual cogitation on the future agenda of the BJP may help to resuscitate it. However, at the moment, the principal opposition party seems directionless, headless and moribund. It may not be able to do much at this point in time, but it can pay heed to Sir Winston Churchill’s famous words, “Success is the ability to go from one failure to another with no loss of enthusiasm”.

oooOOOooo

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The Times of India, “Hooda falls short, but independents come to rescue”, 23 October 2009.

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ISAS Brief No. 136 – Date: 3 November 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Hillary Clinton’s Visit to Pakistan: An Exercise in Trust Deficit Reduction Ishtiaq Ahmed1 Abstract The United States’ Secretary of State, Hillary Clinton, paid a recent three-day visit to Pakistan at a time when terrorism perpetrated by the Taliban-Al-Qaeda forces was wrecking havoc in the country. The United States and Pakistan are allies in the fight against the terrorists, but between themselves, they suffer a trust deficit. This paper examines the nature of the trust deficit and its implications for the fight against terrorism.

Introduction The three-day visit by the United States’ Secretary of State, Hillary Clinton, to Pakistan from 28 to 30 October 2009 took place during a very critical juncture in Pakistan. During this period, the Taliban-Al-Qaeda forces sharply accelerated their terrorist campaign against Pakistan, while within the Pakistani political circles and sections of the power elite, serious doubts were expressed about the United States’ commitment to Pakistan’s security and sovereignty. At the same time, the Americans continue to be sceptical about Pakistan’s approach to the Taliban-Al-Qaeda nexus.

Intensity of Terrorist Attacks It is to be noted that although the Taliban had been relentlessly carrying out select and indiscriminate terrorist attacks in Pakistan since 2005, the level and intensity of those outrages have been increasing every year since then. The year 2009 may, thus, turn out to be the worst, of which the month of October could be the bloodiest, as more than 300 fatalities took place during a short period of only 31 days.

The frequency of the attacks this year has increased in proportion to the success of Pakistan military’s operations against the Taliban which stated from May 2009 onwards, when the first determined offensive was launched in Taliban-occupied Swat. The dramatic upsurge in the attacks in October 2009 occurred before Operation Rah-e-Nijat (Path to Deliverance) was set

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Professor Ishtiaq Ahmed is a Visiting Research Professor at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg.

in motion on 17 October 2009 to defeat and dislodge the Tehrik-e-Taliban Pakistan from its strongholds in South Waziristan.

On the day Mrs Clinton arrived (28 October 2009), the deadliest bomb blast of the month took place in Peshawar. It claimed 118 lives, including those of many women and children.

More than 500 people were injured. The bomb had been placed in a car in one of the busiest localities, the Meena Bazaar, a women-only shopping area. However, the Taliban leader, Hakeemullah Mehsud, and his deputy, Qari Hussain, notorious for specialising in training suicide bombers, denied that they were behind the outrage. They asserted that their targets were never women and children, but the United States and its lackey, the Pakistani government.

Mehsud and Hussain instead blamed Blackwater Worldwide, a private American security firm, for masterminding the bomb blast in the capital of the North-West Frontier Province. It is to be noted that Blackwater Worldwide has lately established itself in Pakistan in a big way, apparently to protect United States diplomats and other officials serving in Pakistan and those who are likely to arrive later, to constitute the bureaucracy that will supervise the implementation of the Kerry-Lugar economic and military aid package.

The Kerry-Lugar Bill commits the United States to provide US$7.5 billion of economic and military aid to Pakistan over the next few years, while simultaneously imposing an elaborate monitoring mechanism to keep track of funds and the efficacy of various inputs in the struggle against the Taliban-Al-Qaeda duo. A huge ruckus was created by the right-wing Pakistani media, populist intellectuals and Islamists when the Bill was passed by the United States Congress. It was alleged that the Kerry-Lugar Bill was a sinister plot to step-by-step gain economic, political and military control over Pakistan. One of the main authors of the Bill, Senator John Kerry, as well as United States President Barack Obama’s special adviser on Afghanistan and Pakistan, Richard Holbrooke, visited Pakistan to allay Pakistani concerns about the Bill (The Daily Times, 20 October 2009). Both of them asserted that the Bill, in no way, imposes preconditions or compromises Pakistani sovereignty.

Conspiracy Theories Abound In any event, the proliferation of the Blackwater Security personnel’s activities in Pakistan fits in very well with the conspiracy theory about a United States’ bid to usurp Pakistan’s sovereignty. What credence such theories merit is always an open question. There is a widespread feeling in Pakistan, even among those who are not rabid anti-Americans, that the United States is a fair weather friend. In any case, contemporary Pakistan is fertile soil for real and imagined conspiracies. However, from a political and security point of view, the chasm between the United States’ and Pakistan’s perceptions about each other’s intentions and objectives is a matter of great bafflement because it lays bare a very intriguing and worrying reality – that the actors who are formally allied to each other and are involved in fighting terrorism do not have mutual trust and confidence in each other. No doubt, a lack of an agreed strategy and concomitant coordination and prioritisation of tasks is apparent the way the two sides have been conducting the military campaign against a declared common enemy.

To illustrate this, an author and analyst of Pakistan, Shuja Nawaz, who heads the South Asian section of the Atlantic Council in Washington D. C., deplored in a recent article that the Americans were not providing required weaponry to Pakistan to fight the Taliban in rugged

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and difficult territory as Waziristan (Foreign Policy, 20 October 2009). Moreover, according to other Pakistan sources, when the military launched Operation Rah-e-Nijat and entered South Waziristan, instead of sealing all entry and exit routes into Waziristan, the Americans did just the opposite in that they removed scores of security check posts on the Afghanistan side of the Pak-Afghan border (The Daily Times, 20 October 2009).

Such a decision allegedly helped the Taliban infiltrate from Afghanistan into South Waziristan as well as escape from there into Afghanistan. The Chief of Army Staff, General Ashfaq Parvez Kayani, took up this issue with the top United States commander in Afghanistan, General Stanley A. McChrystal, urging him to seal the border. It is not clear what General McChrystal said in return. Moreover, the American Congress passed a special Bill that requires “efforts to track where United States military hardware sent to Pakistan ends up, as well as a warning that the aid must not upset ‘the balance of power in the region, – a reference to tensions between Pakistan and India’ (The Daily Times, 24 October 2009).

President Obama has put his signature to the Bill and now it is a law.

On the other hand, the Americans have been expressing concern and criticism of Pakistani behaviour. They allege that Pakistan is restricting its military operation only to South Waziristan, where the Pakistani Taliban are entrenched and perceived by Pakistan as a threat to its security and existence.2 However, Pakistan has shown no inclination to go after the Taliban in North Waziristan or in the capital of Baluchistan, Quetta, where, according to the United States, the Afghan Taliban and Al-Qaeda leadership are hiding.

Significance of Mrs Clinton’s Visit Considered in light of these perplexing and confusing behaviour patterns of two supposedly close allies – the United States and Pakistan – Mrs Clinton’s visit was of utmost importance to gauge the state of the United States-Pakistan relationship at present. Just before she left Washington D. C., the correspondent of Pakistan’s leading newspaper, The Dawn, interviewed her. When asked to comment if it was fair on the part of the United States to demand a Pakistani military unit to use certain a weapon on the Afghan border and leave it behind when the unit is transferred to another place, she responded by saying that, ‘A lot of military equipment is ‘fungible’ and mobile and can be used in different places’ (The Dawn, 28 October 2009). Pakistan interpreted this as a move to accommodate Indian concerns about Pakistan acquiring modern weapons.

Consequently, when Mrs Clinton addressed Pakistan’s newspaper editors in Lahore on 29 October 2009 and asserted that the leadership of Al-Qaeda was hiding in Pakistan, it greatly disturbed many Pakistanis but she insisted that her accusations were based on the information she had at her disposal. She remarked that, “I find it hard to believe that nobody in your government knows where they are and couldn’t get them if they really wanted to. Maybe that’s the case; maybe they’re not gettable. I don’t know...As far as we know, they are in Pakistan” (The Daily Times, 30 October 2009).

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The Taliban were Islamists who came to power in Afghanistan in 1996, but fell from power when the United States launched a military campaign against them in October 2001 in retaliation to the 9/11 terrorist attacks in the United States. They dispersed and hid on the Afghanistan-Pakistan border. Those belonging to the Pakistani side of the border later embarked on military confrontation with the Pakistani state and came to be known as the Pakistani Taliban represented by the Tehrik-e-Taliban Pakistan while those who fight the United States-North Atlantic Treaty Organization-Afghan government forces are known as the Afghan Taliban.

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Now, in terms of diplomatic praxis, it was perhaps too blunt an accusation to be made publicly by a visiting high-ranking diplomat of a country allied to a host country in an ongoing major violent conflict. However, Mrs Clinton only expressed an opinion that had for quite some time been ventilated by United States think-tanks and State Department functionaries. I received similar views from several United States analysts during my visit to Washington D. C. in July 2009.

However, the overall thrust of Mrs Clinton’s interactions with the public as well as the government and military was that fighting terrorism and defeating the Taliban-Al-Qaeda forces were in the best interest of Pakistan; that the United States would fight terrorism side by side with Pakistan; and, therefore, there was no reasonable ground to suspect bad faith from her country. She particularly committed to American assistance in bolstering Pakistan’s counter-insurgency capabilities.

Mrs Clinton went on to propose a set of practical measures to improve Pakistan’s fiscal and economic performance, urging Pakistan to expand its tax base and to modernise the taxation system. She also announced funding for several educational and developmental projects, including help in solving Pakistan’s serious problem with energy shortage. The regular loadshed brings production to a standstill and causes great discomfort to citizens, especially during the summer. The bottomline of her message to the Pakistani power elite was that both sides will engage in a serious strategic dialogue.

She also urged a resumption of the India-Pakistan dialogue which has remained more or less suspended after the Mumbai terrorist attacks in November 2008. India is now a strategic partner of the United States and, following the nuclear deal that was agreed between them in 2009, it enjoys a special relationship with the latter. The Obama presidency is viewed with some anxiety in India but both President Obama and Mrs Clinton have assured the Indians that the United States would not interfere in the relationship between the two South Asian rivals and both must resolve their disputes through bilateral negotiations.

It is too early to say if her visit helped reduce the trust deficit which exists between Pakistan and the United States, but there cannot be any doubt that the Taliban-Al-Qaeda forces will not be defeated if they pursue secretive nationalist agendas against a common enemy, which is truly regional and global. Both Pakistan and the United States are interdependent though it cannot be denied that, because of the United States’ status as a superpower and its long and intimate involvement with Pakistan, it obviously enjoys the upper hand.

Conclusion A careful scrutiny of the events in the last one or two years suggests that the United States has been able to persuade Pakistan to assume an active role in combating terrorism. Indeed, Pakistan’s own experience of dealing with the Taliban has played a major role in changing the attitude of the Pakistani military but the United States pressure has been an important factor in strengthening Pakistan’s resolve to take on the Taliban. One can imagine that the most important objective of the United States in Afghanistan and Pakistan is to capture or kill the leadership of Al-Qaeda as the organisation is believed to be promoting terrorism worldwide. As far as the United States’ position on the Taliban is concerned, there is some confusion as to whether it wants to eliminate its leadership and destroy its networks in Afghanistan and Pakistan. The United States’ policy will become clearer once a legitimate government comes to power in Afghanistan. If the Americans decide to dispatch a large

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contingent of troops as requested by the United States military commanders in Afghanistan, then, most probably, the objectives could be beyond the destruction of Al-Qaeda.

At present, the situation remains highly equivocal and that generates anxiety and fear in all sides fighting the Taliban-Al-Qaeda forces. Within Pakistan, although public opinion has increasingly turned against them, within the state and society they continue to enjoy the sympathy of Wahabi and Deobandi Muslims. That too needs to be changed but all such developments will take some time. Right now, the struggle for Pakistan’s survival remains a paramount concern. oooOOOooo References The Dawn, Karachi, Pakistan.

Foreign Policy – accessed at http://www.foreignpolicy.com/articles/2009/10/20/how_to_ help_pakistan_win_this_fight.

The Daily Times, Lahore, Pakistan.

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ISA S Brief No. 137 – Date: 4 November 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Afghanistan Presidential Elections 2009: The ‘Run-off’ That Never Was Shahid Javed Burki 1 Abstract Following 10 weeks of uncertainty after the Afghans went to the polls to elect the next president, the country’s Independent Election Commission (IEC) declared Hamid Karzai, the sitting president, as the winner. He was to face a run-off with Dr Abdullah Abdullah, the man who polled the second highest number of votes in the elections held on 20 August 2009.

Initial results had Karzai winning well over one-half of the total votes cast. The results were, however, contested and, after a recount of some of the suspicious votes, Karzai’s share fell below one-half, necessitating a run-off between the two candidates winning the most votes.

The run-off election was scheduled for 7 November 2009. On 1 November 2009, Dr Abdullah withdrew as a candidate leading the IEC to declare Karzai the winner. Immediately after the IEC’s announcement, the United Nations, the United States and other North Atlantic Treaty Organization (NATO) countries declared that they were ready to work with the new government to bring peace and development to the country that had gone through a series of civil wars since the Soviet Union sent in its troops in 1979. Would Karzai be able to win the support of the people not with the Taliban to fight the Taliban? At this point in time, most analysts would suggest that more troubles lie ahead for the country.

The Run-off Called Off Some political scientists could have predicted this outcome even before the presidential elections were held in Afghanistan on 20 August 2009. 2 As Fareed Zakaria wrote in his 1

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Mr Shahid Javed Burki was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from May to August 2009. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at isassjb@nus.edu.sg.

These elections were the subject of inquiry by me in four earlier ISAS Briefs. See Shahid Javed Burki, “Afghanistan Presidential Elections 2009: Developments since the fall of the Taliban”, Brief No. 123, 17 August 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/124.pdf),; Shahid Javed Burki, “Afghanistan Elections 2009: The Day of Reckoning”, Brief No. 126, 31 August 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/127.pdf); Shahid Javed Burki, “Afghanistan Presidential Elections 2009: Inconclusive Results a Dilemma for the United States”, Brief No. 130, 22 September 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/1231pdf); and Shahid Javed Burki, “Afghanistan Presidential Elections 2009: The Run-up to the Run-off”, Brief No. 134, 26 October 2009 (accessed at http://www.isas.nus.org/events/backgroundbriefs/135.pdf).

seminal book on the subject, it takes more than the holding of elections to politically develop a backward society. 3 The results gave victory to Karzai, the sitting president, by a wide margin. The IEC gave him more than 54 percent of the total votes cast. Dr Abdullah, who had served in one of the earlier Karzai administrations as Foreign Minister, was a distant second, polling half of what the president was said to have received. However, the United Nationsmanaged Electoral Complaints Commission (ECC) refused to validate the results. A sample survey of the contested votes was carried out and the ECC concluded that 1.3 million votes, most of them cast for Karzai, were suspect. His share was retallied and it came out at less than 50 percent while that of Dr Abdullah increased by a couple of percentage points.

According to the Constitution that Karzai had piloted through a jirga convened for that purpose soon after his government was established, if no candidate won a clear majority in the votes cast, a run-off election would be held between the two that had received the most votes.

President Karzai initially resisted the call for a run-off declaring that the ECC had come under pressure from the United States and other NATO countries who were fighting the resurgent Taliban. These countries wanted their own man in the presidential palace and that he was too independent for their taste, he declared. The United States sent Richard Holbrooke, President Barack Obama’s Special Representative for Afghanistan and Pakistan, to convince Karzai to accept the finding of the ECC and order a run-off election. Holbrooke failed in his mission and Washington tried once again by dispatching Senator John Kerry to Kabul on the same mission. This time, Washington’s arm twisting succeeded and Karzai ordered a run-off to be held on 7 November 2009. Dr Abdullah preferred a later date, perhaps some time in the spring of 2010. In the meantime, he suggested that a caretaker government, involving most of the major parties, should be appointed to run the country and manage the war. He also wanted the IEC – misnamed since its conduct had clearly indicated that it acted on the orders of the president – to be reconstituted. Both conditions were unacceptable to Karzai. There was, thus, another impasse.

Washington waited for the resolution of the crisis. This drama in Kabul was being played out at the same time that President Obama was carefully weighing the options he had in Afghanistan. He had not acceded to the request of General Stanley McChrystal for an additional 44,000 American troops to be sent to Afghanistan as a part of the counterinsurgency strategy he had implemented in Iraq. Instead of quickly reacting to the advice of the commander he had himself appointed, President Obama ordered a full-fledged review of America’s Afghanistan strategy. He was prepared to cast aside the approach he had himself endorsed in March 2009, two months after taking office. Then, he had called the Afghan War a “war of necessity” for the United States. He now seemed less sure of that description as the American casualties mounted. October 2009 turned out to be the bloodiest month for American troops in Afghanistan when 57 soldiers lost their lives. The total toll since the invasion of the country by the Americans in October 2001 had begun to approach 1,000. This conflict had also become the longest war the United States had ever fought.

Washington was anxious to have a settled government in Kabul before it decided on the strategy it wished to pursue. It also wished that for the government to have legitimacy among the many ethnic, tribal and religious groups that made up the Afghan population. The first objective seemed within reach; the second, at best, was a more distant one. However, even 3

Fareed Zakaria, The Future of Freedom: Illiberal Democracy at Home and Abroad, New York, W. W. Norton, 2007.

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the first objective seemed ambitious as the date for the run-off election approached. It seemed that Dr Abdullah was not prepared to bestow legitimacy on the government headed by Karzai. Several polls conducted by independent observers suggested that the president would easily triumph over his rival even if the election was free, fair and transparent. On 1 November 2009, in a speech delivered by an emotional candidate to his equally emotional followers, Dr Abdullah said that he was bowing out and no longer a candidate for the run-off election. He urged his supporters not to take to the streets to protest or boycott the political system. “But he said he could not take part in an election run-off this week that he believed would be at least as fraudulent as the badly tainted first round in August…” 4 Karzai said in a statement released by his office that he wanted the vote to proceed as scheduled. He did not comment on his challenger’s new accusations of fraud but said, “it was Dr Abdullah’s right to choose to withdraw from the run-off election.” 5 Dr Abdullah’s withdrawal from the race posed a constitutional and legal dilemma for the IEC. As provided in the Constitution, the IEC had gone ahead and put both Karzai and Dr Abdullah on the ballot. Legal experts believed that the election must proceed even if one of the candidates withdrew but did not formally resign. However, Dr Abdullah did not choose the option of resigning, preferring rather to withdraw and telling his supporters that it was up to them to go to the polls. He, thus, threw the ball back into the court of the IEC. The IEC acted a day after Dr Abdullah’s speech. On 2 November 2009, it cancelled the run-off election and declared Karzai the winner. Addressing a press conference in Kabul, Azizullah Ludin, Chairman of the IEC “declared the esteemed Hamid Karzai as the president…because he was the winner of the first round and the only candidate in the second round”. It was Ludin that Dr Abdullah wanted to have replaced as one of his conditions for participating in the run-off election. “The Commission’s announcement came as the United Nations Secretary General, Ban Ki-moon, was making a previously unannounced visit to Afghanistan less than a week after Taliban insurgents stormed a guest house in Kabul where United Nations election workers and other employees were staying, killing five United States staff and three Afghans.” 6 Looking Beyond Following the announcement from Kabul, Washington reacted quickly. President Obama sent a message of congratulations to Karzai. The United States administration had come to the conclusion that Karzai would remain in control and that it had pressed him to order the runoff election in order for him to gain legitimacy. However, Dr Abdullah denied him that opportunity. In the process, he began to carve out a role for himself in Afghan politics.

Looking beyond the election, Washington and other western capitals deeply involved in Afghanistan hope that the new Karzai administration would be more effective and less corrupt in governing the war-torn country. “Now, administration officials argue that Mr Karzai will have to regain that legitimacy by changing the way he governs at a moment when he is politically weaker than at any time since 2001”, wrote David E. Sanger, a respected foreign relations analyst. In addition to providing good governance, Karzai is expected to quickly raise an army that could take care of the country’s security problems without heavy American involvement. “For eight years, the United States and its allies have been struggling 4

5 6

Carlotta Gall and Jeff Zeleny, “Out of race, Karzai rival is harsh critic of election”, The New York Times, 2 November, 2009, pp. A1 and A6.

Ibid.

Pamela Constable and William Brangin, “Afghan election commission declares Karzai winner”, The Washington Post, 3 November 2009, p. A1.

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to train an Afghan army; while it currently has a force of more than 90,000, American commanders put the number who can sustain themselves in a fight at closer to 50,000.” 7 It was also reported that while reviewing the situation in Afghanistan, President Obama had asked his national security advisors to come up with an agenda they could press on the newly elected Karzai. It included making the Karzai administration more inclusive by reaching out to his political opponents including Dr Abdullah. The Afghan president will also be persuaded to dispense with the more tainted ministers in his administration and the more corrupt governors in the provinces. Also, Karzai will be asked to peel away – through the use of whatever inducements that might work – the least committed of the Taliban, at least those with no links to Al-Qaeda.

With the review of the strategy still proceeding, President Obama had begun “scaling back American ambitions. With the advice of his Defense Secretary, Robert Gates, he dropped the Bush-era talk of turning Afghanistan into a western-style democracy. He carefully avoided the word ‘victory’ which Bush had used so often. He narrowed the United States military objectives to destroying Al-Qaeda – which is thought to be based largely in Pakistan – while simply subverting the Taliban’s ability to once again take over the country.” 8 If the Obama administration had expected that the elections of 20 August 2009 would usher in a new era in Afghanistan, that hope did not materialise. It is apparent that Afghanistan will remain work in progress for years to come. oooOOOooo

7 8

David E. Sanger, “Buttressing a tainted ally”, The New York Times, 2 November 2009, pp. A1 and A6.

Ibid.

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ISA S Brief No. 138 – Date: 9 November 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

President Obama’s First Asian Visit Shahid Javed Burki 1 Abstract This is the first of two briefs on the United States’ evolving relations with East Asia – with the region as well as the countries in the area. The first provides the context in which United States President Barack Obama will undertake his first official visit to the region. The second will examine what the American president accomplishes during the visit and what its longterm consequences will be for the relations between these two important parts of the global economy. It should be noted that in preparing for the visit, President Obama consulted with Lee Kuan Yew, Singapore’s veteran leader, who impressed upon him the importance Washington must give to economics, in particular to trade, in basing its relations with the region. The Obama visit comes at a time when China is leading the world out of what has come to be described as the “Great Recession”. Its fast developing economy is intertwined in several different ways that call for good working relations between Beijing and Washington.

These need to be based not on ad hoc exchanges between the two leadership groups but on solid and durable institutional arrangements. What we are seeing is the evolution of G2 at the apex of a new world order.

Background “Ever since taking office, President Obama has signaled that the United States wants to improve relations with the powerhouse nations of East Asia, and he’ll put his personal imprint on that when he travels to the region for the first time next week”, wrote John Pomfret for The Washington Post on the eve of the American president’s departure for the region 2. The approach the new American president has adopted is different from that of his immediate predecessor, George W. Bush. This is in two respects, although there is continuity in one area. President Bush occupied himself and his country with the Middle East and West Asia by waging wars in Afghanistan and Iraq. There was little time left for engaging his country with East Asia. Second, when he did turn to East Asia it was again in the context of pursuing his country’s security interests. After having identified North Korea as one of the 1

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Mr Shahid Javed Burki was a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore, from May to August 2009. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

John Pomfret, “U.S. is reaching out to East Asia’s powerful nations” The Washington Post, 7 November 2009, p. A6.

three countries that constituted the axis of evil – the other two were Iran and Saddam Hussein’s Iraq – he devoted considerable time to pressuring North Korea to abandon its quest for nuclear weapons. China helped by becoming a part of the six-country arrangement for negotiating with North Korea. That said, its principal interest was in developing its economy within a global framework that was not disruptive. However, economics, a subject that was of little interest to the former United States (US) president, was not the basis for his administration’s dealing with the countries of the region.

The only part of the Bush legacy that has entered the policy framework being pursued by the Obama administration is the importance being attached by Washington to emerging China. 3 In fact, in developing a new international framework for formulating economic policies, Washington was pursuing a two-tier approach. It was working with China in what many analysts, including myself, had called the G2 along with effectively replacing the G8 with the G20. The G20 was made up of all the advanced countries that constituted the G8 along with a dozen large emerging markets. Four of the countries included in the G20 are from Asia, namely, China, India, Australia and South Korea.

The United States under President Obama sent a clear signal to Asia that the region will receive its attention on a priority basis. Secretary of State Hillary Rodham Clinton’s first overseas visit was not to Europe, the traditional starting point for most of her predecessors.

Instead, it was to Asia where she attended the meeting of regional leaders that had been skipped by previous Secretaries. While there, she signed a treaty with the 10-member Association for Southeast Asian Nations, or ASEAN. However, as discussed below, for the United States signing a treaty with a foreign power is only the beginning of a complex process.

The methodical President Obama prepared himself well for his maiden voyage to the region as president. Among the several people consulted was Lee Kuan Yew of Singapore, who visited the American leader in the White House. After the visit, Mr Lee said that he told the American president, “if you do not hold your ground in the Pacific, you cannot be a world leader”. But working closely with East Asia and with the countries on the two sides of the Pacific meant placing emphasis on economics. “The business of Asia is business,” says Evan A. Feigenbaum, a former senior State Department official currently at the Council of Foreign Relations. “What you’ve got is an Asian challenge to Obama in the economics area that his predecessors didn’t face. Whatever good things the administration is doing – and they are doing good things – there is no substitute for economic management”. 4 In that area, the United States does not have a good record.

Basing Relations on Economics The most important issue in economics is trade. Here, the American record is poor. Its leaders have not brought to bear the kind of pressure the American political system needs to move initiatives forward though Congress. It took a lot of arm twisting by President Bill Clinton to get the North America Free Trade Area, the NAFTA, approved by the US Congress. The 3

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In an earlier work for ISAS, I had suggested that China is rising for the second time, this time by not putting that much emphasis on external trade and the development of the private sector. Instead, China based its recovery from what was now called the “Great Recession” by focusing also on the development of internal markets, and by bringing the state back as a major player in economic managements. See Shahid Javed Burki, “The Rise of China: How It Will Impact the World”, ISAS Insights, No. 80, 6 August 2009.

John Pomfret, “U.S is reaching out to East Asia’s powerful nations”, Op. Cit.

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president got the approval with a margin of only one vote. President Obama is currently preoccupied with getting Congress to approve his agenda. His agenda includes such difficult subjects as the reform of the health and financial systems and accepting targets for the United States concerning carbon emission. Given this policy load he has not been able to turn his attention to the treaties his country has signed with the East Asians. The United States and South Korea, for example, signed a free trade agreement in June 2007 but the Senate has as yet to ratify it. On the other hand, South Korea’s parliament ratified a free trade agreement with India on 6 November 2009. Even when the United States took the lead in developing a framework for multi-regional cooperation, it failed to take advantage of its own work. A good example of this is the trade treaty with ASEAN. While the treaty languishes for approval in the Senate, it has been used as a model by other countries and regions that have recognised the importance of working closely with Asia. Earlier this year South Korea signed a free trade deal with the European Union (EU) that, ironically, was modelled on the one worked out with Washington.

Washington will need to turn its attention to trade relations with East Asia for the simple reason that this is now the fastest growing region in the world. It is also the case that the East Asians are reshaping the global trading system. Broadly speaking, there are now three parts to the emerging global structure. The smaller East Asian nations on China’s periphery have become major suppliers of parts and components to the Chinese industry. China is now concentrating on using these inputs to manufacture finished products that range from iPods to airplanes. It is no longer dependent on the export of such simple items as toys and garments.

The final products it produces find their way into the markets of the United States and Europe. The question then is – how to regulate this three-way trade? The hope that this will be done in the context of a multilateral treaty negotiated under the auspices of the World Trade Organization (WTO) has not been realised. The Doha round of talks that began in 2001 is now stalled. It has turned out that the matters that were to be resolved within the framework of one treaty could not be done because of the complexity of the trade-offs that were involved. Instead, the world is moving towards concluding bilateral treaties between countries, between regional arrangements such as the EU and ASEAN, and between regions and countries such as between South Korea and the EU. The US cannot afford to ignore this development no matter how great its weight is in the global economy and the world trading system. It has a cumbersome treaty-approval system that needs to be improved for it to remain involved in the evolving global trading system. This matter will be taken up in the talks that President Obama will have with the East Asian leaders in particular with those of China.

Working with China The most important part of the Obama visit to East Asia will be the three-day stay in China.

In Beijing, he will spend a significant amount of time with Hu Jintao, his Chinese counterpart. The two have met before including on a one-to-one basis, of which their first meeting was in London in April on the sidelines of the G20 meeting. In August, President Obama hosted a large delegation from Beijing that met with an equally large number of officials from the United States. These consultations clearly signalled to the world that the two countries were prepared to work together to handle global economic issues within a framework that could be labelled the G2.

The Hu-Obama meeting will be held at a time when some strains exist in the relationship between the two countries. These have arisen largely on the account of a variety of disputes

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concerning trade. It has not pleased Beijing that Washington, under President Obama, has used the blunt instrument of counter-veiling duties allowed under China’s agreement with the WTO to pacify some of the influential lobbies that the new administration wishes to keep on its side. These lobbies are threatened by the increasing competition coming from China. The Chinese leadership was not pleased with the fact that only days before the Obama visit Washington has slapped anti-dumping duties on US$2.6 billion of Chinese steel pipe imports.

The US Department of Commerce imposed tariffs of up to 99 per cent on some Chinese imports while filing a formal complaint as required by international law with the WTO. Last month, the Obama administration levied 35 per cent tariffs on vehicle tires made in China and imported into America. These actions, as usually happens in trade disputes, led to counteractions by Beijing. It opened investigations into US exports of poultry on the grounds of safety, and car and car parts because of the state aid these industries have received. The reference was to the bailout of General Motors and Chrysler by Washington. There was irony in this since the Chinese government’s support of its state-owned companies has long been a bone of contention with its major trading partners. But Beijing did not stop at the adoption of these counter-measures. It issued a stinging rebuke to Washington – “China resolutely opposes such protectionist practices and will take steps to protect the interests of our domestic industries”, said the country’s commerce ministry. “The US should give objective consideration to the fact that the fundamental problem of the US industries in question is the fall of demand brought about by the financial crisis.” 5 The economies of China and the US have become intertwined in several unexpected ways.

Take for instance the setting of interest rates in the US, a responsibility that lies with the Federal Reserve System, the US central bank. The Fed sets short-term interest rates which then influence the long-term rates which, in turn, have an impact on the levels of investment.

However, this link has been severed. Since 2001, the Fed has moved short-term rates from 1 per cent to more than 5 per cent and then back to zero. And yet the rate on the 10-year Treasury note has stayed mostly within a relatively narrow range between 3.5 percent and 4.5 per cent. The lack of volatility in the long-term rates was almost entirely because of Chinese purchases of the US Treasury bills. The Chinese now have close to US$900 billion in investments in the US long-term instruments. It has been suggested that “it’s time to form a joint central bank. This won’t happen overnight, but in some ways the process has already begun”. 6 There are other areas where fresh thinking is required to set the relations between the two countries based on the recognition of reality. One of them is the US concern with international property rights. “Successful American businesses operating in China, however, have learned that trying to protect intellectual property wastes time and energy, and they’re better off reinvesting in research and developing new products. Chinese firms excel at copying but not yet creating. As a result, smart firms have recognized that the lasting solution is innovation, not courts and lawyers.” 7 It is in the area of climate change that the two countries need to work together. This subject will figure prominently in the Hu-Obama discussions. Some of the commentary concerning this subject has missed the links that exist between China and the United States in the area of global warming. It is pointed out that China will soon overtake the United States as the largest emitter of carbon into the atmosphere and therefore, has to adopt an aggressive carbon-emission target matching those the United States is working on. A clear path forward 5 6

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Quoted in Geoff Dyer, “China attacks US in fresh trade spat”, Financial Times, 7 November 2009, p. 2.

Zachary Karabell, “For China trip, lose the old baggage”, The Washington Post, Outlook, 8 November 2009, p. B3.

Ibid.

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would “involve regular meetings and annual targets that might be set by some combination of the [US] Environmental Agency and China’s Ministry of Environmental Protection. Given that a significant portion of China’s emissions result from American companies manufacturing goods there, and given that the cost of US energy consumption is shaped by China’s hunger for the resources, the two nations must coordinate policy and action, including emission targets that adjust over time – with China bearing a larger share of the burden as it becomes ever more energy intensive.” 8 Conclusion There is an important conclusion to be drawn from the preceding analysis of the circumstances that will determine the success or failure of the first visit to East Asia by President Barack Obama. Relations between these two parts of the global economy should be based on institutional arrangements rather than on ad hoc dialogue between the leaderships of the various countries. This is particularly the case with relations between Beijing and Washington. If institutions were to develop, it will not happen overnight but will evolve over time. There are a number of areas that will need to be tackled within institutional frameworks. These include monetary policy, trade policy and management of climate change.

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Ibid.

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ISA S Brief No. 139 – Date: 17 November 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

A ‘New’ Japan and Possible Implications for Japan-India Relations Sinderpal Singh 1 Introduction The victory of the Democratic Party of Japan (DPJ) in the Japanese Lower House elections in late August 2009 brought to an end half a century of uninterrupted rule by the Liberal Democratic Party (LDP) in Japanese politics. It also signalled a potential “revolution” in Japan’s domestic and foreign policies. However, with about two months into this new DPJ era, in terms of Japanese foreign policy at least, it is yet unclear as to how radical a departure this new government will take from the central tenets of the preceding Japanese foreign policy.

In the specific case of Japan-India relations, there are fears that Prime Minister Yukio Hatoyama’s highly enthusiastic embrace of China would come at the expense of relations with India. Such fears, especially in New Delhi, are located against the backdrop of a significant deepening of bilateral ties between Japan and India before the DPJ’s ascent to power. Certain preliminary observations can be made in four distinctive issue areas, each offering varying prospects for future Japan-India relations.

Climate Change and Copenhagen As part of its approach to the global Climate Change Summit in Copenhagen in December 2009, Japan’s new government has made a commitment to cut its greenhouse gas emissions by 25 percent by the year 2020 from the 1990 levels. This is a considerable increase in comparison to the eight percent target pledged by the earlier LDP government. In real terms, this is a significant pledge for a country which is the fifth largest emitter of greenhouse gases.

Meeting at the sidelines of the Association of Southeast Asian Nations (ASEAN) Summit in Thailand in October 2009, the prime ministers of Japan and India “agreed to work together in a positive and constructive way on the climate change issue”. However, beyond such general proclamations lay a more specific difference. Prime Minister Hatoyama saw India’s commitment as “indispensable for the success of Copenhagen”. One the other hand, while welcoming Prime Minister Hatoyama’s initiative, Indian Prime Minister Dr Manmohan Singh stopped short of making any new commitment, reasserting the prevailing Indian “per 1

Dr Sinderpal Singh is a Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassss@nus.edu.sg.

capita position”, wherein India has pledged to keep its per capita emissions lower than the global per capita average.

Clearly, there is a variation in approach between the two countries on this issue. This is not surprising given that India, together with China, has taken the position that the major developed economies like Japan should commit, amongst other things, to significantly deeper cuts in greenhouse emissions as compared to developing economies on the “principles of equity and the overriding imperative of economic development and poverty reduction” on a global level. However, what is not totally clear at this moment, and which may impact bilateral ties in the near future, is the extent to which the DPJ government will push, at the multilateral level, its professed desire to play a global leadership role on climate change.

Given the fact that the chances of securing a definite deal in Copenhagen are now all but over, it is unclear how much political capital the DPJ government will pour into nudging “major emitters” into making deeper emission pledges. More significantly, given India’s and China’s shared position on “common but differentiated responsibilities” on emission cuts visà-vis the more developed economies, it is not clear if these differences in the realm of climate change policy specifically would significantly impact Japan-India relations.

The Nuclear Dimension: Energy, Non-Proliferation Treaty and Comprehensive Test Ban Treaty The nuclear dimension has been a perennial factor in relations between Japan and India, preceding the present DPJ era. In 1998, when India conducted its nuclear tests, Japan suspended all political exchanges with India and froze all economic assistance for a period of close to three years, publicly condemning the tests in the harshest of tones. This was to be expected given the symbolic place nuclear weapons and their use occupy within the collective Japanese psyche. However, with time, and especially with the United States slowly but surely building stronger links with India in both the Bill Clinton and especially the George W. Bush period, Japan-India relations also improved, with India’s nuclear programme casting less of a shadow on bilateral relations over time.

The DPJ era, however, could spell potential new difficulties for bilateral ties in the nuclear field. Before coming to power, one of the DPJ’s stated policy platforms was its very strong proclamation of nuclear disarmament principles. More significantly for India, the DPJ’s policy manifesto saw the United States-India civilian nuclear agreement as an unwelcome development and as sending “the wrong message” to states like Iran and North Korea. In its view, the Non-Proliferation Treaty (NPT) needs to be given a fresh lease of life, especially by nudging non-signatories like India to sign on. In this, it shares the Barack Obama administration’s broad stress on the importance of bringing more countries under the NPT as part of a global pact to control nuclear weapon and technology proliferation.

To add to this, the chair of the recently-concluded East Asia Summit (EAS), Thailand’s Prime Minister, Abhisit Vejjajiva, on behalf of the grouping “encourage[d] those EASparticipating countries that have not acceded to the Comprehensive Test Ban Treaty (CTBT) prior to the NPT Review Conference to do so.” Japan is a member of the EAS while India is the sole participant in the grouping that has yet to sign the CTBT, although China, the United States and Indonesia have signed but not yet ratified the CTBT (the next NPT Review Conference is set to be held in May 2010 – it takes place every five years). At the moment, direct Indian requests for Japanese assistance for India’s civilian nuclear power generation efforts have been met publicly with ambivalence with Prime Minister Hatoyama saying he

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was “cautious” on such a notion and had to “consider various factors before looking into providing assistance”.

As in the domain of climate change, it is difficult to ascertain at this juncture how much political capital the DPJ is willing to sacrifice in the near future, in foreign policy terms, in order to push its stated disarmament goals. For a start, much will depend on how much of a domestic consensus the Obama administration can achieve in the United States on ratifying the CTBT. In the event of the United States, and resultantly China, ratifying the CTBT, India’s refusal to sign could impinge considerably on Japan-India relations under a DPJ government. Barring this, it is unlikely that Japan-India relations would suffer considerably because of this issue, especially given India’s stated position on exercising a self-imposed moratorium on further nuclear testing, as well as its widely appreciated record on nuclear weapon and technology non-proliferation.

Economic Cooperation Economic relations between Japan and India have been growing steadily in recent years.

Export from India to Japan has nearly doubled from US$2.2 billion in 2001 to US$4.1 billion in 2007 while Japanese exports to India have grown even more steadily from US$1.9 billion to US$6.1 billion over the same period. Direct investment from Japan to India has also grown rapidly from ¥18.4 billion in 2001 to ¥178.2 billion in 2007. In December 2006, the prime ministers of the two countries decided to launch immediate negotiations for the conclusion of a bilateral Economic Partnership Agreement (EPA). However, despite the best of intentions, and after 12 rounds of negotiations between the two sides, the agreement has yet to be finalised. In their meeting at the recent ASEAN Summit, Prime Minister Singh stressed the need for both sides to “become flexible” in order to finalise the EPA (one of the main sticking points at the moment is the negotiation over the simplification of procedures for approving generic drugs).

As importantly, the Japanese government is a major partner in what would be India’s largest infrastructure project, the Dedicated Freight Corridor (DFC). The DFC will involve building a 3,300-kilometre railway network exclusively for freight movement, with the western corridor linking Mumbai with Delhi and the eastern corridor linking West Bengal with Punjab. Linked to this is the project to build an industrial corridor along the Delhi-Mumbai freight corridor. Prime Minister Hatoyama has indicated that his new government places great importance in these major infrastructure projects, urging Dr Singh to implement the projects “at the earliest”. The previous Japanese government had approved (under the auspices of its International Cooperation Agency) a loan of Rs. 17,000 crore for this project, with the conditionality that a certain percentage of the loan amount be used to purchase specific Japanese goods. In following through this commitment, the new government has recently signed an agreement for the delivery of the first instalment – Rs. 133 crore – of this loan.

In the economic sphere, Japan-India relations do not seem to have deviated in any meaningful fashion with the new Japanese government. Both sides look keen to pursue the finalisation of the EPA, and are mindful of the trade benefits such an agreement would bring. Political will on both sides does not seem to be wavering on this count. Similarly, with the DFC, the new Japanese government seems determined to move ahead with the commitments made by the earlier government to be an important part of one of India’s largest infrastructure projects.

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Strategic-Political-Military Ties One of the major symbols of closer relations between the two countries in recent years in the strategic realm was the establishment of the “Strategic and Global Partnership between Japan and India” in August 2007 which led to the “Joint Statement on the Advancement of the Strategic and Global Partnership between Japan and India” in October 2008. One of the central elements of this joint statement was to affirm the point that “as major countries in Asia that share common values and interests, (both) must advance bilateral cooperation as well as cooperation in regional and multilateral areas”. Amongst other things, this referred to developing common approaches to institutions like the EAS, the United Nations and global issues like terrorism and the World Trade Organisation. In the security-military sphere, there have been several high-level visits between the armed forces of both sides culminating in the Japanese Maritime Self Defence Forces participating in the “Malabar 07-2” exercises hosted

by India. In addition, coast guards from both countries have been engaged in annual joint exercises in anti-piracy, and search and rescue since 2000.

Many saw such Japanese efforts to strengthen strategic-political relations with India as stemming from the former’s uneasiness with China’s growing economic power, which is seemingly being translated into greater strategic-political clout, both regionally in East Asia and globally. However, the DPJ’s position on China appears to be appreciably different. It aims to build closer relations with China, rejecting what it sees as earlier attempts by certain sections, in both Tokyo and Washington, to contain China. It also aims to revisit its alliance relationship with the United States, proclaiming that it wants a more “equal” association with its traditional military partner. Prime Minister Hatoyama’s recent proposal at the EAS of a future East Asian Community (EAC), which seemingly excludes the United States, has set off alarm bells in Washington. At the Asia Pacific Economic Cooperation (APEC) Summit later, Prime Minister Hatoyama’s vision of a future EAC was still unclear, especially with regards to who should be part of this grouping, much less what the EAC should aim towards becoming. India is part of this tentative EAC proposal, by virtue of being part of the EAS process.

It remains unclear at this moment how closely the DPJ’s rhetoric on fostering deeper ties with China will translate into actual foreign policy. It is clear, however, that earlier fears of the new government ditching the United States-Japan alliance are unfounded. Prime Minister Hatoyama has publicly stated that the United States-Japan alliance will remain “the cornerstone” of Japanese foreign policy. For India, the important question is whether the momentum of stronger strategic ties forged during the earlier Japanese administration will continue or if they will slow down as the DPJ moves to cement even closer ties with China.

Presently, especially given India’s unambiguous signals in wanting a stake in any future region-wide grouping (India has also indicated that it intends to apply to join the APEC grouping next year when the moratorium on the admission of new members expires), it is difficult to foresee Japan-India strategic ties taking a significant U-turn. India will be too difficult to ignore, much less by any Japanese government, in any future constellation of regional order in the Asia-Pacific.

Conclusion Much of the world has been watching, with anticipation, how the DPJ government will implement its “revolution” in Japanese politics, especially in its foreign policy. In terms of Japan-India relations, it is still too early to tell how the new government will (re)orient its

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approach to this bilateral relationship. In each of the four issue areas discussed, differing prospects emerge at this early stage. A clearer picture might emerge if and when the new Japanese Prime Minister accepts the standing Indian invitation for an official visit to New Delhi.

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ISA S Brief No. 140 – Date: 18 November 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Pakistan’s Nuclear Weapons: How Safe Are They?

Ishtiaq Ahmed 1 Introduction With the assault on the office of the Inter-Services Intelligence (ISI) in Peshawar on 13 November 2009, which left at least 20 people dead, including 10 ISI officials, the Taliban-Al Qaeda nexus has once again demonstrated that it is capable of hitting the supposedly wellguarded targets representing the power and authority of the state. A few weeks earlier, they were able to deceive the guards at the entry of the citadel of the Pakistan army, the General Headquarters, in Rawalpindi. On that occasion, more than 40 people were taken hostage, of whom 37 were rescued due to a daring operation by the commandos of the elite Special Services Group.

The Head Office of the Federal Investigation Agency in Lahore was bombed in October this year. A similar attack took place in 2008. Since 2007, attacks have been launched on military, air force and naval personnel and officials. On the other hand, the media also reported that some terrorists had tried to enter the restricted area where the nuclear facilities are located, but they were stopped at the outer security ring.

Report on Safety and Security of Pakistan’s Nuclear Weapons In his detailed report published in the New Yorker dated 16 November 2009 (though it was already made public a week earlier), Seymour Hersh claims that the United States was doing all it could to ensure that Pakistan’s nuclear warheads were safe and secure. He referred to United States President Barack Obama’s response to a question by a journalist about the safety of those weapons. President Obama reportedly said that the United States wanted to “make sure that Pakistan’s nuclear arsenal is secure – primarily, initially, because the Pakistan army, I think, recognises the hazards of those weapons falling into the wrong hands.”

Some of Hersh’s assertions put the Pakistanis in an awkward and deeply embarrassing position. For example, a spokesman for Admiral Michael Mullen, the chairman of the Joint Chiefs of Staff, told Hersh that Admiral Mullen was deeply involved in day-to-day Pakistani developments and “is almost an action officer for all things Pakistan”. However, Admiral 1

Professor Ishtiaq Ahmed is a Visiting Research Professor at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasia@nus.edu.sg.

Mullen denied that he and General Ashfaq Parvez Kayani Pakistan’s Chief of Army Staff, or their staffs, had reached an understanding about the availability of American forces in case of a mutiny or a terrorist threat to a nuclear facility. “To my knowledge, we have no military units, special forces or otherwise, involved in such an assignment”, Admiral Mullen is reported to have said through his spokesman. The report informs that, for the last three years, the United States and Pakistan have been working very closely on the nuclear weapons issue.

In light of conflicting reports, one wonders who should be believed – the American journalist Hersh, who has suggested that the United States is seeking a greater role in the protection of Pakistan’s nuclear weapons from terrorists or the angry refutation by the Chairman of the Joint Chiefs of Staff Committee, General Tariq Majid, who dismissed Hersh’s report as sensational and mischievous. He reportedly said that, “We have operationalised a very effective nuclear security regime, which incorporates very stringent custodial and access controls. As overall custodian of the development of [the] strategic programme, I reiterate in very unambiguous terms that there is absolutely no question of sharing or allowing any foreign individual, entity or a state, any access to sensitive information about our nuclear assets” (The News, 10 November 2009).

Possible Scenarios Hersh considered a number of scenarios that could plunge regional and world peace into jeopardy. The most serious was the possibility of a mutiny within the military stationed at the Pakistan nuclear weapon sites. It was based on the assumption that support for radical Islam and sympathy for the Taliban-Al Qaeda ideology could exist even among soldiers and officers stationed in places where the weapons are kept. When Hersh probed that possibility with military officers who he claimed to have spoken to, they rejected such a turn of events.

They told him that the personnel working in such places were thoroughly scrutinised and those whose ideological orientation or mindset was suspect were screened out.

Moreover, Hersh was told that the nuclear devices are kept in deep tunnels that can never be detected by spy satellites. Even more importantly, the procedure adopted to make the nuclear weapons operational is exceedingly complex. The different elements and parts of a nuclear bomb are kept apart from one another. In order to use these devices, they needed to be assembled in one place. The procedure has been streamlined and, in case of a war or some threat to national security, a select group of military personnel could quickly make them operational.

The United States and Pakistan’s Sovereignty It may be recalled that a controversy raged in Pakistan recently over the Kerry-Lugar Bill, which was attacked by right-wing media and politicians as an invasion of Pakistani sovereignty. Hersh’s report suggests that the Americans are determined to take control of Pakistan’s nuclear assets. In one sense, it gives credence to the conspiracy theory that the Americans are out to nullify Pakistani sovereignty and security – the nuclear weapons epitomising sovereignty and security!

It is, therefore, not surprising that it was not only a top Pakistani military officer who refuted the claim that the terrorists could get hold of Pakistani nuclear weapons; Pakistan’s President Asif Ali Zardari, the Federal Minister of Information, Qamar Zaman Kaira, and the Pakistan Foreign Office also issued similar statements. Their standpoint was supported by statements

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issued by the United States Secretary of State, Hillary Clinton, and the United States’ Ambassador to Pakistan, Anne Patterson.

Will this latest controversy subside now that the power holders on both sides are singing the same refrain or will it only adversely affect the United States-Pakistan alliance against terrorism? That remains to be seen.

However, this is not the most interesting aspect of the recent controversy.

The most crucial problem policymakers have to face in the current situation is that the Taliban-Al Qaeda network will not hesitate to try anything to stop the offensive launched against them by the Pakistan military and to force the American and North Atlantic Treaty Organisation forces to pack up and leave Afghanistan. There are good reasons to believe that General Majid is speaking with sincerity that only those which the military has already included in the core group, who, in case of an emergency, will make those weapons operational, can access them unless that core group itself is eliminated. Arguing thus, he assured that it was not possible to reach the nuclear warheads and use them because all precautions have been taken to prevent that from happening.

Rational men in command positions in the Pakistani military who are in charge of the nuclear assets know that if they use such weapons, there would inevitably be a similar retaliation. The destruction and suffering that will follow in such a situation will defy imagination; hence the assumption is that while nuclear weapons are not usable, they guarantee peace. However, from the die-hard Islamist point of view, such reasoning may not carry much persuasive power.

Moreover, no watertight, foolproof guarantee can be provided by any nation or military that some mad men in their midst would never be able to get hold of such weapons and use them.

Such a danger is present in all circumstances and, therefore, the Pakistani explanation is convincing on its own merits.

There is, however, no reason to believe that the Americans would not be interested in getting as accurate as possible knowledge about those weapons because, in case the unimaginable happens and hardcore Islamists do manage to get hold of them, regional and world peace would be gravely threatened. Some time ago, Rowan Scarborough, a journalist with Fox News, reported that three attempts have already been made by terrorists to get to Pakistan’s nuclear assets. Under the circumstances, the United States has a detailed plan to rapidly deploy the Joint Special Operations Command, a super-secret commando unit headquartered at Fort Bragg, North Carolina, in Pakistan to take control of Pakistani nuclear weapons in case Pakistan was destabilised and extremists come to power. Some rumours suggest that an elite commando force is already stationed in Afghanistan for such an undertaking.

Decline of Pakistan It is truly very sad that Pakistan should end up in such a sordid and profoundly dangerous situation. In the mid-1960s, Pakistan was being celebrated as the paragon of economic development that many nations, including South Korea, Singapore and Malaysia keenly studied, but after the 1965 war with India, Pakistan could not return fully to the path of peaceful development and change.

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The military defeat at the hands of India in 1971 in the former East Pakistan, which broke away to become Bangladesh, played a most vitiating role in accentuating a belief in the need for an Islamist orientation of the armed forces. Such a mindset reached consummation during the Afghan jihad of the 1980s. It set in motion a process that inevitably took it down the path of violent politics, which undermined the social peace within Pakistan and created dangerous situations of a military confrontation with India.

Until the beginning of the 1980s, Pakistan’s standard of living was higher than not only India but China as well. Now, China is way ahead and, since 2006, India has also surpassed Pakistan. Poverty, illiteracy and despondency mark the lives of the majority of an otherwise very hardworking and warm-hearted Pakistani nation.

Conclusion If and when things return to some modicum of normalcy, it would be imperative to consider other options as well to make Pakistan strong and confident through progressive investments in education and economic development. The Americans will have to persuade India and Pakistan to sort out their differences if the arms race in this region is ever to stop. At present, Pakistan’s reputation as the most dangerous polity on earth is, unfortunately, likely to persist.

References General Tariq Majid, ‘Pak N-safety plan’, The News, 10 November 2009.

Rowan Scarborough, Fox News, 14 May 2009, http://www.foxnews.com/politics/2009/05/14/ plan-pakistan-teeters-falling-taliban/ (accessed on 19 November 2009).

Seymour Hersh, ‘Defending the Arsenal: In an unstable Pakistan, can nuclear warheads be safe’, The New Yorker, 16 November 2009.

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ISA S Brief No. 141 – Date: 24 November 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Hamid Karzai’s Second Term as Afghanistan’s President: Promises, Challenges and Prospects Shahid Javed Burki 1 Abstract Hamid Karzai was sworn in as Afghanistan’s president on 19 November 2009 after being ratified as the winner in the elections held on 20 August 2009. The long delay in being sworn in was caused by the successful challenge launched by Dr Abdullah Abdullah to the election results. Abdullah had received the second highest votes in the contested elections. A run-off election was ordered for 7 November 2009 but was cancelled when Abdullah withdrew from the contest, clearing the way for the swearing-in ceremony. 2 President Karzai begins his second term at a very difficult time for his country. The resurgent Taliban have tightened their grip on Afghanistan, leaving only Kabul in the control of the government. In order to win his second term, Karzai had aligned himself with a number of warlords who were known to have plundered the country. Even before Karzai was sworn in for a second term, the United States administration, headed by President Barack Obama, became engaged in an intensive review of its position on Afghanistan. The review has been undertaken as public support in the United States for the war in Afghanistan has declined to a point where most people favour the withdrawal of American troops. Whether Karzai would govern the country differently in order to continue receiving help from the world outside is a question frequently being asked as he begins his second term.

Pledges by Karzai On the eve of Karzai being sworn in for his second term as Afghanistan’s president, much of the country was in the hands of the Taliban and deadly insurgent attacks were occurring in 1

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Mr Shahid Javed Burki is a Visiting Senior Research Fellow-designate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

See my earlier ISAS Briefs for a discussion of the elections – “Afghanistan Presidential Elections 2009: Developments since the fall of the Taliban”, ISAS Brief No. 123, 17 August 2009 (accessed at http://www.isas.nus.edu.sg/events/backgroundbriefs/124.pdf); “Afghanistan Elections 2009: The Day of Reckoning”, ISAS Brief No. 126, 31 August 2009 (accessed at http://www.isas.nus.edu.sg/events/back groundbriefs/127.pdf); and “Afghanistan Presidential Election 2009: The Run-up to the Run-off”, 4 November 2009, ISAS Brief No. 134 (accessed at http://www.isas.nus.edu.sg/events/backgroundbriefs/ 135.pdf).

Kabul. According to one newspaper account, “Mr Karzai’s inauguration took place amid virtual lockdown of the Afghan capital, with government offices closed and streets blocked off of all traffic in the city centre. He took the oath of office in the white-columned hall in the heavily-guarded presidential palace, where some key Western dignitaries, including United States Secretary of State Hillary Clinton as well as Pakistani President Asif Ali Zardari, sat in [the] front row.” 3 Eight hundred guests were invited to the palace to witness the swearing-in ceremony. Karzai spoke for 30 minutes. Mrs Clinton said that she was “very heartened” by the speech. “He could have been very vague [about corruption] and talked about how we’re all against it and we all want to end it. But he got much more specific and we’re going to watch along with the people of Afghanistan how that’s implemented.”

The president’s speech was a long laundry list, detailing what his government would do during his second five-year term with several time-specific targets laid down. President Obama, while on a nine-day long visit to Asia, had laid down a target of his own, saying that he wanted to end the Afghan War before the end of his presidency. Karzai provided his own framework within which his government would act. In the next two years, all private security firms – widely used by coalition forces to defend their bases and supply lines – would cede their functions to the Afghan government. After three years, the president said, the Afghans should be able to lead and conduct operations around the country. “The roles of the international troops will be gradually reduced and limited to support and training of Afghan forces”. By the end of his five-year term, Karzai added, Afghan forces should be “capable of taking the lead in ensuring security and stability across the country”. At that time, no foreign troop presence would be required to deal with internal security.

Karzai also promised to reach out to the moderate elements within the Taliban movement. He said that reconciliation with these people will be given a high priority by his administration.

“To put an end to three decades of war is what most Afghans want,” he said, adding that “peace and security cannot be achieved only militarily.” He said he would convene another log jirga (an assembly of elders) that would include those Taliban who were prepared to work with the government. However, Afghan-led efforts at dialogue with insurgents had achieved little and “experts say funds devoted to encouraging fighters to give up their cause have been squandered”. 4 Concern with Corruption The international community has been extremely concerned with corruption in the Karzai administration. The Washington Post published a detailed account of how one of the senior ministers of the administration had taken US$30 million from a Chinese company for a contract to explore and exploit Afghanistan’s rich copper deposits. Keeping such stories in mind, Karzai vowed to end the “culture of impunity and violation of law and bring to justice those involved in spreading corruption and abuse public property” and dismiss corrupt officials. “For some time now, the world media has widely reported on corruption in our country’s offices and administration. Whatever the truth may be, these allegations have given the Afghan administration a very bad reputation. Corruption and bribery constitute a very dangerous problem.” However, he also laid part of the blame on the international community itself. He singled out the aid system, saying a “lack of transparency and accountability in aid 3

4

Alan Cullison and Anand Gopal, “Karzai has plenty of promises for the West”, The Wall Street Journal, 20 November 2009, p. A14.

Joshua Partlow, “Karzai sets key goals in inaugural address”, The Washington Post, 20 November 2009, p.

A13.

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spending reduces people’s trust and causes the spread of administrative corruption”. He vowed to push for a law requiring all senior officials to declare their properties and assets. He promised to convene a conference to generate ideas to fight corruption and said that his cabinet would include “expert ministers” who could lead with integrity. He did not minimise the task that lay ahead and was no longer dismissive of the role the international community could play in helping him to reach his goals.

Softening of the United States’ Stance The United States also softened its position towards the president. Karzai had taken a very tough position with respect to the United States and its allies in a wide-ranging interview with Margaret Warner of the Public Broadcasting Service (PBS), which aired a day before the swearing-in ceremony. The widely-watched interview was not well received in Washington.

Karzai said that much of the blame for his country’s current situation could be laid at the doorstep of the United States, which had left suddenly after the Soviet Union pulled out its troops in 1989. This left the country hostage to the whims and interests of its neighbours, a clear reference to Pakistan. Asked about his reaction to the decision of the United Nations to pull its staff out of the country following an attack on their office in Kabul that left several people dead, he said it would make no difference to him or his administration if the United Nations did not return. He went on to say that the United States was in Afghanistan not to help his country but to fight its war against terrorism.

After showing some irritation at the president, Washington concluded that it would not serve its purpose to have a cantankerous Head of State sitting on the other side of the table in its dealings. “It is not sustainable to have a ‘War of the Roses’ relationship here where we basically throw things at each other”, a senior administration official told Rajiv Chandrasekaran, the Pulitzer Prize-winning correspondent of The Washington Post who had done extensive reporting on Iraq and now covers Afghanistan. A significant change occurred in the environment surrounding the United States’ dealing with the Afghan president as he was preparing to be sworn in. “When a team of senior United States officials led by Secretary of State Hillary Rodham Clinton entered the presidential palace on Wednesday [18 November 2009] for a dinner meeting, they had little indication of what Afghan President Hamid Karzai planned to discuss, or whether questions about corruption and governance would pitch their host into a foul mood”, Chandrasekaran wrote for his newspaper. “But instead of revisiting old disputes, Karzai brought in several cabinet ministers to talk about development and security. He explained details of a new effort to address graft. And halfway through a meal of lamb stew, chicken and rice, he looked across the table and said he had decided that the United States would be a ‘critical partner’ in his second term.” 5 This was a different tone from the one he had adopted in the much-discussed PBS interview. Secretary Clinton stayed back after the dinner for a 90-minute one-on-one meeting with the Afghan leader. She told the president that “future levels of development aid will be linked to improvements in governance and she urged him to use merit, not cronyism, as a criterion for filling cabinet posts. She also indicated that the White House would seek to have the Afghan government meet as yet-to-be defined benchmarks of progress as a condition of United States security and development assistance”. 6

5

6

Rajiv Chandrasekaran, “A softer approach to Karzai”, The Washington Post, 20 November 2009, pp. A1 and A12.

Ibid.

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Secretary Clinton continued with the conciliatory tone after hearing the speech by the president. “We want to assist him and the military and police leadership in Afghanistan to move as quickly as they can, to stand up and deploy a professional, motivated, effective force”, she said at a news conference. “The road ahead is fraught with challenges and imperfect choices, setbacks are inevitable, and we have to be realistic about what we can accomplish”, she continued. As if to underscore the point she was making, two United States service members were killed in a bombing in southern Afghanistan, close to the border with Pakistan on the day Karzai was sworn in, and a suicide bomber detonated explosives in a market, killing at least 10 people.

The softening in the United States’ stance towards Karzai came with an increase in the role the Obama administration gave to Mrs Clinton. According to one analyst, “it is far from clear that President Obama can depend on President Karzai to bring order to this violent country, but it is becoming clear that he will depend on Hillary Rodham Clinton to be his go-between in dealing with the mercurial Afghan leader.” 7 Some other senior officials of the Obama administration had found it difficult to work with the Afghan president. Vice President Joseph Biden once stalked out of a dinner meeting with Karzai 10 days before he and Obama took office while Richard Holbrooke, President Obama’s special representative for Afghanistan and Pakistan, had annoyed the Afghan leader by adopting a hectoring tone. Karl W. Eikenberry had, at best, a working relationship with Karzai, unlike Zalmay Khalilzad, one of his predecessors, who had become a close associate and adviser of the president. It took a visit and display of extraordinary patience by Senator John Kerry to convince Karzai to accept that it was in his interest to agree to a run-off election. Kerry was travelling in the area when Holbrooke failed to convince the Afghan leader and was persuaded to play the role of an emissary. Secretary Clinton was, therefore, filling an important role in that she was combining her experience as a politician with respect to some of the achievements of the Karzai administration.

When interviewed about her role in Afghanistan, Mrs Clinton reminded the press that when Karzai took office, there were only one million students in the country, virtually all boys.

Today, there are seven million students, 40 percent of them girls. When asked to comment about corruption in the country and the rumour that the president’s brother was involved in the drug trade, she said that, “every country makes compromises, and it behoves you to be humble about pointing fingers. It also is a reminder that we have to do more to support his campaign against corruption. We have to facilitate, not impede, the removal of those who are corrupt.” The Obama administration, she went on say, was prepared to work with Karzai, stating that, “I would imagine that, if things go well, that we would be helping with education and health systems and agricultural productivity long after the military presence had either diminished or disappeared.”

After the discussion with the press, Mrs Clinton flew back to Washington to join the debate on the size of the American military contingent in Afghanistan. President Obama said that he was close to reaching a decision as he also headed back to Washington after concluding a nine-day visit to Asia.

7

Mark Landler, “Clinton emerges as Obama’s closest link to Afghanistan’s unsteady leader”, The New York Times, 20 November 2009. The evolving Obama-Clinton relationship is now the subject of considerable interest in the press. See also Daniel Dombey, “The Obama Clinton story promises many twists in plot”, Financial Times, 21 November 2009, p. 2.

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Conclusion Following his swearing-in, Karzai has made a list of things to do in his second term as Afghanistan’s president and has promised action on a number of fronts. He is fully aware of the domestic dilemmas and the concerns of the international community, particularly the United States, and has his work cut out for him. Mrs Clinton has promised the United States’ support and it would be interesting to see the outcome of President Obama’s decision on American troop withdrawal from Afghanistan. However, regardless of the decision taken in Washington, Karzai has a mountain to climb and he should start scaling it soonest.

oooOOOooo

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ISA S Brief No. 142 – Date: 3 December 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The United States in Afghanistan: President Obama decides to fight the war his way Shahid Javed Burki1 Abstract The decision to send in more American troops to Afghanistan was a long time coming. The strategy was finalised by President Barack Obama after he met with his war council on Monday, 23 November 2009. This was the tenth high level meeting chaired by the president a couple of days after his return from his first visit to Asia. The decision was announced on 1 December 2009 in a televised address to the nation delivered in front of the cadets of the West Point Academy. In that respect the president was following the precedence set by former president George H. W. Bush who had used the military as the backdrop for announcing some of his strategies. President Obama revealed at the point when he held the press conference with the visiting Indian Prime Minister, Dr Manmohan Singh, that he had made up his mind of the troop level the United States will maintain in Afghanistan. The president walked a fine line between the two positions taken by his advisers: some wanted him to pursue what has come to be called the counter-insurgency approach while the latter advocated a counter-terrorism strategy. The first is aimed at using considerable amount of force to overcome insurgency while undertaking intensive development of the liberated terrain. The second is aimed at concentrating fire power on the strongholds from where the terrorists are launching their attacks. The strategy adopted by President Obama calls for a rapid build-up of the force in Afghanistan with the promise to begin the process of drawdown eighteen months after the troop build-up. During this period the Afghan force is to be built up with the expectation that as the Americans withdraw, the country’s own military and police force would be able to take care of security.

1

Mr Shahid Javed Burki is a Visiting Senior Research Fellow-designate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

1

Background The military did not get all it wanted but it got more than President Obama’s most ardent supporters would have wanted him to provide. Two groups have emerged among President Obama’s close advisers. One, led by Vice President Joseph Biden, wants to follow a counterterrorism approach that would require fewer American troops and greater concentration of the military effort on eliminating or weakening the terrorists at the bases from where they are operating2. This would have meant concentrating the battle in Pakistan where the al-Qaeda now seems to be concentrated. Several important Congressmen, in particular those occupying committee chairs in Congress were sympathetic to this approach. It would cost less and would probably have greater support of the public that has grown increasingly uncomfortable with the war that has been ongoing for eight years. Their preference was for a quick pull out, leaving Afghanistan to its own devices.

The other group comprises Secretary of State Hillary Clinton and Defense Secretary Robert Gates – dubbed as “hawks” by the media – that argued for a counter-insurgency approach that had been tried successfully in Iraq. That implies using a large force to pacify one troubled area at a time and then staying there to introduce economic development and thus focusing on improving the lot of the common people. This approach also has the support of the military commanders.

On the same day that Obama told the press that he would be laying down before the American public his strategy for Afghanistan, House Speaker Nancy Pelosi described what she “called ‘serious unrest’ in her caucus over the prospect of another vote to finance billions of dollars for an expanded war. It is, she said, the most difficult vote she can ask of the members of her party…Pelosi met with Obama at the White House on Tuesday [24 November] and later sat next to him at the state dinner he held that evening [for the Indian prime minister]. Both sides declined to comment on Wednesday about the substance of the roughly hour-long discussion.”3 Members of Obama’s Democratic Party were opposed to the build-up of American troops for a number of reasons; by far the most important of these was the strain on the already stretched budget. It is estimated that one additional soldier would cost one million dollars a year.

Increasing the force level by 30,000 would mean an additional expenditure of US$30 billion per annum. In June, Speaker Pelosi strong-armed Democrats into voting for a US$100 billion measure to fund the wars in Iraq and Afghanistan. During an interview in July she recounted her appeal to the lawmakers. “Will you change your mind one more time and vote for war funding?” she told the lawmakers. “This is the very last time”, she promised. Asking them again would seriously hurt her credibility4.

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James Traub, After Cheney: Joe Biden could be the second-most powerful vice president in history”, The New York Times Magazine, 29 November 2009, pp. 34-41.

Michael D. Shear and Paul Kane, “President vs. party on troop increase”, The Washington Post, 26 November 2009, pp. A1 and A21.

Ibid.

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The long process of deliberation that resulted in the decision to send 30,000 additional soldiers – a process the president’s detractors called “dithering” – resulted in giving the commanders additional troops so that they could concentrate their effort in the south and south east provinces bordering Pakistan. The build-up in troops has one more dimension that is not well known.

Aiding the present American contingent are 100,000 contractors performing various functions that had been outsourced for the military. Adding another 30,000 troops would increase the number of consultants by at least 50,000. There are problems associated with such a large civilian presence when controls on the people that constituted it were not particularly good. This was demonstrated by the experience in Iraq. The most egregious example of this was the alleged involvement of the consultants working for Blackwater, the American security firm, in the massacre of more than a dozen Iraqis.

Doubts by the Democrats about the surge in the number of troops proposed by General Stanley McChrystal, the American commander in Afghanistan, was not confined to the members of the legislature. Vice President Joseph Biden was highly sceptical. Also many who belonged to what the Americans call the “base” of a politician opposed President Obama’s decision to send more troops to Afghanistan and spend more money on a war that does not seem to affect the United States. “Where’s that additional money going to come from?” asked the columnist Colbert I. King, once an ardent Obama supporter. “Obama need to address that question. This country has an accumulated debt of $12 trillion that is forecast to rise to $21 trillion in 10 years”, he wrote in a column for The Washington Post. “The nation’s unemployment rate is 10.2 percent, a 26 year high. These people will be waiting to hear why adding to the $10 billion monthly price tag for Iraq and Afghanistan will help find them work. African American men, 17.1 percent of whom are unemployed, want a word from Obama on this.” 5 King is an African-American journalist of great repute.

On the eve of the speech Having done the analytical work needed to define a strategy in Afghanistan, President Obama prepared himself and his administration to reveal its content to the public. An extensive roll-out was developed that included telephone calls on Monday, 30 November 2009 to United Kingdom Prime Minister Gordon Brown, French President Nicholas Sarkozy, German Chancellor Angela Merkel, Danish Prime Minister Lars Loekke Rasmussen, and Russian President Dmitri Medvedev. It was revealed to the press by the way of leaks. The president also briefed Presidents Asif Ali Zardari of Pakistan and Hamid Karzai of Afghanistan. President Obama plans to send 30,000 additional American troops, 10,000 shy of the request by General Stanley McChrystal.

But the US was requesting its partners in the war to step up to the plate. The allies, 43 in all, were finding it difficult to comply with the US demands. President Obama spoke with President Sarkozy of France for 40 minutes, a day before his public address, but failed to convince him to add more soldiers to the 3,750 soldiers and 150 police officers in the French contingent in Afghanistan. The UK was prepared to help marginally, increasing its already large presence by the promise of an additional 500 soldiers. That addition would bring the British total to 10,000 soldiers. According to a press report, “On top of previous reinforcements already sent this year,

5

Colbert I. King, “Get real on Afghanistan”, The Washington Post, 28 November 2009, p. A19.

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the troop build-up will nearly triple the American military presence in Afghanistan that Mr. Obama inherited when he took office and represents a high-stakes gamble by a new commander in chief that he can turn around an eight-year-old war that his own generals fear is getting away from the United States.”6 The Speech On 1 December 2009, President Obama spoke for 36 minutes surrounded by West Point cadets.

“His speech was sobering, and so was his manner…His body language was as restrained as his promises; he spoke without fanciful flights or filigree. In short, Mr. Obama projected all the caution and sober consideration that he suggested his predecessor had thrown to the winds.”7

He told his audience that it was neither his intention to go over the distraction of the war in Iraq from America’s mission in Afghanistan nor to repeat the “wrenching debate over the Iraq war”8.

Instead he wished to detail why America needed to recommit itself to winning the struggle against extremism. He wanted to speak to the nation “about our effort in Afghanistan – the nature of our commitment there, the scope of our interests, and the strategy that my administration will pursue to bring this war to a successful conclusion”.

He acknowledged that mistakes had been made under the watch of his predecessor although he did not refer to them as mistakes or directly referred to the policies pursued by former president George W. Bush. “But while we’ve achieved hard-earned milestones in Iraq, the situation in Afghanistan has deteriorated. After escaping across the border into Pakistan in 2001 and 2002, al Qaeda leadership established a safe haven there. Although a legitimate government was elected by the Afghan people, it’s been hampered by corruption, the drug trade, an underdeveloped economy and insufficient security forces.” The implication of this was clear: the American president was challenging President Hamid Karzai to improve the quality of governance in his country.

President Obama told the American nation – and the world – that he planned to send an additional 30,000 troops and ask NATO (North Atlantic Treaty Organization) allies for several thousand more. With these additions the US contingent would increase to almost 100,000. But “this burden is not ours alone to bear. This is not just America’s war.” The NATO forces were likely to increase to 40,000. The additional American troops would be moved quickly but it would take six to eight months to complete the deployment. By late July or early August 2010, the full American force will be present on the ground. This would be the peak of the fighting season in the country. Most of the American troops would be concentrated in the provinces bordering Pakistan, particularly around Kandahar and the province of Helmund. In fact, orders had gone out to the commanders to deploy the additional force even before the president’s address.

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7

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Eric Schmitt, “Obama Issues Order for More Troops in Afghanistan”, The New York Times, 1 December 2009, p.

A1 and A14.

Alessandra Stanley, “Before audience of cadets, a sobering message of war”, The New York Times, 2 December 2009, p. A17.

Unless otherwise indicated all the quotations are from President Obama’s speech on 1 December. The text used is from the White House website.

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The president promised an honest accounting of the financial resources this strategy would involve. It was estimated that the Americans had already spent $200 billion on eight years of war in Afghanistan. The new strategy would add another $30 billion a year to the cost. This was to be a time–bound commitment. The president indicated that he plans to begin the drawdown of the American troops by July 2011. This will depend on the conditions on the ground. But he made no promise about when all American forces will be gone from Afghanistan.

What purpose was to be served by this build-up in the size of the American contingent? “Our overarching goal remains the same: to disrupt, dismantle, and defeat al Qaeda in Afghanistan and Pakistan, and to prevent its capacity to threaten America and our allies in the future.” The new mission will last at its peak for a period of 18 months after which “our troops will begin to come home. These are the resources that we need to seize the initiative, while building the Afghan capacity that can allow for a responsible transition of our forces out of Afghanistan.”

President Obama recognised that nothing would succeed in Afghanistan unless Pakistan was helped to stabilise its economy and equipped to handle insurgency. “...we will act with the full recognition that our success in Afghanistan is inextricably linked to our partnership with Pakistan. We’re in Afghanistan to prevent a cancer from spreading through that country. But this same cancer has also taken root in the border region of Pakistan. That’s why we need a strategy that works on both sides of the region. In the past, there have been those in Pakistan who’ve argued that the struggle against extremism is not their fight, and that Pakistan is better off doing little or seeking accommodation with those who use violence. But in recent years, as innocents have been killed from Karachi to Islamabad, it has become clear that it is the Pakistani people who are the most endangered by extremism. Public opinion has turned. The Pakistani army has waged an offensive in Swat and South Waziristan. And there is no doubt that the United States and Pakistan share a common enemy.”

This time around, President Obama promised an enduring relationship with Pakistan that would go beyond contacts with the military and the intelligence services. He had already signed into law the Kerry-Lugar bill that promised Pakistan US$1.5 billion of economic assistance a year spread over a period of at least five – possibly ten – years. He also stated that, “In the past, we too often defined our relationship with Pakistan narrowly9. Those days are over. Moving forward, we are committed to a partnership with Pakistan that is built on a foundation of mutual interest, mutual respect, and mutual trust. We will strengthen Pakistan’s capacity to target those groups that threaten our countries, and have made it clear that we cannot tolerate a safe haven for terrorists whose location is known and whose intentions are clear. America is also providing substantial resources to support Pakistan’s democracy and development. We are the largest international supporter for those Pakistanis displaced by the fighting. And going forward, the Pakistan people must know America will remain a strong supporter of Pakistan’s security and prosperity long after the guns have fallen silent, so that the great potential of its people can be unleashed.”

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There was a great deal of debate in Pakistan about the merits of the Kerry-Lugar bill. The debate culminated in a visit to Washington by Shah Mahmood Qureshi, Pakistan’s foreign minister and a letter by the sponsors of the bill that it was not the intention of the American legislature to dictate conditions to Pakistan. See Shahid Javed Burki, “The bill explained”, Dawn, 20 October 2009, p. 7.

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The response in Pakistan to the country’s inclusion in the refined Afghan strategy was mixed.

Prime Minister Yusuf Raza Gilani worried about the movement of the Afghan insurgents into Balochistan as the pressure on Afghanistan’s province of Helmund increased. He wanted some assurance that the American troops will block these escape routes. Former president, Pervez Musharraf, wrote an article for The Wall Street Journal expressing the fear that the Americans will not be able to sustain their stay and will eventually walk out of the country as they had done in 198910.

Conclusion In the lead up to the decision by President Obama on the question of the next phase of America’s Afghan strategy, certain words and phrases had become loaded with all kinds of meanings.

“Surge” was identified with the dispatch of a large number of additional US troops to Iraq by the administration of President George W. Bush. This strategy was bitterly resisted by the Democrats in US Congress and was not favoured by candidate Barack Obama during the presidential campaign. The other phrase was “exit strategy” which was talked about a great deal as President Obama deliberated on the approach to the Afghan problem. The final strategy as revealed in the West Point speech has both components. In a long interview with Jim Lehrer of Public Broadcasting Service a day after the presidential address, Defense Secretary Robert Gates explained that the decision to start the drawdown of US troops did not mean that the Americans were going to walk out of the country beginning in July 2011. The plan was to partner with the Afghan forces, teaching them combat in a guerrilla situation. As the Afghan forces gain confidence, they will be entrusted with the responsibility district by district and province by province. The Americans will remain committed for many years reviewing the situation as time passes and the situation changes on the ground. The Washington Post summed up well in an editorial the reaction to the Obama Afghan-Pakistan strategy: “Many in America and around the world have wondered about Mr. Obama’s personal dedication to winning the war. The president’s speech offered a qualified answer. He said he must ‘weigh all of the challenges our nation faces’, and argued against as more expansive commitment to Afghanistan ‘because the nation I am most interested in building is our own’. But he also described powerfully the threat posed by ‘violent extremism’, and said, ‘it will be an enduring test of our free society and our relationship in the world’. With obvious reluctance but with clear-headedness, Mr. Obama has taken a major step toward meeting that test.” 11

10 11

Pervez Musharraf, “The Afghan-Pakistan solution”, The Wall Street Journal, 2 December 2009, p. A13.

The Washington Post, “An Afghan strategy”, 2 December 2009, p. A22.

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ISA S Brief No. 143 – Date: 7 December 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

A Tale of Two Visits: The India-US-China Relationship Sinderpal Singh1

Abstract In November 2009, United States’ President Barack Obama visited China, and Indian Prime Minister Dr Manmohan Singh went on a state visit to the United States (US). Many in India closely followed President Obama’s visit to Beijing, while Dr Singh’s trip to Washington was intimately charted in China. Presently, there are three significant issue areas in this triangular relationship that resonate deeply in both New Delhi and Beijing. These are: (1) carbon emission caps; (2) Afghanistan-Pakistan; and (3) the India-US civilian nuclear deal and global non-proliferation regimes.

Introduction The month of November 2009 witnessed President Barack Obama working to further develop US’ bilateral relationship with two of Asia’s ‘giants’ – China and India. In mid-November, President Obama was in Beijing for his first state visit to China and shortly after, he hosted Prime Minister Dr Manmohan Singh in Washington for a state visit - the first state visit hosted by the Obama presidency. Although technically both visits concentrated largely on bilateral issues and concerns, it was difficult to ignore the wider implications of both bilateral interactions on the growing trilateral relationship between India, the US and China. It is not surprising therefore, many in India closely followed President Obama’s visit to Beijing, while Dr Singh’s trip to Washington was intimately charted in China. Presently, there are three significant issue areas in this triangular relationship that resonate deeply in both New Delhi and Beijing. These are: (1) carbon emission caps in the context of global climate change negotiations; (2) the Afghanistan-Pakistan concerns of the Obama administration; and (3) the India-US civilian nuclear deal and non-proliferation regimes.

Carbon Emission Caps and Climate Change A dramatic turn emerged in discussions on climate change during President Obama’s visit to Beijing. Before his arrival in Beijing, President Obama downplayed expectations that the Copenhagen summit in December 2009 would yield a definitive global agreement on climate 1

Dr Sinderpal Singh is a Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isassss@nus.edu.sg.

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change and carbon emission targets. However, by the end of his trip, President Obama and Chinese Premier Hu Jintao, rather unexpectedly, announced both countries’ determination to work towards a pact at Copenhagen that was “not a partial accord or a political declaration, but rather an accord that covers all the issues in the negotiations and one that has immediate operational effect”. Soon after his return home from this trip, President Obama announced US intentions to declare at Copenhagen that it was ready to commit to reduce its greenhouse gas emissions “in the range of” 17 percent below 2005 by 2020, and 83 per cent by 2050.

This prompted China to announce, the next day, its own emission targets to reduce carbon dioxide emissions per unit of its gross domestic product (its carbon intensity) in 2020 by 40 to 45 percent as compared with 2005 levels.

For India, China’s announcement was somewhat unexpected. The two had earlier agreed on a joint position for the Copenhagen summit, wherein they would argue that developed economies bear historic responsibility for climate change and that developing nations should not be pressured to commit to targets on carbon emission cuts. China’s announcement, though a proportional and not an absolute emission cut like that of the US, initially put India on the back foot, especially since it was announced a day before that China, India, South Africa and Brazil were due to hold a dialogue session together with Sudan (the current head of the G77), to chart a coordinated position amongst them at Copenhagen. India’s Environment Minister Jairam Ramesh acknowledged that India could not simply “sweep aside the fact” that China had announced emission targets while Dr Singh, speaking at the Commonwealth Summit, accepted that India was willing to commit to “ambitious” carbon emission reduction targets provided it was a part of an “equitable” burden sharing plan. The Chinese response to US’ commitment to emission cuts, and consequently the effect of this on India’s position for Copenhagen, has not gone unnoticed. At the time of writing, there were reported leaks of India being ready now to table a voluntary quantitative commitment – curbing the carbon emitted relative to the growth of its economy – its carbon intensity – by 24 percent by 2020 relative to its 2005 levels.

India and China have also managed to maintain presently, at least publicly, a common position vis-à-vis the Copenhagen summit. Both countries have agreed to reject – legally binding emission targets placed on developing economies; the concept of a peaking year (which would require each country to indicate on what date they will reach the highest level of pollution before beginning to come down); and any international reporting and verification of domestic environment protection measures carried out by both countries. It remains to be seen how durable such a joint India-China position will prove when negotiations begin at Copenhagen.

Afghanistan-Pakistan (AfPak) Any doubts about the interlinked nature of India-US-China ties were removed for many, especially in India, by the joint statement issued at the end of President Obama’s visit to China. Amongst other shared declarations, both countries “welcomed all efforts conducive to peace, stability and development in South Asia” as well as specifically pledging “support for the improvement and growth of relations between India and Pakistan”. This set off alarm bells in India, with India’s external affairs ministry stating the fundamental Indian position that all India-Pakistan issues must be resolved bilaterally and that “a third country role cannot be envisaged nor is it necessary”. The US, and then later China, both sought subsequently to reassure Indian leaders that they were in agreement with the Indian position and were not seeking to alter it. The US especially reassured India that it was not advocating any form of

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interventionist role for China in both India-Pakistan ties nor in the regional politics of South Asia.

This ‘AfPak’ issue continued to figure in this triangular relationship during Dr Singh’s visit to the US. Dr Singh, conscious of the fact that President Obama was on the brink of outlining a new US strategy in Afghanistan, warned the US against entertaining any notion of a premature exit from Afghanistan. The Indian position was clear – the US and the rest of the international community need to remain engaged in Afghanistan. Failure to do so would result, according to Dr Singh, in “catastrophic consequences for the world – particularly for South Asia, for Central Asia and for the Middle East”.

China, meanwhile has, for the most part, adopted a publicly low key position on Afghanistan, seeing it as a strategic-military quagmire. While it is quietly investing huge sums in Afghanistan’s development efforts (China’s development of the Ainak Copper Mine is the largest single foreign direct investment in Afghanistan’s history), it has remained reluctant to commit any military troops in Afghanistan (though it is currently offering mine-clearance and police training to Afghan security forces). However, the official mouthpiece of the Chinese Communist Party, the People’s Daily, saw fit to comment on the ‘AfPak’ issue in the context of Dr Singh’s visit to the US. Countering the view that the US saw India as an important strategic partner and a major global player, it opined that the “high-profile reception of the Indian prime minister by Washington DC was intended precisely to dissolve some concerns for Indian-Pakistan relations” and that the “US hinges on Pakistan and Afghanistan instead of India in counter-terrorism in South Asia”. Besides obviously downplaying representations of India as a major global partner within the US strategic thought, it also sought to hyphenate India with Pakistan, thereby equating US-India relations as a mere subset of US policy towards Pakistan.

Civilian Nuclear Deal, Nuclear Non-Proliferation Treaty (NPT) and Comprehensive Test Ban Treaty (CTBT) There has been a general air of uneasiness among Indian leaders for some time due to the perception that the Obama administration was not keen on following through on the India-US civilian nuclear deal agreed with the Bush administration. There was thus, a feeling in Indian circles that Dr Singh’s trip should ideally lead, if not a final agreement on the operationalisation of the civilian nuclear deal, then at least to a public declaration by President Obama on his administration’s pledge to honour the deal in principle. Therefore, although a deal to operationalise the deal was not completed during Dr Singh’s visit, it was music to Indian ears to hear President Obama referring to India as a “nuclear power”, promising that his “administration is committed to fully implementing the US-India civil nuclear agreement”. Sounding upbeat on the prospects for operationalising the civilian nuclear deal, Dr Singh announced that he was “confident” and had “the assurance that that process can be completed without much further loss of time".

However, located against the context of the US-China joint statement issued during President Obama’s visit to China, there are potential concerns for India on the nuclear issue. Feeding on the Obama administration’s stated goal of strengthening non-proliferation regimes like the CTBT and the NPT, China and the US “agreed to work together” to realise a successful Review Conference of Parties to the Treaty on the Non-Proliferation of Nuclear Weapons in 2010. They also agreed to “pursue ratification” of the CTBT and “work together for the early entry into force of the CTBT”. This declaration has further strengthened voices in India

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which had earlier claimed of Chinese insistence, in private, to the US to push India harder on signing up to these treaties. Meanwhile India has stuck to its position of not signing both the CTBT and the NPT “in their present form”. It is not clear, for the near future at least, how far the Obama administration is willing, and is capable, of pushing India on signing up to both these treaties, especially in their current form.

Conclusion President Obama’s trip to China and Dr Singh’s trip to the US have been declared as important events in the management of US relations with both these Asian ‘giants’. As the US goes to great lengths to assert that it values both sets of ties very highly and does not see one set of ties impinging on the other, the view from New Delhi, and even from Beijing, is not quite the same. It is no coincidence that Dr Singh chose an American audience at the US Council for Foreign Relations to remark on a “certain amount of assertiveness on the part of the Chinese” vis-à-vis India. Such stresses and pulls will continue to be part of this triangular relationship, however much this US administration might not want them to. It remains to be seen how the three countries negotiate a trilateral relationship that will have a major impact on the international politics of our near future.

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ISA S Brief No. 144 – Date: 10 December 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Climate Change Challenges: Leading up to Copenhagen Shahid Javed Burki 1 Abstract The climate change summit began in Copenhagen on 7 December 2009. The climate in which it began was somewhat better than most analysts and observers had believed would be the case. There was greater optimism as the opening ceremony was held. This was largely the result of the announcements made by the United States, China and India – three of the four largest polluters of the atmosphere – a few days before the summit was convened, that they will be willing to take a number of important steps to control the amount of carbon their economies were putting out in the atmosphere. While in Singapore on his visit to Asia, United States President Barack Obama met with a number of world leaders and agreed that there was not enough time to produce an enforceable international treaty at Copenhagen.

There will, instead, be a focus on developing political consensus to produce such a treaty in 2010, possibly as soon as the summer of next year. President Obama also indicated that he would be addressing the summit at the beginning of the week-long session. This brief discusses the lead up to the summit and the positions taken by some of the more important players. The second brief will examine the outcome of the summit.

Leading up to Copenhagen The global community is now gathered at Copenhagen where the leaders will attempt to negotiate an international treaty on climate change this month. The hope is that these talks will produce commitments from each nation that, collectively, would keep temperatures from rising two degrees Celsius above pre-industrial levels. That will require deep cuts in emissions – as much as 80 percent among industrialised nations – by mid-century. In order to reach an agreement, two countries – the United States and China – will have to show great political resolve. Together, they produce 40 percent of the world’s greenhouse gas emissions.

As The New York Times editorialised recently, “together they can lead the way to an effective global response. Or together they can mess things up royally.” 2 As noted below, these two countries were prepared to work responsibly. This was indicated by the pre-conference commitments made by Beijing and Washington.

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Mr Shahid Javed Burki is a Visiting Senior Research Fellow-designate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

The New York Times, “Mr. Obama and Mr. Hu on Warming”, 23 September, 2009, p. A34.

In an op-ed article contributed to The New York Times as the first week of the United Nations General Assembly got under way, British Prime Minister Gordon Brown identified climate change as one of the five major issues that confronted the world and on which urgent action was needed. “The next six months will test international cooperation more severely than at any time since 1945”, he wrote. “That may seem strange to say after a year of global crisis that has demanded unity on an immense scale, yet five challenges confront us and we cannot delay our responses.” 3 Of these five, halting climate change was perhaps the most important one. “This week starts with efforts to reinforce talks to secure a new international agreement on climate change in Copenhagen this December. Progress is too slow and a deal now hangs in the balance. But failure will increase the threat not only of humanitarian and ecological catastrophe but also of economic decline. Investment in energy efficiency and low-carbon energy resources will help drive economic growth over the next decade – as well as reduce dependence on imported oil and enhance energy security. Millions of jobs stand to be created as this investment expands – the low-carbon sector is now larger than defence and aerospace combined. But it is vital that we give confidence to such investment through a new international climate agreement.” 4 The previous treaty negotiated at Kyoto, Japan could not be put into effect because the United States, under the leadership of then-President George W. Bush, turned away from it. Kyoto was negotiated in 1997 by the administration of President Bill Clinton with Al Gore, the Vice President, taking the lead. Bush, who succeeded Clinton, was not persuaded that there was sufficient scientific evidence to support the view that human activity was leading to a change in climate. However, science continued to provide data and information that the globe was getting warm, very warm. Many scientists have argued that if the change is not arrested and ultimately reversed, economic and social catastrophe will be the result.

South Asia is one of the many world regions that will be seriously affected. Rise in the level of the seas will inundate large parts of Bangladesh. Under this scenario, as many as 20 million Bangladeshis could be displaced. They will seek refuge on higher ground of which there is not much available in Bangladesh. They will, thus, need to go to neighbouring India, posing serious problems for that country. That such an eventuality is not only likely but also not very far, was underscored by Mr Abul Maal Abdul Muhith, Bangladesh’s finance minister in an interview with The Guardian. “Twenty million people could be displaced [in Bangladesh] by the middle of the century. We are asking all our development partners to honour the natural right of persons to migrate. We can’t accommodate all these people.” 5 He called on the United Nations to redefine international law to give climate change refugees the same protection as people fleeing political repression. He stated that, “The convention on refugees could be revised to protect people. It’s been through other revisions, so this should be possible.” 6 However, that would not be the only problem that climate change would bring to the countries of South Asia. India and Pakistan will have to deal with the ultimate reduction in river flows that draw most of their water from snow and glacier melts in the mountain ranges.

Melting glaciers will initially produce enormous floods endangering the irrigation systems 3

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The United Nations set aside a few days at the start of the General Assembly meeting in September 2009 to build some momentum as the date for the climate summit to be held in Copenhagen approached. The summit is being held in the Danish capital from 7 to 18 December 2009.

Gordon Brown, “All together now”, The New York Times, op. cit, 22 September 2009. http://www.southasianmedia.net/index_opinion.cfm?category=Environment&country=WORLD. Harriet Grant, “Now climate refugees”, The Guardian, 6 December 2009, p. 13.

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that were built over centuries in these two countries. Once the glaciers reduce in size, these mighty rivers will begin to dry up. Much of Pakistan will revert to being a desert once again.

While there were advances in the science supporting the view that climate change produced by the emissions of greenhouse gases posed a real threat to the global economy, President Bush refused to budge. This gave Al Gore, now a private citizen, the opportunity to educate the American public. His efforts won him a Nobel Peace Prize. While campaigning for the presidency, President Obama promised that, if elected, he would put his country in the lead of this effort that needed to be made on climate change issues. Once in office, he developed what he began to call the “green agenda” for his administration. A number of regulatory steps have been taken by his administration to reverse the decisions taken by his predecessor.

However, even with this change of heart in Washington, a new treaty on controlling climate change does not seem to be anywhere near the capacity for delivery by the global political system. On the eve of the United Nations meeting devoted to clearing the air before the world met again at Copenhagen, Dr Rajendra Pachauri, the Indian scientist who had chaired the Intergovernmental Panel on Climate Change, warned that “science leaves us no space for inaction”. Along with this panel of scientists report, a report written by a group of economists chaired by Britain’s Lord Nicholas Stern, had presented the costs and benefits of actions taken at this time. The calculus was clearly in favour of immediate action but international agreement did not seem to be in sight.

There were two reasons for this. It was by no means certain that the United States Congress would be prepared to pass the needed legislation to move in that direction. Any international treaty that meant higher costs for United States industries would be a hard sell. Second, a number of large developing countries – most notably China and India, and possibly also Brazil – were opposed to a treaty that would slow down the pace of their economic growth. It was the second resistance that Prime Minister Gordon Brown addressed in his article. A new treaty “will not be possible without the cooperation of developing countries”, he continued.

“For this reason, Britain has suggested a program of US$100 billion a year by 2020, financed by wealthier countries and the private sector, to help poorer nations develop low-carbon economies”.

On 22 September 2009, the United Nations General Assembly was addressed by Presidents Hu Jintao and Barack Obama indicating their respective country’s approaches to the problem that could not remain unaddressed. It was President Hu’s speech that surprised the climate community. He promised to reduce the rate of growth in carbon dioxide by a “notable margin” – at which he implied that China would seek to reduce them in absolute terms.

Among the promised actions is a government programme that would bring millions of acres of new land under forests. This is a small step, but in the right direction. The question remains whether India will also go the same way.

What Copenhagen may produce Now that the global community is assembled in Copenhagen and that some initial commitments have been made by America and China – with the indication that India may also adopt the approach China is taking – some agreement on climate change may be a bit nearer than was the case in late September when I first explored this subject in these pages. A number of political advances have been made since then. The United States, China and India are now among the four largest emitters of carbon into the atmosphere. All three have declared their intention to act. China became the largest polluter in 2008, passing the United

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States. India is in the fourth position. No international agreement could be made unless these countries are on board with serious commitments to act. The change of administration in Washington has made a great deal of difference. The United States is now led by an individual who has identified climate change as one of his top priorities.

Each capital seems to have influenced the other two to move in the direction in which the world needs to go in order to avert disaster. Climate change was high on the agenda during President Obama’s visit to Asia in November 2009. 7 He appeared to have motivated the Chinese to announce their targets before they sent their negotiating team to Beijing. After returning from the Asian trip, President Obama, using the provisions in the bill passed by the House of Representatives of the United States Congress as the basis, announced a set of targets for his government. He said that his administration would work towards reducing carbon emissions by 17 percent from the level reached in 2005. This target would be achieved by 2020. A more significant reduction was promised for the year 2050.

The Chinese made some pledges of their own, using a different criterion for indicating the kind of effort they are prepared to make. They based their commitments on what is called “carbon intensity”, the amount of carbon emitted per unit of gross domestic output. China said it would lower the intensity by 40 percent by 2020. This means that China will work on new technologies to reduce the consumption of energy for producing additional output. These announcements propelled India to make its own commitment to slow the emission of greenhouse gases. This is a significant shift for India, which until recently, has insisted that the brunt of adjustments in making carbon cuts should fall on developed countries rather than emerging nations. Any cut on the part of emerging economies would slow down their rates of economic growth.

India has indicated that it will follow the Chinese approach and adopt a target of its own for carbon intensity. According to a senior Indian official, the announcements made by the United States and China “signalled to us that the global politics has moved beyond everybody sitting behind their tables and doing nothing. So a lot of number crunching is going on now.”

When the number crunching is done, the Indian position will be presented at Copenhagen as a domestic initiative, not dependent on international financial or technological support.

However, “we have to be very careful that we are not hustled into a position, inadvertently, where our interest is harmed”, said Mr Shyam Saran, India’s top climate change official in an address to the powerful Conference of Indian Industry. 8 India, in other words, was taking the position that it would not be bound by an international agreement on climate change. It had taken the same position when it refused to sign the NonProliferation Treaty to prevent the spread of nuclear weapons. That left it with the wiggle room to develop nuclear weapons. Once again, it is not prepared to surrender its national sovereignty to an international body implementing an international treaty.

The real issue at Copenhagen is the role emerging markets are prepared to play. The International Energy Agency pointed out in its World Energy Outlook report that the commitments announced by the large polluters will fall well below the minimum needed.

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This visit was covered by me in two publications by ISAS. See Shahid Javed Burki, “President Obama’s First Asian Visit”, Brief No. 138, 9 November 2009 and Shahid Javed Burki, “President Barack Obama in Asia – Searching for the Basis for a Partnership”, Working Paper No. 102, 7 December 2009.

Quoted by Rama Lakshmi, “Moves by U.S., China induce India to do its bit on climate”, The Washington Post, 2 December 2009, p. A9.

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Atmospheric concentrations of carbon dioxide equivalent to 450 parts per million are consistent with two degrees Celsius global temperature increase. The agency notes that energy related carbon dioxide emissions have increased from 20.9 gigatons (Gt) in 1990 to 28.8 Gt in 2007. This is expected to go up to 34.5 Gt in 2020 and 40.2 Gt in 2030. This is equivalent to an average increase of 1.5 percent a year over the period. Emerging countries account for all the projected growth in energy-related emissions to 2030, with 55 percent of the increase coming from China and 18 percent from India. The issue therefore is whether emerging markets such as China and India are prepared to come up with more aggressive targets.

In debating this issue, emerging economies will emphasise the role trade-offs can play. One example of the kinds of trade-offs that can be made is provided by the World Bank in its latest World Development Report. 9 “Poor people emit little”, says the Bank. For instance, reductions in emissions secured by switching the automobile fleet in the United States of just sports utility vehicles (SUVs) into cars with European Union fuel economy standards would provide a cushion for the development of the world’s poorer areas. It would, for instance, cover the emissions from providing electricity to 1.6 billion people in the developing world who currently do not have access to electrical power. This example suggests a number of areas for public policy. A tax on fuel consumption on cars in the United States would encourage drivers to switch from high consumption SUVs to low consumption hybrid, and eventually electric cars which are already available in the market. A large proportion of the resources generated by the tax could be given in the form of grants to the less developed countries for building fuel efficient power plants and for investing in green technologies. At the same time, some of the tax on fuel could be used to subsidise research in producing low fuel consumption engines.

Conclusion According to Martin Wolf of the Financial Times, “tackling the risk of climate change is the most complex collective challenge humanity has ever confronted. Success requires costly and concerted action among many countries to deal with a distant threat, on behalf of people as yet unborn, under unavoidable certainty of the costs of not acting. We have reached the point, however, where a broad consensus exists on the nature of the threat and the sorts of policies we need to follow to deal with it.” 10 As some of the world leaders recognised when they met with President Obama in Singapore, there is not enough time to work out an international treaty at Copenhagen. While some of the major polluting countries have come up with some targets that they could factor in their own economic and environmental programmes, it would take much longer to arrive at a consensus on a document that would have the force of an international treaty. Copenhagen could help to arrive at a political consensus with a detailed treaty to be worked out later.

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The World Bank, World Development Report, 2010: Development and Climate Change, Washington DC, 2009.

Martin Wolf, “Why Copenhagen must be the end of the beginning”, Financial Times, 2 December 2009, p.

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ISA S Brief No. 145 – Date: 11 December 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Unwinding the Fiscal Stimulus – Dilemmas for India and China S. Narayan 1 Abstract This paper states that, with the return of economic growth in India and China, policy makers are concerned about inflationary pressures as well as growing asset price bubbles. The causes of concern arise from different macroeconomic fundamentals in the two countries, and accordingly, the strategies are different. For the world at large, of the two countries, the consequences of China not getting it right are much more serious. This paper examines some of the concerns.

Introduction The last two quarters of 2009 have been good for both India and China, and in both countries, there is discussion about the sustainability of the economic recovery, the valuation of assets and the monetary strategy for next year. There are several similarities and dissimilarities between the two that are likely to determine the future course of action in these countries.

The Indian and Chinese Economies India continues to be a supply-constrained economy, with manufacturing accounting for only about 18 percent of the total gross domestic product (GDP). In comparison, the manufacturing sector in China accounts for 33 percent of its GDP, and given that the economy is about three times as large as that of India, this means that China’s manufacturing sector is five to six times as large as that of India. While the share of agriculture in India’s GDP has dropped to 18 percent (China is at 12 percent), the number of people that depend on agriculture and allied activities has not dropped as sharply as in China, leaving a large number of rural underemployed.

Recent estimates of the Indian Planning Commission indicate a revision in poverty estimates to 37.2 percent. 2 The Tendulkar Committee has increased the poverty threshold to Rs. 446 instead of Rs. 368 per month for the rural population, and Rs. 580 instead of Rs. 560 per month for the urbanites. Additionally, it has compared the bundle of goods and services 1

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Dr S. Narayan is Head of Research and a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore. He is the former economic adviser to the Prime Minister of India. He can be reached at snarayan43@gmail.com.

Tendulkar Committee Report, Planning Commission, India, December 2009.

consumed by the urban population with those in rural areas, where the poverty ratio has accordingly been pushed up from 28.3 percent to 41 percent. The recent reports from a World Bank study indicate that India has lagged behind China and Brazil in the reduction of poverty levels. 3 The very slow growth of opportunities for low-skilled employment and the large number of people in the rural areas have exacerbated the drop in the agriculture sector’s share of the GDP in India. The prevalence of rural distress and Naxalism are not unconnected with the lack of opportunities for employment.

The policy answer to this has been the enlargement of subsidies and a large social welfare programme through the National Rural Employment Guarantee Scheme which has served as a stimulus for increasing consumption in the last 18 months. This programme has been generally successful, with the Planning Commission estimating that over 47 million people accessed this scheme for benefits during the period 2008-09. The estimates also indicate the beneficial aspects of the programme in terms of consumption expenditures, especially on food and food-related consumption. It has been argued that this programme has increased access to food, and coupled with the subsidy programmes under the public distribution system and the midday meals programme, has enabled those below the poverty line to have at least one more meal per day. There has been a negative effect to this as well. This year 2009 was one of unexpected drought, which has severely affected agricultural production. Though there are adequate buffer stocks of rice and wheat, prices of all other food-related articles, including edible oils, meat, milk and vegetables have increased substantially, and food inflation in November 2009 has been reported to be over 17 percent. There is also the fiscal deficit to worry about, with state and central deficits likely to exceed 10 percent this year, and the ability to continue these welfare measures would be affected in 2010.

Dilemma for India’s Monetary Policy This background is necessary to understand the dilemma for monetary policy that is being faced by the Reserve Bank of India (RBI). The Governor of the RBI has articulated concerns about inflationary pressures but has also said that monetary measures alone cannot address food price inflation, and that supply side initiatives to increase production are necessary. At the same time, there are other pressures as well. The liquidity that is available in the economy is putting pressure on asset values as well as on real goods and services. The automobile sector is on a boom, with sales of automobiles touching a high of over 82,000 cars on a single day – an auspicious day before Deepavali. Sales of diamond, gold, televisions and other durables are growing at a frenetic pace and the stock market is delivering returns at levels that had been forgotten for the whole of 2008. There are also pressures on asset values that are being caused by inward capital flows, which are seeking higher returns against a falling dollar.

The capacity of the Indian economy to absorb these flows is still constrained and it has not yet developed the capability of investing in resources and returns overseas. The last quarter’s figures of GDP growth of 7.9 percent surprised everyone and analysts have now confirmed that there is evidence of fresh capital formation, namely, investments in capacity addition.

Indian policymakers would, thus, have to tread a very careful path between controlling asset bubbles and encouraging growth. The RBI has already signalled that it proposes to do so.

There has been some tightening of the repo rate and the cash reserve ratio of bank, and on 9 December 2009, it reintroduced an interest rate ceiling for companies borrowing from abroad 3

Martin Ravallion, World Bank, 26 August 2008.

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and closed the window for the buyback of foreign currency convertible bonds (FCCBs). In a late night release, the RBI said the facility by which Indian companies were allowed to buy back their FCCBs – under both the automatic and approval routes until 31 December 2009 – will be discontinued with effect from 1 January 2010. There is, thus, a reversion to capital control measures.

The Situation in China The picture in China appears to be very different. In terms of the economy, while there are signals of a robust growth, nearly 90 percent of the growth in the last three quarters has come through public expenditure on infrastructure projects. At the enterprise level, exports dropped almost 14 percent in October 2009, the twelfth straight month of decline. Behind the bluster, policymakers are terrified of what the economy would look like without full state support behind it. Investment in fixed assets accounted for almost 95 percent of GDP growth in the first three quarters. Of that, ‘government-influenced’ investment was almost half by CEIC/World Bank estimates.

The trillion dollar fiscal stimulus package was easy to implement due to two reasons. First, policy makers pragmatically decided to use the funds to accelerate the already approved projects – the five-year plan implementation was in fact shortened to two years, and the projects were, thus, able to get off the ground fast. Second, the fiscal incentive was as much a responsibility of the provincial governments as the central government – only 35 percent of the incentive came from central funds, the rest having to be put up by the provincial governments, who were allowed access to bank funds for the projects. This measure has kept the fiscal deficits of the central government under control. Simultaneously, there has been a focus on increasing revenue collections, and efficient use of information technology has doubled tax collections as a percentage of GDP in the last three years, and is close to figures of developed countries.

Until Beijing gets a clear view of unassisted growth, external pressure to revalue will be the least of its worries. Till mid-2005, the Chinese Yuan was pegged to the United States dollar.

Attempts to revalue the Yuan between 2005 and 2008 resulted in a huge carry trade of hot money as companies borrowed in United States dollars, and converted them to Yuan, and waited for the Yuan to appreciate. Unfortunately, since then the Chinese government has kept the Yuan pegged at 6.82 renminbi per United States dollar, whereas a reasonable figure would be closer to 4 renminbi to the United States dollar. Given the 2005 experience, China is unlikely to signal a gradual appreciation of the Yuan, and will be constrained from doing a one-shot appreciation due to political reasons. The Chinese trade authorities believe that it is ‘unfair’ to expect the renminbi to rise when the American dollar’s decline was making the United States goods more competitive. However perplexing this is for politicians or investors who are long on renminbi forwards, policy shocks are not what China needs. The dilemma then is that, in a demand-constrained economy, with exports falling and a currency that is undervalued, how to extricate the macro-economy from the fiscal stimulus to a gradual nonstate assisted growth process. They are severely conscious, as are the Indians, on the calamitous effects of a bursting asset bubble – actually much more for China than India.

The advantage in China is, of course, that decision making is centralised and pragmatic, and it is easier to implement central decisions all over the country. One sees signals of adjustment policies that attempt to address the above dilemma. The approach is to make input costs more reflective of true, market-determined prices. First, gradual re-adjustments of land prices are

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underway – compensations for land taken away are being increased substantially and land banking is being discouraged – in short, land is not being subsidised. Second, there is a recognition that wages will have to rise – if the economy is demand-constrained, then it is important that there is enough spending power in the hands of the people and, hence, a reduction of export dependency can come through increased domestic consumption. There is also a move to remove other subsidies for the industry including power and water, as well as tighter rules on environment damage mitigation. These will raise input cost and more truly reflect market-based cost. Simultaneously, there is a move to offshore low quality, low margin manufacturing to neighbouring Southeast Asia, including Vietnam, Laos and other smaller countries, to attempt to keep final margins to industry remunerative. The increases in costs would partly offset the undervalued Yuan in terms of exports. The resultant inflationary pressures will have to managed, while keeping a careful lookout for developing asset price bubbles.

Conclusion In short, it is unlikely that the revaluation of the Yuan is at the top of the worries in China.

There is still the worry that China’s current account surplus would still be over five percent of GDP in 2010. As long as a current account surplus of this magnitude persists, the expectation of renminbi appreciation is bound to remain strong and will surely lead to significant ‘hot money’ inflows, which contribute to large and persistent foreign exchange reserve accumulation despite potentially narrowing current account surpluses. And a large foreign exchange reserve accumulation will constitute a major challenge to monetary policy implementation, namely the loss of monetary policy independence.

The common worry in both the countries is to keep a healthy growth going, which is not dependant o the state, and to prevent asset price bubbles from forming. Both countries would have their task cut out for them in 2010.

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ISA S Brief No. 146 – Date: 11 December 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

The Dubai Debt Debacle: Likely Impact on South Asia M. Shahidul Islam 1 Abstract This paper focuses on the ongoing debt crisis in Dubai and other recent economic setbacks in the United Arab Emirates (UAE), and assesses their likely impact on South Asia. Owing to the region’s lower exposure to Dubai World’s over-leveraged debt, the impact on South Asia’s financial markets is likely to be limited. However, South Asia’s real economies, particularly those related to remittances, could be adversely affected as Dubai’s real estate bubble bursts and the UAE counts the impact of the financial crisis. The real downside risk for the South Asian region, nevertheless, is the sustainability of the dubious ‘Dubai model’ which has been emulated in the Gulf neighbourhood and one that absorbs a large number of South Asia’s surplus manpower.

Background The equity markets around the world rattled following the recent announcement by Dubai World, a state-owned investment conglomerate of the UAE, of a six-month standstill on its US$59 billion debt. However, investment bank UBS thinks that Dubai, one of the sheikhdoms of the UAE, may owe more than the estimated US$80 billion to US$90 billion in liabilities assumed by investors. 2 Dubai World’s investments span a wide range of areas – transport and logistics, dry docks and maritime, urban development, and financial services.

Its debt deferment plan has led to a jump in the Gulf region’s default swaps. 3 Some analysts even fear that this might escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way it did in Argentina during the early 2000s or in Russia during the late 1990s. 4

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Mr M. Shahidul Islam is a Research Associate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He can be contacted at isasmsi@nus.edu.sg.

“Dubai Debt May Be Higher Than $80 Billion”, UBS says (http://www.bloomberg.com/apps/news?pid= 20601087&sid=aXGrvyOI6IWs&pos=3).

The Bonds of Dubai World’s property unit, Nakheel, mature on 14 December 2009. Dubai contract climbed 120 basis points to 438 basis points. Credit-default swaps across the region rose sharply, with Saudi Arabia climbing 11.5 basis points to 86.5 and Qatar rising 5.5 basis points to 99. Contracts linked to Abu Dhabi rose 34.5 basis points to 134.5, according to London-based CMA (http://www.independent.ie/business/world/ dubai-debt-crisis-rattles-confidence-in-persian-gulf-borrowers-1954263.html ).

“Dubai Crisis May End in ‘Major’ Default”, BofA says (http://www.bloomberg.com/apps/news?pid= 20601087&sid=a8RD8uqjoLCQ ).

Like the Lehman Brothers in the United Sates, could Dubai be the canary in the coal mine for heavily indebted countries? It is too early to predict such a gloomy picture considering the fact that the UAE is one of the world’s leading hydrocarbon producers, and it has a stock of US$75 billion foreign exchange reserves, and not to mention the fact that the Abu Dhabi Investment Authority (ADIA), UAE’s sovereign wealth fund, has estimated assets of approximately US$800 billion. However, investors are alarmed by the problems in some Eastern European economies, and even in more developed economies, particularly countries that have higher debt-gross domestic product (GDP) ratio, following Dubai’s debt crisis.

Moreover, the crisis in sovereign debt gives an indication that the current financial crisis is far from over.

Abu Dhabi, the capital and the largest of seven sheikhdoms that make up the UAE, has been reluctant to bail out the Dubai World, the corporate face of the Emirates, frustrating investors who had assumed the sheikhdom’s debt was quasi-sovereign. Nevertheless, Dubai World announced last week that it was in talks to restructure its debt. With the current debt crisis, the Emirates’ financial strength faces a huge setback following a series of losses owing to the global financial turmoil. In February 2008, the Abu Dhabi government injected US$20 billion in Dubai to ease its liquidity problem. The real estate market in Dubai has seen a 20 to 50 percent drop in its property prices. In addition, the ADIA may have lost over US$125 billion since the financial turmoil hit the United States in fall 2007. 5 Likely Impact on South Asia The fallout of Dubai World’s default risk and other recent setbacks in the UAE could affect South Asia through two channels. The first is through the direct financial linkages between Dubai World and South Asian (mostly Indian) banks and other institutional investors. There could be some spillover effects to the regional equity markets, notably Indian and Pakistani bourses, largely owing to the global investor’s sentiment following Dubai’s debt woe.

Secondly, the region’s real economies could be affected adversely due to significant economic relations between the UAE and South Asia. India-UAE non-oil bilateral trade stood at US$29 billion in 2007-08. Dubai Ports World, a part of Dubai World, runs five container terminals in India that accounts for 40 percent of India’s container traffic. It has operations in Pakistan too. More importantly, the UAE is one of the leading destinations for South Asian low and semi-skilled manpower.

It appears that South Asian, notably, Indian financial institutions’ exposure to the Dubai World is not large. Available report indicates that Bank of Baroda and the State Bank of India have US$200 million and US$50 million exposures respectively to the troubled Dubai World.

Some Indian real estate companies may also have some business links with Dubai. Reuters reports that at least one Indian real estate company has an exposure of US$9.6 million through a joint venture with Dubai World’s property developer unit, Nakheel. The country’s total exposure will be available to the public once the Reserve Bank of India’s (RBI) enquiry on it is conducted. The Sensex, India’s flagship equity index, joined the tumble in bourses around the world but recovered following the RBI and the Finance Ministry’s intervention in the market that played down the issue viewing that the fallout from the Dubai debacle on India would be limited.

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The Straits Times, 13 February 2009.

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There could be some adverse affects in terms of remittance flows in the South Asian region as the UAE counts the total cost of the ongoing financial meltdown. In recent years, oil price hikes had fuelled Emirates’ growth that made it one of South Asia’s leading labour destinations. An estimated 5.3 million Indians live in the Gulf and, of them, 31 percent are in the UAE. Indians alone constitute 40 percent of Dubai’s population and account for 10-12 percent of India’s inward remittances. Remittances have emerged as a key driver of economic growth in South Asia, particularly in Bangladesh, Nepal, Sri Lanka and Pakistan. The UAE constitutes the third largest source of remittances for Bangladesh and Sri Lanka. For Pakistan, it is fourth largest source of inward remittances. The major setback for South Asia’s manpower export is Dubai’s plunging property market that absorbs most of the foreign labour. Construction and real estate account for almost 50 percent of Dubai’s GDP. Major property developers are abandoning their expansion plans in the city. For instance, Emaar Properties, the biggest developer in the UAE, abandoned a merger with three real estate units of Dubai Holding, halting the expansion into the world’s worst-performing property market, viewing that the transaction was no longer economically viable.

As the UAE pays the huge toll of the ongoing financial turned wholesale economic crisis, it is likely that the growth in this sector will slow down and this could, in turn, markedly decelerate the manpower export in this country from South Asia.

All that Glitters is not Gold Despite the recent setbacks, the UAE and the Gulf region would continue to cash in on the benefits of windfall gains from its hydrocarbon resources. A McKinsey Global Institute study conducted in 2008 revealed that, at an oil price of US$70 per barrel, the Gulf’s oil export earnings will add up to over US$6 trillion over the next 14 years and at US$100 a barrel will mount to almost US$9 trillion. However, for the region, the issue is not so much the accumulation of petro-dollars as much as the productive utilisation of those dollars.

Nevertheless, despite the Gulf’s recent boom, it could not hide its pitfalls. For instance, apart from Dubai’s heavily reliance on debt, productivity is another issue that should worry the UAE’s long-term growth. Productivity growth in the Middle East, except in Qatar and Bahrain, remains very low, if not negative. Labour productivity in the UAE grew -0.9 percent in the period of 2000-2008.

Moreover, the problem in Dubai will have some ripple effects in the Gulf. For the rest of the Gulf, Dubai has been an economic model that developed an open economy and showed an entrepreneurial spirit well beyond oil. However, like the United States, Dubai too proved that there is a limit to growth with an over-leveraged finance. Taking the lessons from Dubai, the other Gulf countries could be more cautious in developing luxurious real estate projects or putting their petro-dollars in speculative investments. For them, another worry is the current economic conditions of the United States. As the UAE and most Gulf economies’ large chunk of foreign exchange reserves are invested in the United States treasury and their currencies are pegged with the United States dollar, they may not find the world’s largest economy a safe haven anymore. All these factors may adversely affect the economic outlook and the economic expansion of the UAE and the other Gulf states.

The debt and other economic crises in Dubai may have limited impact on India considering the latter’s giant economy and growing economic opportunities in the country. However, other South Asian countries such as Bangladesh, Pakistan and Nepal that have become

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remittance economies of late depending on external labour markets heavily, particularly the Middle East, may face difficulties to send their surplus labour to the region.

Dubai may be one of the world’s largest gold trading hubs and may soon be home to the world’s tallest building. However, with an economy whose boom relies heavily on debt, it has to face the day of reckoning once it is forced to walk towards the darker side of its business cycle. Its oil-rich neighbour, Abu Dhabi, can afford to bail it out more than once thanks to its huge stock of black gold, but for a sustained economic growth, the city-state needs to follow or invent a better model. Apart from over leveraged-finance, South Asia, particularly Pakistan, Bangladesh and Nepal have another lesson to learn from the current global economic crisis and Dubai’s debt woes. They should focus more on domestic economic reforms so that their surplus labour need not rely excessively on overseas markets for employment. oooOOOooo

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ISA S Brief No. 147 – Date: 22 December 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Pakistan’s Supreme Court and the National Reconciliation Ordinance: What Now for Pakistan?

Rajshree Jetly1 Abstract This brief looks at the potential implications of the Supreme Court’s decision on rendering null and void the National Reconciliation Ordinance promulgated by General Pervez Musharraf in 2007, which stopped investigations and prosecutions against over 8,000 individuals for corruption and other wrongdoings. The brief suggests that, while the judgment in itself is a welcome decision, its political repercussions need to be carefully managed and that Pakistan’s goal of returning to a vibrant democracy not be derailed in the process.

Introduction On 16 December 2009, the Supreme Court of Pakistan passed a historic judgment declaring the National Reconciliation Ordinance (NRO), which was promulgated by General Pervez Musharraf in October 2007, unconstitutional. This has once again thrown Pakistan into another state of constitutional crisis as the judgment removes the immunity from prosecution enjoyed by a slew of senior political and senior administrative officials. The NRO was part of a deal between Musharraf and the late Benazir Bhutto whereby Musharraf would remain President while Benazir Bhutto would be allowed to return to Pakistan and participate in politics without facing criminal charges. The NRO put an end to corruption investigations and prosecutions against almost 8,000 individuals – ministers, bureaucrats and politicians, including President Asif Ali Zardari. Apart from Pakistan’s President Zardari, other notable serving politicians who were beneficiaries of the NRO include federal ministers Rehman Malik (Interior Minister) and Chaudhry Ahmed Mukhtar (Defence Minister).

The NRO was highly controversial and severely criticised by civil libertarians, who argued that the NRO condoned corruption and protected powerful elites by allowing them to avoid accountability for their actions. The Supreme Court, in delivering its judgment viewed the NRO not as an instrument of national reconciliation but as an unlawful order against the national interests of Pakistan. The 17 member bench of the Supreme Court headed by Chief 1

Dr Rajshree Jetly is a Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. She can be contacted at isasrj@nus.edu.sg.

Justice Iftikhar Chaudhry, ruled that the NRO was unconstitutional and held that none of the actions and orders taken pursuant to the NRO was valid. The Supreme Court further stated that “all cases in which the accused were either discharged or acquitted under Section 2 of the NRO or where proceedings pending against the holders of public office had got terminated in view of Section 7 thereof…shall stand revived and relegated to the status of pre 5th of October 2007 position.”

Implications for Pakistan’s Politics It would not be an understatement to say that this judgment of the Supreme Court could have far-reaching implications on the course of Pakistani politics. This brief will consider the judgment’s impact on President Zardari and the Pakistan Peoples Party (PPP), and the politics of democracy in Pakistan. Even though this judgement potentially reopens cases against more than 8,000 people, the question that is uppermost is how the incumbent President Zardari may be affected. President Zardari arguably has immunity from prosecution for as long as he remains in office. There are already calls for petitions to challenge the legality of his Presidency although Article 41(6) of the Constitution categorically states that the “validity of the election of the President shall not be called in question by or before any court or other authority.” In hindsight, it would appear that this fear of prosecution must have been a major factor that motivated President Zardari to stand for President, and then as President, to delay the reinstatement of Chief Justice Ifthikar Chaudhry for as long as possible.

Regardless of his Presidential immunity, President Zardari is on a sticky wicket at the moment. He suffers from very low popularity ratings (32%), as against Nawaz Sharif (79%) and Prime Minister Yousaf Raza Gilani (67%), remains tainted by corruption allegations and is caught between the devil and the deep blue sea in balancing US’ interests in the waging war against the Taliban as well as domestic opposition to foreign interference in Pakistani affairs, especially the US drone attacks on Pakistani territory. President Zardari has also lost much of his moral authority by failing to repeal Article 58(2)b, the constitutional provision that allows the President to dismiss an elected national assembly, elect governors of various provinces and appoint the Chief of the Armed Forces. President Zardari’s options are limited.

He can resign on moral grounds and let the law take its own course, or remain as President and tough it out. It appears that he has chosen the latter option with the backing of the PPP. The PPP has resolved to stand behind all the affected ministers and has adopted a defiant stand. Prime Minister Gilani has gone on record in a spirited defence of President Zardari stating that reopening cases against the President would be tantamount to “double jeopardy” as President Zardari had already served twelve years in prison. There is a real risk now that saving the President may well come at the cost of the PPP’s political survival. It may well be a suicidal mission for the PPP to continue defending President Zardari who has lost popular support and is now squarely in the sights of the judiciary. The opposition has also not surprisingly called for the resignation of President Zardari. There is clearly a conflict of interest with President Zardari also the co-Chairman of the PPP. From a party perspective, it would appear to be in the party’s interest for it to distance itself from the President. Instead, at the PPP’s Central Executive Committee meeting held on 19 December 2009, President Zardari declared vehemently that the PPP would defend itself against its adversaries.

The Supreme Court judgment has clearly dropped a bombshell in Pakistani politics, but its implications may go beyond the mess of party politics. On the positive, one may view the 2

judgment as evidence of an independent judiciary upholding constitutionalism and the rule of law. At a time when Pakistan is struggling to re-establish its democratic credentials and international credibility, this development may be in Pakistan’s long-term interest. It will certainly be welcomed by civil society in Pakistan which has been embroiled in a long and painful struggle for democracy. It is also likely to be welcomed by the international community, although there is a question whether this serves the US short-term interest. The paramount US interest in Pakistan is in fighting the Taliban and Al-Qaeda. President Zardari has been accommodating of US’ needs and to that end the US may well prefer that he continues to remain in power.

On the other side of the coin, there is a possibility that the judiciary may have implicitly played politics by trying to determine not just the legal issues but to influence the preferred political outcome in Pakistan. For example, in delivering its judgment, the Court also called for the establishment of a Monitoring Cell within the Supreme Court of Pakistan to monitor the progress and proceedings of the cases under the purview of the National Accountability Bureau (NAB), which suggests a lack of confidence in the integrity of the NAB. It is no secret that Chief Justice Chaudhry is a highly political figure, having rallied the masses around him during his dismissal by General Musharraf and further consolidating his support base while President Zardari dithered on his reinstatement. Given this context, the Supreme Court will have to be very careful and walk a fine line in determining these constitutional cases while staying out of the political arena. Even if there is a perception that the judiciary is “playing politics” the delicate democratic balance found in the separation of powers doctrine could be upset. This would not be in Pakistan’s interest.

The role of the army in Pakistan’s political history is well-known. Immediately after the Supreme Court judgment, speculation was rife of another possible coup, especially after the Defence Minister, Mr Chaudhry Ahmed Mukhtar, was stopped from leaving the country as he was one of the beneficiaries of the NRO who might be called upon to answer charges.

Also, in recent months, the army and President Zardari have been at odds on several issues, especially certain aspects of the Kerry-Lugar Bill, which require civilian control over the Armed Forces. However, it is unlikely that a coup is imminent given that it has not even been two years since the last military dictatorship. Pakistan’s history suggests that the periods between coups are much longer. Also, the army is overstretched on the eastern and western fronts as well as dealing with Islamist insurgency within the country. General Kayani has also reiterated that the army would not impede civilian administration. Nonetheless, even if a coup is not on the horizon, the army may still have reasons to oust Mr Zardari as President if its differences with him became intolerable.

Conclusion This judgment by the Supreme Court is an important milestone in Pakistan’s path to democracy. The judiciary appears to have been restored and this decision is the clearest indication that it is acting independently and in the interest of the nation by tackling endemic political corruption. From a pragmatic point, one must be careful not to throw the baby out with the bathwater. There is a democratic process underway in Pakistan as the country has just emerged from ten years of military dictatorship. If the civilian leadership is crippled by corruption cases, there is a risk that the democratisation may be derailed. The challenge is in getting the balance right. The Supreme Court has shown the way and it is now up to all the key stakeholders, including the political parties, civil society and the army to resist the 3

temptation of indulging in one-upmanship for narrow selfish interest. Pakistan needs to find creative ways of putting the past behind it and keeping the bigger picture always in mind, namely the restoration of a vibrant democracy.

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ISA S Brief No. 148 – Date: 29 December 2009 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Sri Lanka’s Presidential Election 2010: The Choice before Pluralist Democrats 1 Dayan Jayatilleka 2 Abstract The Sri Lankan presidential election will take place in January 2010. Seeking a fresh mandate prior to the expiration of his first term in 2011, President Mahinda Rajapakse’s main challenger will be his former Chief of Defence Staff, General Sarath Fonseka, who played a key role in the defeat of the Liberation Tigers of Tamil Eelam. This paper compares the two candidates and concludes that, between President Rajapakse and General Fonseka, continuity is better than change; within the government, change is imperative; and between the government and the opposition, change may be better than continuity.

Introduction Five days after we won the war, at a meeting of the (president’s) Security Council, he said he’d stop recruiting new people in the army because it’s too strong and too big, that Sri Lanka would become like Myanmar. Such statements demoralised me. I thought they were disgusting.”

General Sarath Fonseka 3 There are many interpretations of what came between Sri Lanka’s President Mahinda Rajapakse and General Sarath Fonseka. Some able commentators have speculated that it was dynastic rule. While there is indeed such a dismal prospect (as during the Sirimavo Bandaranaike years from 1970 to 1977), it is unlikely that this was the issue. The central issue was the balance of power between the civilian and military wings as represented by President Rajapakse and General Fonseka. During the war, there was a shift in that balance, which General Fonseka sought to prolong, make permanent or take to the next level in the post-war period. In peacetime, on the other hand, President Rajapakse pushed back to reassert civilian control and the supremacy of the elected Executive. The critical issue was whether 1

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This piece first appeared in The Island (Colombo) on 7 December 2009 – see http://www.island.lk/2009/12/ 07/features.html.

Dr Dayan Jayatilleka is Visiting Senior Research Fellow-designate at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He is Sri Lanka’s former Permanent Representative to the United Nations. He can be contacted at dayanjayatilleka@yahoo.com.

Interview with Outlook India Magazine on the question of why he fell out with Sri Lanka’s President Mahinda Rajapakse; Satarupa Bhattacharjya, “He Said The Army’s Too Strong, Sri Lanka Will Become Like Myanmar”, Outlook India Magazine, 14 December 2009.

General Fonseka would exert veto power over decision-making as the military did for decades in Pakistan before the restoration of democracy. The army would dominate the armed services and the former army commander turned Chief of Defence Staff would determine the processes within the army and the military as a whole, while setting the parameters of national policy under the rubric of national security. The issues of a vastly expanded post-war military, the fate of the internally displaced persons and the 13th Amendment/Devolution were cases in point, and the faint contours of a “national security state” became discernible.

The President who ended the war In the post-Cold War period, patriotic populists, President Ranasinghe Premadasa (1978-89) and President Rajapakse, were probably the most progressive alternatives possible. This stand derives support from ex-Cuban president Fidel Castro’s statements of 1986-87, foreseeing the collapse of the Union of Soviet Socialist Republics and the global socialist system, that, “in the present historical period, revolutionary socialism is not on the agenda; what is on the agenda is the defence of national independence and the sovereignty of the state”.

Politically and historically, President Rajapakse has been far less disappointing than President Premadasa, – the reason being my failure to convince the latter to apply his drive and efficiency to the task of defeating Velupillai Prabhakaran [the slain leader of the Liberation Tigers of Tamil Eelam (LTTE)] and thereby securing the pre-requisites for the sustainability of his amazing social and development programmes. As a political scientist, I do not take my stand on the basis of personal disappointments but on an objective historical assessment.

Four Sri Lankan presidents – J. R. Jayewardene, Premadasa, Digiri Bada Wijetuga and Chandrika Bandaranaike Kumaratunga – failed to win the war. President Rajapakse did. By what logic or morality can Sri Lankans fail to reward him with a second term? By what logic or ethics can the Sri Lankan voter, who gave a second term to a president who failed to win the war and abandoned efforts to do so, turf out, after one term, a president who won the war, or if one prefers, on whose watch the war was won?

The Sri Lankans should not make the same mistake as the Tamil people did. Out of profound dissatisfaction, they abandoned and turned their backs on their civilian lawyer-politician leaders and opted for a warrior-warlord as their “national leader”. This led them to the brink of destruction as a community. Do the Sinhalese, Tamils and Muslims collectively wish to make the same disastrous choice or its equivalent? Sri Lanka needed a tough, ruthless, driven, army commander to beat an enemy as ruthless as the Tigers but do the Sri Lankans need him to lead us and rule them?

If we were to adopt a different analogy, the end of the Tamil nationalist cause commenced with Colonel Karuna Amman’s breakaway and the challenge to his leader. Colonel Karuna has proven his point about being the match-winning commander for the Tigers – they lost the only war in which he did not fight and, indeed, fought on the other side. Is General Fonseka the equivalent of Karuna? Karuna was good for Sri Lanka as a whole but that was because he went up against Prabhakaran, who was not a democratically-elected nationalist leader. What would the effect on the national interest of a Karuna rebellion be, on the Sri Lankan side? Do Sri Lankans wish to reward it with electoral success?

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Significance of General Fonseka in war victory General Fonseka claims that the military victory was his, while he acknowledges the “support” extended by President Rajapakse. History, however, rightly credits Abraham Lincoln over Ulysses S. and William T. Sherman, Vladimir Lenin over Leon Trotsky, Joseph Stalin over Georgy Zhukov, Winston Churchill over Bernard Montgomery, Franklin D. Roosevelt over George S. Patton and Douglas MacArthur, Mao Zedong over Zhu De and Lin Biao, and Ho Chi Minh over Vo Nguyen Giap. This is because the role of overall political leadership and the necessary political will is the single most vital element in the conduct of war.

General Fonseka was a vitally indispensable factor in the victory. There may not – or probably would not – have been one without him. However, there definitely would not have been a victory without President Rajapakse. If Sri Lanka had only General Fonseka as army commander and no Rajapakse as President – which would have meant no Gotabhaya Rajapakse as Defence Secretary – Sri Lanka may have had a very large Jayasikuru (Victory Assured) 4 writ. Having fought under President Kumaratunga, who permitted Mangala Samaraweera’s Sudu Nelum movement 5 and the Saama Thavalama 6 to roam the countryside spreading anti-war propaganda precisely at the same time that the army was struggling to recruit men for the ongoing war that had been imposed by Prabhakaran, General Fonseka should perhaps be more aware than most of the vital role played by political will and commitment to victory at the top. In other words, this would be at the level of the Executive and Commander in Chief – the Rajapakse presidency. While General Fonseka was the driving force of the ground war and the prime motivator of the soldiery, this was a combined arms war in which tactical airpower was more important and effective than ever before, and the navy crippled the logistics of the Tigers. Bernhard Montgomery defeated Erwin Rommel’s German troops by targeting his petroleum supplies, reducing the efficacy of his splendid tank force. If the Tigers had been able to bring down on the Sri Lankan infantrymen the kind of ordinance they were able to during Operation Jayasikuru, the war would still be on. This does not mean that Admiral Wasantha Karannagoda and Air Marshal Roshan Goonetilleke were more important than General Fonseka, but it does mean that the victory was a superb collective effort, and that the collectivity of effort, overcoming inter-service rivalry and indeed intra-army rivalry was made possible by President Rajapakse through “General Manager” Gotabhaya, who also secured the necessary external inputs, both material and intangible-qualitative.

It is extremely amusing that some who have never looked violent death in the face say or heavily hint that General Fonseka, who has shed blood copiously for the Sri Lankan cause, carries enemy lead in his body, and was the thrust of the main force – the army – of the historic victory against the Tamil Tigers, is a traitor. What gives them the moral right and authority to do so? Who has the right to determine who is and is not a traitor, and by what criteria? Furthermore, what is the relevance of this terminology anyway? The war is over and 4

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The Sri Lankan military launched Operation Jayasikuru in 1997. It was aimed at clearing out a land route to the government-held Jaffna peninsula through territory held by the LTTE by linking Vavuniya and Kilinochchi. However, the operation failed to even accomplish half of its objectives. By mid-May 1998, the operation completely stalled and it was called off in 1999.

The Sudu Nelum movement was the propaganda arm of the Sri Lanka Freedom Party.

This Saama Thavalama (Peace Caravan) was an island-wide publicity campaign launched in August 1997 as part of the programme to raise awareness among all communities about the Sri Lankan government’s peace and constitutions reform proposals.

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won, thanks far more to General Fonseka than to any of those people, so what is the relevance of traitors and patriots except in the historic sense of who was and was not proTiger when the war was on? It is doubtful that this rhetoric of an international conspiracy and General Fonseka as a traitor is going to cut much ice with the Sri Lankan voter who is a pretty sophisticated political animal. Conspiracies are secret and what is happening is out there in the open, in the Western and Sri Lankan media. There is a crisis in Sri Lanka’s external relations with a very important part of the world, including the world’s only superpower, led by one of the world’s most popular personalities. Any conspiracy is located within this crisis and is a by-product of it.

The two presidential candidates Anyone who hopes for the top-most slot in any enterprise, be it in the corporate or state sector, must either have some experience in that broad area or possess academic training and qualifications in that subject, or have a combination (for example, United States President Barack Obama – academic and intellectual, community organiser, writer and Senator). A soldier with 40 years experience, General Fonseka is seeking the top spot in the country with no experience in politics or civilian life. Dwight Eisenhower was the United States’ President in 1953; not 1945, and in the intervening years, he was President of Columbia University, one of the Ivy League universities in the United States and one of the best in the world. President Susilo Bangbang Yudhoyono came from within the Indonesian military which had governed Indonesia since 1965 until 2000. General Colin Powell was once regarded as a possible American presidential candidate but that was after he was Secretary of State. General David Petraeus of the United States army is seen as a possible United States presidential candidate next time around, but he is known as a warrior-scholar, a student of History with a PhD from Princeton (and a protégé of the renowned progressive scholar of international law and international relations, Richard Falk). General Fonseka does not qualify on either count, though it may be added that, with a term in Parliament as a Member of Parliament or as a Cabinet Minister, he may qualify for serious consideration as a presidential candidate.

It was his 40 years in the army that turned General Fonseka into what he is: a warrior capable of providing inspiring leadership to his men to win the war. It is precisely those 40 years that disqualify him from holding the top-most civilian job in the land – a job that requires consultation, compromise and consensus – three qualities that are necessarily absent in the army, and which General Fonseka was never renowned for during his military career.

President Rajapakse has exactly the same number of years of experience in civilian politics that General Fonseka has in military life. That makes him at the moment – a time where General Fonseka has not yet accumulated any civilian experience – the better man for the presidency. He is not the visionary that Sri Lankans need to take the country united into the 21st century, but as a populist, he is preferable to an authoritarian persona.

None of this means that the country does not need change, accelerated and socially responsive economic progress, or an enlightened charter for multi-ethnicity and a vastly improved style of governance. Someone should just look at the United Nations Development Programme’s Human Development report figures for Sri Lanka over the past few years, including the Gini Coefficient. President Rajapakse’s rule does indeed need reining in, but the answer does not reside in General Fonseka as president; it does not lie in the presidential election at all. It resides in the doctrines of “balance of power”, “containment” and, more concretely, “checks and balances”. The parliamentary election is to be held shortly after the presidential election. The two must not be confused with each other. Sri Lankans get an

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opportunity to throw the non-performers out at the parliamentary election by either (i) electing the United National Party [UNP] (which is unlikely if the party leadership remains unchanged); (ii) reducing the strength of the Sri Lanka Freedom Party-led coalition and having a strong UNP opposition or (iii) simply throwing out, by means of preference votes, existing incompetent ministers and sitting members of parliament.

Conclusion Between President Rajapakse and General Fonseka, continuity is better than change; within the government change is imperative; and between the government and the opposition, change may be better than continuity. Observing the vital distinction between the two elections, presidential and parliamentary, enables Sri Lanka’s citizens to get the best deal available. Fortunately, for democracy, the issues that really divided General Fonseka and President Rajapakse (by the former’s own admission) are now out in the open, not hidden within the state structure where they could have exploded in extra-constitutional violence.

Now, it is the people of all communities, who, by their free choice at the ballot box, will determine the trajectory of the country.

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ISA S Brief No. 149 – Date: 18 January 2010 469A Bukit Timah Road #07-01, Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isassec@nus.edu.sg Website: www.isas.nus.edu.sg

Hasina’s Visit to India and Emerging Indo-Bangla Relations: Implications for the Region Iftekhar Ahmed Chowdhury1 Abstract The visit of Prime Minister Sheikh Hasina of Bangladesh to India (10-13 January 2010) was extremely significant in the regional context. It brought the two vibrant democracies in South Asia – Bangladesh and India – close together and opened the way for their collaboration with Nepal and Bhutan. Throughout the visit India displayed an awareness of its disproportionately greater responsibility as the regional pre-eminent power, according ‘sovereign equality’ to a less powerful neighbour, creating a new paradigm for intra-state relations in South Asia. Can this model be attractive enough for Pakistan to be drawn into a relationship of ‘trilateralism’ including itself, Bangladesh and India?

Introduction The visit is over. The red-carpet in New Delhi has been rolled back; and the Bangladeshi Prime Minister, Sheikh Hasina, has returned home to Dhaka. By all counts the most recent bilateral interactions between these two large South Asian democracies that occurred in the course of that event have opened up a new chapter in Bangladesh-India relations. Indeed its positive impact should be felt wider, beyond the borders of the two protagonists, India and Bangladesh. Nepal and Bhutan should also benefit from the result, gaining access to two Bangladeshi ports, and from better facilitation of intramural sub-regional trade among India, Bangladesh, Nepal and Bhutan. There is a caveat though. There must be as much zeal in implementing the outcomes as there was in crafting them.

Sheikh Hasina deserves credit for timing this trip well. It was not too early in her tenure of office, which is a year old, so as not to demonstrate an excessive tilt towards India in order to calm criticisms of overly friendly disposition towards that powerful neighbour, nor too late to assuage any Indian sentiments that Bangladesh had ‘better’ friends in the region or beyond, say, for instance, in Beijing or in Islamabad. Dr Manmohan Singh also deserves praise for remaining focused on broad strategic concerns rather than on narrow tactical and immediate interests. The challenge to diplomacy here was to create a matrix for discussions where two 1

Dr Iftekhar Ahmed Chowdhury is a Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He was the (Foreign Advisor) Foreign Minister of Bangladesh from 2007 to 2009. He can be reached at isasiac@nus.edu.sg.

obvious ‘unequals’ could not only deal but would also be seen to be dealing with each other as ‘equals’. Mark Singh’s banquet remarks that: “We meet today as two vibrant and equal democracies that share common values and common goals.” He was responding most tactfully to the great store India’s neighbours in South Asia place on their ‘sovereignty’ and ‘equality’ in their dealings with it and with one another.

Between the two, the political risks for Hasina were greater. Opinions on Delhi-Dhaka relations are far more varied, divisive and strident in Bangladesh than is the case in India.

Already the General Secretary of the opposition Bangladesh Nationalist Party (BNP) which does not look upon India kindly, has, albeit rather sweepingly, described the visit as “100 per cent failure” (in terms of gains for Bangladesh). Granted this is an extreme position, but there will be others who will be needed to be persuaded that Bangladesh ‘gained’ more than it ‘lost’. Sadly there is a tendency there to see relations with India as a ‘zero-sum’ game in which if one side gains the other side loses. The idea that there could be a ‘win-win’ situation for both is yet to take firm root. To demonstrate the possibility of such an outcome would at worst be a Sisyphean, or at best, an uphill task.

The Backdrop India is most certainly seen today as being a country on the ‘rise’. This is true politically, economically, and strategically. Few pre-eminent powers are hero to their neighbours, and this was no different in the case of India, particularly given the troubled political history of the subcontinent. Likewise bilateral relations between Bangladesh and India had been fraught with complexities. The initial euphoria that marked them in the aftermath of the Bangladesh War of Liberation, which both sides fought as allies dissipated soon, foundering on the rock of mutual suspicions. Unlike the fish that tacks close to the shark to avoid being eaten, Bangladesh sought security by distancing itself from the larger entity. It also sought to bridge the power-gap by building a web of linkages with extra-regional powers. This irked India, and often small but smouldering bilateral issues remained unaddressed, developing into larger conflagrations.

A plethora of such problems abounded. Issues agitating the Bangladeshi mind comprised upstream diversion of river flows, demarcation of land and maritime boundaries, the burgeoning trade imbalance, shootings by border guards, and the persistent matter of enclaves. On the Indian side, subjects of interest and concern were enhanced connectivity, transit facilities linking the rest of that country to its northeastern states, non-provision of safe havens to insurgents, and greater cooperation in different international fora. Between the Awami League and the BNP, the Indian predilections are generally seen to prefer the former, so now was the time to see if mindsets of the past could be changed. But this would have to be done with utmost circumspection, keeping pace with the mood of the general public in Bangladesh, including its very vibrant civil society and media.

Indeed a beginning in a positive direction was already in the offing, based on the surprisingly good functional cooperation that existed between Dhaka and Delhi during the period of the Caretaker Government in Bangladesh, between 2007 and 2009 (India had offered support and succour following the disastrous ‘Cyclone Sidr’ that hit Bangladesh in 2007 and also offered 500 tons of rice to shore up Bangladesh’s buffer stock in 2008; Bangladesh had also supported Indian candidacy for the Secretary-General of the Commonwealth in 2008. The Dhaka-Kolkata rail link was established amidst much fanfare, and as an attempt to reduce the existing trade imbalance in India’s favour, India agreed to buy eight million pieces of ready-

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made garments annually. Indeed both the Indian Foreign Minister Pranab Mukherjee, and the author who was then his Bangladeshi counterpart, described the bilateral relations as having reached a “trajectory” from which there should be no slippage downwards.

The arrest by Bangladesh of some top leaders of the United Liberation Front of Assam (ULFA), and the rendition to India of several of them provided a backdrop to the visit. The date of Hasina’s arrival in Delhi for the four-day visit on 10 January 2010, coincided, more by accident than by design, with that of her father, Bangabandhu Sheikh Mujibur Rahman’s arrival to that city to a grand welcome, thirty-eight years ago on his way back to Dhaka from London upon his release from Pakistani prison immediately after the independence of Bangladesh. This fact invested Hasina’s visit with positive emotional content. Also, per chance she, “a valued friend and close neighbour” in Dr Singh’s words, became the first State Visitor for the new decade in New Delhi, a point that was not ignored in Indian pronouncements. The Indian leadership had been signalling for some time that they would avoid inflicting on their distinguished visitor any kind of “embarrassment”. Indian bureaucrats are normally viewed as having “crusted views” not amenable to changes readily, but in this case some significant retired diplomats had penned very warm curtain-raisers (see Krishnan Srinivasan’s ‘Sheikh Hasina Comes Visiting: Great Expectations’, The Telegraph, Kolkata, 5 January 2010). Upon arrival, the visitor became the recipient of the Indira Gandhi Peace Prize, widely seen as a prestigious award. The ceremonial content of the protocol was impeccable. But as The New York Times in its issue of 12 January 2010 aptly pointed out, “[the visit] has an importance far beyond the ceremonial”.

The Visit Three major initiatives were undertaken by India. First, there was the US$ 1 billion credit line to Bangladesh for infrastructure development, the largest single financial aid package to any recipient from India. Indeed it was double the anticipated US$ 500 million anticipated earlier.

The terms were exceedingly ‘soft’, and it is believed that 35 to 40 percent would eventually be transformed into ‘grant’, which means for that amount, no repayment would be necessary.

Second, amidst the raft of five agreements signed, one on cooperation in the power sector was also included. According to it, India was committed to providing 250 MW of power to Bangladesh every day, substantially more than the 100 MW promised last September. And third was to reduce the ‘negative list’ of items imported from Bangladesh, and accord it ‘zero tariff’ treatment. Instead of the paltry US$ 50 million or so India could have made in the form of duties and tariffs, India clearly, and perhaps, wisely opted for much larger, though more intangible, political returns.

There were substantial paybacks for India as well. India will be able to obtain access to two Bangladeshi ports, Chittagong and Mangla. This would open up the landlocked Indian northeastern states to the Bay of Bengal. Small steps were taken to facilitate transit of goods to Bangladesh from Nepal and Bhutan through India, and between India’s north-east to the rest of its territories through Bangladesh. Nepal and Bhutan are also clear beneficiaries as a longstanding aspiration had found fruition. A project to link the Indian state of Tripura to Bangladesh was agreed upon. The upshot of the visit was the 50-paragraph Joint Communiqué, one of the longest ever issued in recent times. Some of its contents were purely ‘aspirational’, some could even say a triumph of hope over experience, but even a statement of shared cherished goals between these two, or for that matter any two South Asian nations, in the general context of regional politics, is no mean achievement.

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Future Steps Two things will now need to be done. Since directions from the highest levels have been obtained, the first task should be to ensure that each set of bilateral issues be boxed into separate compartments with a mechanism set up to address each. Second, a pecking order of priorities should be agreed to and reversed, tackling the ‘low hanging fruits’, the simpler issues first and then graduating to the more complex ones, so that success in easier negotiations would have a positive influence on the more difficult ones. Building bilateral relations is like constructing a Gothic Cathedral; it is never quite finished but already begins to serve the purpose it was intended for.

Impact on the Sub-region: Nepal and Bhutan The proof of any pudding lies in its eating, and the litmus test of the success of this visit, as with any other of such nature will surely lie in how the consensus commitments are implemented. But in this case there will be a yet deeper, and in some ways a more significant, scrutiny. Can India carry along its neighbours as it climbs higher in the scale of global leadership? What transpired in course of the interactions between these two large South Asian protagonists will have a paradigmatic effect on other such bilateral relations in the subregion, particularly between India, Bangladesh, Nepal and Bhutan. If Bangladesh is able to develop an acceptable modus vivendi with Myanmar, and Indian support in this venture could be useful, then it can truly become a bridge between South and Southeast Asia. Already Bangladesh outshines her neighbours, including many Indian states, in having better social indices. Its macro-economic management has been edifying despite its many and varied contents, and as Dr Atiur Rahman, the Governor of its Central Bank pointed out in an upbeat assessment at a recent seminar at the Institute of South Asian Studies in Singapore, good relations with India would help unleash energies for the desired great leap forward in its economic growth and progress.

Implications for ‘Trilateralism’ As for Sheikh Hasina herself, in a telephone conversation with the author, she expressed ‘profound satisfaction’ over the outcome of the visit. If genuine benefits are to accrue to the two peoples, then all concerned, and not just the two leaders, must contribute by conforming to, not just the letter, but more importantly the spirit of the joint communiqué and the agreements. Above all, India must be able to show that it is not only just the largest country in the region, but also the country with the largest heart. If the Bangladesh-India relationship truly takes off, then it would also attract the attention of Pakistan. Relations with Bangladesh can in many ways be a dry-run for India’s relations with Pakistan, despite the many differences that would mark the two sets of bilateral relationships. The aim could be to ultimately draw Pakistan into a framework of trilateralism, beginning with a Summit level meeting of the three concerned counties in the ‘core’ of South Asia.

Then to no capital in South Asia would Delhi be ‘hanooz dur ast’ – still very far!

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