ISAS Insights 2009 by Institute of South Asian Studies ISAS

ISAS Insights 2009

ISA S Insights No. 44 – Date: 9 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

Indian Bureaucracy – Dismantling the Steel Frame Bibek Debroy∗ This is an apocryphal story, even though I got it from a very senior ex-civil servant – Lord Linlithgow was Governor-General and Viceroy to India from 1936 to 1943 and Chairman of a Royal Commission on Agriculture (1926-28) earlier. In 1973, Tamil Nadu constituted a State Administrative Reforms Commission, which also examined existing government positions in the state. It was discovered then that there were positions known as ‘LBAs’ and ‘LBKs’, though no one precisely knew what these job descriptions meant, since vacancies had not been filled up and earlier incumbents were now drawing pensions. The Royal Commission felt Indian cows were not good enough and cattle strains needed improvement through the import of sturdier bulls and using them to impregnate Indian cows. As was common, this recommendation was not implemented until in 1936 when it was announced Linlithgow would become Viceroy. Someone in the Madras Presidency then woke up, realising the incoming Viceroy would be sure to ask about a key recommendation made by a Commission of which he had been Chairman. Creating government jobs was not easy either. Hence, the Viceroy’s name was invoked in the job title to facilitate creation. ‘LBA’ stood for Linlithgow’s Bull Assistant and ‘LBK’ stood for Linlithgow’s Bull Keeper. ‘LBKs’ imported foreign bulls and maintained them. ‘LBAs’ ensured impregnation occurred on time and ensured that ‘LBKs’ did not commit fraud on the exchequer. These posts were abolished in mid-1970s. Apocryphal or not, this beats the story about the British civil service position finally abolished in 1945. It was created in 1803 and a man was asked to stand on the cliffs of Dover, with a spyglass in his hand, to watch out for Napoleon and ring a bell if he saw signs of an invasion. The steel frame of Indian bureaucracy is much-maligned.1 This is understandably so, since the practice of this bureaucracy is considerably different from the rational and efficient bureaucracy Max Weber contemplated.2 If anything, users of bureaucracy will empathise more with the following quote: “The real spirit of the laws in France is that the bureaucracy ∗

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. Though universally used, it is not universally known that the expression “steel frame” originates in a speech made by Prime Minister Lloyd George to the House of Commons in 1922, defending the British civil service in India. “This small nucleus …of British officials in India…they are the steel frame of the whole structure. I do not care what you build on it – if you take the steel frame out, the fabric will collapse.” In particular, Weber’s Economy and Society: An Outline of Interpretive Sociology, though originally written in 1922, edited and published in English by Guenther Roth and Claus Wittich, Bedminster Press, New York, 1968, especially Part III, Chapter 6.

of which the late Monsieur de Gournay used to complain so greatly; here the offices, clerks, secretaries, inspectors and intendants are not appointed to benefit the public interest, indeed the public interest appears to have been established so that offices might exist.”3 Or for that matter, Joseph Heller’s 1961-novel ‘Catch-22’ or Antony Jay and Jonathan Lynn’s ‘Yes Minister’ and ‘Yes Prime Minister’.4 There is some cross-country and theoretical literature on bureaucracy.5 First, the point is made there is asymmetry of information, so that the political system lacks regulatory information required for effective oversight of bureaucracy. Second, question marks are raised about bureaucratic objective functions so that accountability is to political masters rather than the public at large. Third, this spills over into discretion and consequent rent-seeking and corruption, with a vested interest in favour of preserving the status quo of discretion. The Indian bureaucracy exhibits much of this malaise. The size of government employment is not that large. On 31 March 2005, total public sector employment was 18 million, divided into 3 million for the central government, 7.2 million for the state governments, 5.7 million for quasi-government and 2 million for local bodies.6 With an estimated labour force of 420 million in 2004-05,7 government employment thus accounts for 4.1 percent of total employment within the country. This relatively low figure should be borne in mind for several reasons. First, an inordinately large part of the reform discourse gets bogged down in issues pro-urban, pro-organised sector and pro-government at the expense of rural, unorganised and private. Second, any cross-subsidy to government is regressive since it involves transfers from relatively poor to relatively rich and most Pay Commission-type recommendations are transfers because there is not an increase in size of the cake. These resources have opportunity costs and rural social and physical infrastructure will not be built in the process. Third, there are assorted cross-country surveys on governance.8 When the Indian government performs badly on these, it is not because of the size of government employment but because of what the government does.9 Indeed, if the government performs 3

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This quote is from a letter written in July 1765 by Baron von Grimm, cited in Bureaucracy, Martin Albrow, Pall Mall Press, London, 1970. Jean Claude Marie Vincent de Gournay coined the expression “bureaumania” for an “illness in France”. Humphrey Appleby epitomises perceptions of the bureaucracy. The first (1980) episode of ‘Yes Minister’ was titled ‘Open Government’ and Jim Hacker’s introduction to the bureaucracy was “Well briefly, Sir, I am the Permanent Under Secretary of State, known as the Permanent Secretary. Woolley here is your Principal Private Secretary, I too have a Principal Private Secretary and he is the Principal Private Secretary to the Permanent Secretary. Directly responsible to me are ten Deputy Secretaries, 87 Under Secretaries and 219 Assistant Secretaries. Directly responsible to the Principal Private Secretary are plain Private Secretaries, and the Prime Minister will be appointing two Parliamentary Under Secretaries and you will be appointing your own Parliamentary Private Secretary.” See, for example, Neil Garston edited, Bureaucracy: Three Paradigms, Kluwer, Boston, 1993. Economic Survey, 2007-08. This is in the organised sector and 69 percent of employment in the organised sector is public sector employment. Here, quasi-government means the public sector. With a broader definition of quasi-government (such as all those to whom the Pay Commission recommendations eventually apply), the number increases to around 30 million. This is primarily urban. Hence, roughly half of all urban households earn a living off the government, with implications for political economy of reforms and targeting of subsidies, with a pronounced pro-urban bias in the latter. The Expenditure Budget for 2008-09 gives a central government employment figure of 3.4 million in March 2008. Of this, almost half a million is in the Department of Posts and 1.4 million in the Ministry of Railways. Ibid. Governance is a term difficult to pin down but that digression is irrelevant for present purposes. The World Bank’s governance indicators have six heads – voice and accountability; political stability; government effectiveness; regulatory quality; rule of law; and control of corruption. The last four have something to do with bureaucracy. India performs relatively better on government effectiveness and rule of law and relatively worse on regulatory quality and control of corruption. The World Bank’s Doing Business indicators document high compliance costs associated with government procedures. In both measures of

its core governance functions efficiently, the number of government employees might well increase. Fourth, the bulk of government jobs are in Grades C and D, though attention usually focuses on the more visible Grades A and B. Grades A and B roughly account for five percent of government jobs.10 For instance, if an argument is advanced that higher salaries are necessary to retain talent in the public sector and ensure this talent does not migrate to the private sector, that argument can only be valid for a small segment of Grade A individuals, not across the board for all government employees.11 Otherwise, one should end up arguing that since a small segment of the Indian labour force is integrated into the global labour markets, everyone in India should be paid global salaries. To state the obvious, the problem arises because there is no link between pay and performance. Since the marginal product is high in a few instances, it is incorrectly presumed the average product is also high. Fifth, when there are references to surplus within government employment, that surplus is concentrated in Grades C and D and the existence of the surplus has a lot to do with antiquated government procedures. Procedures bring in administrative law. Administrative law can be defined in various ways but it is essentially about rule-making by the executive,12 adjudication and enforcement of statutes and regulation. India’s administrative law has evolved on common law traditions, supplemented by judicial review over administrative action. Looked at differently, administrative law involves three strands that overlap – interfaces between citizens and government, interfaces between enterprises and government, and intra-government dealings. Procedures complicate all three, contributing to rent-seeking. The second can again be divided into three phases of an enterprise’s existence – entry, functioning and exit.13 The first involves birth certificates, death certificates, land titles, assorted requirements of establishing one’s own identity and issues connected with accessing public services and benefiting from anti-poverty programmes. Let us take one example to drive home the point about compliance costs. Outside agriculture, the total self-employed population is 92.1 million.14 Some of these are in relatively high income occupations such as independent professionals (doctors, lawyers, artists and accountants), shop owners in urban areas, rice-mill owners, workshop owners, commission agents, real estate and housing brokers, and owners of small hotels and restaurants. However, others are in relatively low income occupations such as handloom weavers (mostly women), chikan workers (mostly women), street vendors, food processors, rickshaw pullers, rag-

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economic freedom (Heritage Institute and Wall Street Journal, Fraser Institute), India does not do that well again because of what the government does. Finally, India performs badly on Transparency International’s Corruption Perception Index. Grade A recruitments are competitive through the Union Public Service Commission (UPSC), though there are reservations. Grade B recruitments are through the UPSC or the Staff Selection Commissions. Barring Railways, most Grade C recruitments are through the Staff Selection Commissions. Grade D recruitments are usually through employment exchanges. There is also the question of not comparing apples and oranges. Private/public compensation comparisons rarely impute perquisites at market rates and never incorporate premiums for uncertainty. On a base of 197172, in 2006-07, per capita emoluments of central public sector enterprise employees increased by 5402.94 percent, while inflation measured by the consumer price index increased by 1385.94 percent. Economic Survey, 2007-08. Though framework legislation that sanctions right to formulate rules, orders and regulations may be statutory. This type of legislation is thus delegated legislation. The afore-mentioned World Bank’s Doing Business database documents problems in these. Report on Conditions of Work and Promotion of Livelihood in the Unorganized Sector, National Commission for Enterprises in the Unorganized Sector, August 2007. This is a 2004-05 figure, based on the NSS (National Sample Survey) large sample, there having been no large sample after that year.

pickers, beedi rollers (mostly working out of home), agarbatti makers (mostly women), potters and bamboo product makers.15 Eighty-seven percent of own account enterprises are in rural areas, which is why rural reforms also become important. The average own account enterprise is low on assets and low on value addition. The average value addition is Rs2,175 per month in urban areas and Rs1,167 per month in rural areas.16 Depending on the family size, this is not enough to ensure livelihood above the poverty line. Of the own account enterprises, 84.9 percent are not registered and this needs to be flagged because registration also brings attendant benefits such as access to credit or government subsidies on marketing and technology. Why are own account enterprises not registered? The answer is not entirely due to a lack of information or the rural concentration problem. Opting out of registration is probably a conscious decision because benefits from registration are not commensurate with the costs. Not only are procedures connected with registration complicated and tiresome, registration brings with it the attendant problem of bribery and rent-seeking from the government machinery. For instance, for rickshaw pullers and street-vendors, studies in many parts of urban India have documented harassment and bribery by municipal authorities and police.17 Much the same can be said of the citizen-government interface. The simple point is that bribery and rent-seeking are not distributionally neutral. They tend to hurt the relatively poor more than the relatively rich. Reduction in rent-seeking and lower compliance costs hinge on administrative law reform. Civil service reform is not synonymous with administrative law reform, though the latter requires the former. However, administrative law reform goes beyond civil service reform. Since 1947, there have been several committees/commissions, and assorted reports, on administrative law and civil service reform – the Secretariat Reorganization Committee (1947); the Central Pay Commission (1947); the National Committee (1948); the Economic Committee (1948); Reorganization of the Machinery of Government (1949); Report on Public Administration (1951); Report on Efficient Conduct of State Enterprises (1951); Public Administration in India –Report of A Survey (1953); the Railway Corruption Enquiry Committee (1955); the States Reorganization Commission (1955); Re-examination of India's Administrative System with special reference to Administration of Governments' Industrial and Commercial Enterprises (1956); the Public Service (Qualification to Recruitment) Committee (1956); the Commission of Enquiry on Emoluments and Conditions of Service of Central Government Employees (1957-59); the Congress Parliamentary Party SubCommittee on State Undertakings (1959); Report on Indian and State Administrative Service and Problems of District Administration (1962); the Committee on Prevention of Corruption (1962); the Committee on the Indian Foreign Service (1966); Interim Report of The Administrative Reforms Committee on Problems of Redress of Citizens' Grievances (1966); Report of the Study Team on Relations Between the Press and Administration (1966); several reports of the Administrative Reforms Commission18 (1967-70); the Third Central Pay Commission (1973); the Committee on Recruitment Policy and Selection Methods (1976); Economic Administrative Reforms Commission (1983); the Committee on Centre State Relations (1988); the Committee to Review the Scheme of the Civil Services Examination (1989); the National Development Council on Austerity (1992); the Fifth Central Pay

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Ibid. Ibid. Manushi’s work is but one example. See, Madhu Purnima Kishwar, Deepening Democracy, Challenges of Governance and Globalization in India, Oxford University Press, 2005. This was one of the most comprehensive exercises ever undertaken.

Commission (1997);19 the 10-volume report of the Expenditure Reforms Commission (2000);20 Report of the Committee to Review In-Service Training of Indian Administrative Service (IAS) Officers (2003); the Surendra Nath Committee Report (2003); the Committee on Civil Service Reforms (2004); the Second Administrative Reforms Commission21 (2005 onwards); and the Sixth Pay Commission (2008).22 Everything that needs to be said in terms of drawing up a reform agenda has already been said several times over. The problem lies with implementation. Issues of downsizing, identifying surplus manpower, retraining, voluntary retirement schemes, contractual appointments, lateral entry, evaluation and vertical mobility keep recurring.23 However, what are invariably implemented are hikes in salaries and not the rest.24 Indeed, there are legislative constraints. Article 311 of the Constitution is one instance.25 The Prevention of

“The impact of the Fifth Pay Commission and its aftermath on revenue deficits of Center, States and local bodies lends urgency to the need to downsize government,” Economic Survey, 1998-99. “In order to bring about fiscal prudence and austerity, government imposed a 10 percent cut across the board in the number of sanctioned posts as on 1st January, 1992. Instructions were also issued in January, 2000 directing a 10 percent reduction in the number of posts created between January, 1992 to December, 1999. The Expenditure Reforms Commission would recommend a further 10 percent cut in the sanctioned strength of staff as on 1.1.2000 to be carried out by each ministry/department by the year 2004- 2005.” In addition, “The Commission has however, taking a total picture recommended, as far as the total number of civilian posts are concerned, a 30 percent across the board cut, over a ten year frame @ 3 percent per annum, roughly equivalent to the number expected to retire each year. As part of the overall package, they have also recommended that all vacant posts, numbering over 3.5 lakh be abolished and, that there should be a total freeze on fresh recruitments in the categories of supporting and auxiliary staff and a reduction in the intake in all services that operate at the level of executives and supervisory staff. The package further includes a statutory ceiling to be enacted on total sanctioned posts in the central government, appropriate packages for compulsory retirement, voluntary retirement, golden hand shake scheme etc.” Both quotes are from the second volume. There have been nine reports so far. “In any system, the quality of public servants is critical in determining outcomes. We have well-established procedures for initial recruitment of civil servants in India. However, there is growing concern that our civil services and administration in general have become wooden, inflexible, self-perpetuating, and inward-looking. While the bureaucracy responds to crisis situations with efficacy, colossal tardiness and failure to deal with ‘normal’ situations is evident in most cases. Effective horizontal delegation and a clear system of accountability at every level should be at the heart of our administrative reform.” Quote from an approach paper on reforms in governance and administration, written for the Second Administrative Reforms Commission. “The Commission has recommended several innovative features to ensure better delivery systems in the Government with emphasis on end user satisfaction which is the primary criterion for judging the efficiency of an organization. Introduction of Performance Related Incentive Scheme (PRIS) is a step in this direction. This is not a new concept….The PRIS recommended by this Commission envisages a pecuniary component, over and above the salary, for higher performance that would be judged by improved delivery to the end user by an external independent agency.” On downsizing, one should be careful with government figures on employment. First, chunks of employment are now shown under autonomous bodies and not under government proper, though little downsizing may actually have occurred. Second, Information technology-usage has rendered several positions obsolete. Third, employment also takes place through contractual means and these are not shown. In terms of nuance, the Fifth Pay Commission had much more to say on downsizing and making government responsive than the Sixth Pay Commission. This sounds fair and innocuous but makes dismissal impossible. “Article 311(1) No person who is a member of a civil service of the Union or an all-India service or a civil service of a State or holds a civil post under the Union or a State shall be dismissed or removed by an authority subordinate to that by which he was appointed. (2) No such person as aforesaid shall be dismissed or removed or reduced in rank except after an inquiry in which he has been informed of the charges against him and given a reasonable opportunity of being heard in respect of those charges.”

Corruption Act is another.26 There are vigilance enquires, Comptroller and Auditor General audits, political interference and assorted other Constitutional requirements. This should not be taken to mean there have been no improvements since 1991. First, reforms have led to the elimination of shortages,27 reduction in licensing28 and some standardisation and harmonisation, leading to decline in discretion.29 This does not mean that discretion has been eliminated everywhere. In a transitory period of economic reforms, it is possible for discretion to temporarily increase, especially in sectors where private sector licenses are awarded, rather than auctioned out. Sectors where discretion and control mindsets still remain are health, education, several infrastructure areas, services in general, and land use and real estate development. Second, compared to the original draft legislation, the Right to Information (RTI) Act may have had some of its teeth knocked out. However, notwithstanding its warts and blemishes, the RTI has had successes. Third, for both citizens and entrepreneurs, income growth, awareness of rights and competitive climates (where alternative private sector choices are sometimes possible) have led to countervailing pressure, forcing governments to become more responsive. Indeed, the Central RTI Act (2005) was an outcome of such countervailing pressure, with some states having enacted such statutes earlier.30 Fourth, civil society pressure has also meant more intensive scrutiny by media, both print and electronic. However, such civil society pressure tends to be located in certain geographical parts of the country and not elsewhere.31 Fifth, there have been successful egovernance initiatives, both G2C and G2B.32 Sixth, decentralisation, participatory governance and third party scrutiny are now accepted as principles, though devolution of funds, functions and functionaries, decentralisation of centrally sponsored schemes and bottom-up planning have fallen short of what was desired, partly because of resistance by the states.33 Seventh, All India Service Rules have been amended, allowing for a fixed tenure for specific notified posts. It is a separate matter that few notifications have surfaced from the centre as well as the states. And when the centre has indicated a minimum tenure of two years, few states have bothered to implement this. Eighth, moving to the political system, there have been some electoral reforms, with tax incentives to donors and some tightening of anti-defection laws. Ninth, the Election Commission has imposed disclosure norms on candidates. Tenth, there is some discipline on jumbo cabinets since the Council of Ministers is restricted to 15 percent of the strength of the Lok Sabha.34 And eleventh, going back to 26

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For instance, Section 13(d)(iii) includes as criminal conduct “while holding office as a public servant obtains for any person any valuable thing or pecuniary advantage without any public interest”. Since public interest is difficult to prove and since any decision leads to a third party benefiting, this makes every public servant risk averse and prone to not taking decisions. Such as telephone and gas connections, or airlines, or even foreign exchange. Such as manufacturing. Such as indirect taxes. The Consumer Protection Act is another example where pressure led to subsequent legislation. Pressure by Public Affair Centre, Bangalore, and citizen report cards led to a decline in corruption in service delivery. For instance, there is a clear pro-urban bias. Government to consumer and government to business respectively – income tax, passports, MCA-21, insurance, excise, national citizen database, pensions, banking, land records, road transport, property registration, treasury management, municipalities, panchayats, commercial taxes, police, employment exchanges. There are several public-private partnerships and some actual out-sourcing to private sector has occurred. See, Eleventh Five Year Plan, 2007-12, Vol.1, Chapter 10, Governance, Planning Commission, Government of India, 2008. There is also a national e-governance plan. Mr Rajiv Gandhi’s statement in late 1980s that only 15 paise out of every rupee spent reached target beneficiaries is usually interpreted as 85 percent being swallowed up in leakage and corruption. However, this is not true. Eighty-five percent also includes very high administrative costs of delivery. This has probably contributed to the large number of Commissions, headed by those with Cabinet “rank”.

civil services, since 2006, 21 April has been observed as Civil Service Day. This is more than an empty gesture since awards for excellence in public administration and exchange of best practices have been institutionalised. However, the key remains civil service reform.35 â&#x20AC;&#x153;A serious effort will have to be made to protect honest civil servants. Protecting the public services from political interference and abuse of power on the part of politicians will involve (i) enforcement of objective and transparent criteria and procedures for appointments and promotions; (ii) definite tenure for civil servants holding senior positions. The abridgement of tenure through transfers should be for objective reasons to be recorded in writing; (iii) Public Service Commissions/ Administrative Tribunals should have a role in monitoring tenure, transfers and promotions; (iv) no civil servant should be suspended without the prior concurrence of the Public Service Commission; (v) rules of business in government should be strictly enforced, particularly the recording of reasoned orders in writing; and (vi) protection for civil servants who expose corrupt practices. An important question today is developing a climate of probity in public life. Codes of ethics, therefore, need to be developed for civil servants and other public functionaries. A number of countries such as the United Kingdom and Spain have developed their code of ethics. The Administrative Reforms Commission has made extensive recommendations on these issues. Some of the values which a civil servant could be mandated to follow are objectivity, integrity, neutrality, dedication to public service, transparency, exemplary conduct, accessibility and efficiency. These values have also been studied in the context of developing an Act for the Civil Services.â&#x20AC;?36 This is like a motherhood statement and does not mean very much until implementation happens. One should also mention the fairly important issue of whether revenue, magisterial and developmental roles should be segregated. A steel frame erected primarily for the first two functions is not necessarily efficient when focus shifts to the third. However, this bigticket reform agenda is not only about deconstructing and reinventing the civil service alone. It is also about deconstructing and reinventing the electoral system. The average constituency size in Britain is less than 75,000. It is a completely different proposition if one has to address constituencies that routinely cross three million and even approach three million. Corruption within the political system is linked to electoral reform and electoral funding reform. This is an economic rather than a moral issue. And corruption in the political system spills over into corruption within bureaucracy. This should not be taken to mean that there have been no positive changes. For instance, given constraints and limitations within the civil service machinery, one should not ask why liberalisation does not occur. Instead, one should ask why reforms that did occur could be pushed through. A useful collation of successes in public service delivery is available.37 These documented cases span a wide variety of sectors â&#x20AC;&#x201C; telecommunication liberalisation at the centre, rural marketing and dis-intermediation,38 e-governance,39 property tax registration,40 road transport,41 municipal reform,42 urban services,43 education,44 health 35 36 37

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We are ignoring questions of police and judiciary reforms because those raise other issues. Eleventh Five Year Plan, ibid. Reinventing Public Service Delivery in India: Selected Case Studies, edited by Vikram Chand, Sage Publications, Delhi, 2006. Madhya Pradesh. Bhoomi in Karnataka, rural cards in Andhra Pradesh and computerisation of inter-state check-posts in Gujarat are instances. Maharashtra and Karnataka. Karnataka.

services45 and Public Distribution System and mid-day meals.46 These reforms have required support of the civil service and have indeed been driven by civil service. Arguments that these were driven by specific individuals do not get us very far. Instead, one should ask whether there are generic lessons to be gleaned from these success stories so that successes can be replicated elsewhere.47 Are there ideas for systemic reform? From documented cases, lessons can be derived about political support,48 managerial autonomy, decentralisation,49 civil society pressure,50 inter-agency coordination, use of e-governance within the government, stability of tenure and anti-corruption institutions. The stability of tenure issue has already been flagged. A few more comments are in order about anti-corruption mechanisms in a situation where lists of corrupt IAS officers surface in Uttar Pradesh and Maharashtra, senior civil servants figure in corruption scandals in Bihar, Tamil Nadu and Orissa and an IAS officer’s wife in Karnataka launches a website against corruption,51 The issue is not new at all. “During a debate in Parliament in June 1962, many Members of Parliament expressed concern on the growing menace of corruption in the administration. In pursuance of the reply to the debate given by Shri Lal Bahadur Shastri, Honourable Minister for Home Affairs, a committee was set-up in order to review the existing instruments for checking corruption in central services and to advise practical steps that should be taken to make anti-corruption measures more effective. The Committee came to be known as the ‘Santhanam Committee’. The Committee observed that the major causes of corruption were (i) administrative delays; (ii) governments taking upon themselves more than what they can manage by way of regulatory functions; (iii) the scope for personal discretions in the exercise of powers vested in different categories of government servants; and (iv) cumbersome procedures of dealing with various matters which are of importance to citizens in their day to day affairs.”52 Even if identification were to be done today, the words used would not change dramatically. The Santhanam Committee’s recommendations led to the Central Vigilance Commission (CVC) being established in 1964. “In the wake of the directions of the Honourable Supreme Court in 1997, in the Writ Petition filed in public interest by Shri Vineet Narain and others in the Hawala Case, the government promulgated an ordinance in 1998. The Ordinance of 1998 conferred statutory status to the CVC and the powers to exercise superintendence over the functioning of the Delhi Special Police Establishment, and also to review the progress of the investigations pertaining to the alleged offences under the Prevention of Corruption Act, 1988, conducted by them. …After the Bill was passed by both the Houses of Parliament and, with the assent of the President, the CVC Act, 2003 came into force with effect from 11 September 2003. The Act also amended the Delhi Special Police Establishment Act to give the commonly known principle of ‘Single Directive’, a legal status which had been struck 42 43 44 45 46 47 48

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Bangalore, Surat. Hyderabad. Madhya Pradesh. Madhya Pradesh, Tamil Nadu and Karnataka. Tamil Nadu. One learns even more from failed attempts but those are rarely documented. This should be interpreted to mean that the political system thought there was an electoral dividend in these reforms. This broad-bases support for reforms and makes the process bottom-up. Afore-mentioned examples such as the Right to Information Act, media, public interest litigation, citizen report cards. http://fightcorruption.wikidot.com/ Central Vigilance Commission, Annual Report 2006, http://www.cvc.nic.in/ar2006.pdf

down by the Supreme Court in the Hawala Case. According to this, the Central Bureau of Investigation required the prior approval of the central government to conduct inquiry or investigation against any offence alleged to have been committed under the Prevention of Corruption Act by an employee of the level of Joint Secretary and above in the central government or such officers in the government corporations, companies, societies and local authorities owned or controlled by the central government…. Following the murder of Satyendra Dubey and in response to a Public Interest Litigation filed on the subject, the Supreme Court directed the government to designate a suitable machinery to act on the complaints from “whistle blowers” till such time as a suitable legislation was enacted to that effect. In recognition of the faith that the country reposed in the Commission, the central government, while implementing the directive of the Supreme Court, appointed the Commission as the ‘Designated Authority’ for the purpose.”53 One should also mention the Lok Pal system for central government and the Lok Ayukta framework in Karnataka. The impression one forms is endogenous triggers for change are few. Change has occurred only when exogenous pressure has been brought. With income growth and increased awareness, that is perhaps the main reason why the steel frame will finally buckle.

oooOOOooo

Ibid.

ISA S Insights No. 45 – Date: 23 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

Win the War and Lose the Peace: Sri Lanka’s ‘War on Terror’ Darini Rajasingham Senanayake∗

It looks like one of the more winnable conflicts in an age of the global ‘war on terror’. The Sri Lankan government appears to be on the brink of announcing victory in its drawn-out battle against the Liberation Tigers of Tamil Eelam (LTTE). The armed separatist group, listed as one of the world’s most dangerous terrorist groups, has fought successive Sri Lankan governments for over a quarter of a century in the guise of liberating the island’s Tamil community from a state that has increasingly marginalised linguistic and religious minorities. However, the question remains as to whether the victory would be pyrrhic when finally manifest, consolidated on irreparable damage to the county’s increasingly fragile democratic institutions and centuries-old multicultural, multi-religious and hybrid social fabric. Several conflicts have been assimilated to the global ‘war on terror’ in the aftermath of 9/11 and the United States-led global ‘war on terror’ that casts a long shadow in South Asia. In 2006, the conflict in Sri Lanka was officially renamed a ‘war on terror’ after a highly internationalised Norwegian-brokered ceasefire agreement collapsed. Prior to that, the past quarter of a century of violence punctuated by three abortive peace processes, was known as an ‘ethnic conflict’ or a ‘liberation struggle’, depending on the perspective. The current government has worked hard to portray its battle against the LTTE, now in its final stages, as a ‘war on terror’. This time the top priority is to recapture the island’s northeastern territories controlled by the LTTE’s quasi-state, and the LTTE leader, Velupillai Prabhakaran, who is also wanted by India for assassination of former Prime Minister Rajiv Gandhi. One is familiar with the adage ‘one man’s terrorist is another’s liberation fighter’, a phrase that was common in many parts of Asia, Africa and Latin America during the era of postcolonial struggles for self-determination and independence from European empires. The Sri Lankan government also terms the current bid a ‘humanitarian war’ to liberate innocent Tamil civilians from the grip of an organisation that has held people as a buffer and human shield to deflect the onslaught of the military and air force. On the other hand, the LTTE claims that it is seeking to liberate Tamil-speaking people from the abuse and humiliation meted out by the post-colonial state dominated by the majority Sinhala community. There is good evidence to suggest that minority communities in Sri Lanka have had a raw deal in the ∗

form of discriminatory policies on language, education, land settlement and development. There have also been episodic riots and pogroms against minority Tamils and Muslims since independence in 1948. Clearly the conflict in the island is complex and it is necessary to look beyond the blame game between the two principle protagonists and the gloss of the ‘war on terror’ to seek sustainable solutions. After all, sustainable peace would need to be based on an analysis and address of the root causes of conflict. In the case of ethno-nationalist guerrilla movements such as the LTTE, once a group loses territory, it may melt into the people and return years or decades later to fight, if the root causes of the conflict are not addressed. Several long-term, low-intensity conflicts that predate the global ‘war on terror’ in South Asia make this apparent.

Democracy as Collateral Damage At independence from Britain in 1948, the prognosis both for democratic governance and development in the island nation then called Ceylon was generally rated excellent. Sri Lanka was considered a ‘model democracy’ with an established record of peaceful co-existence between diverse ethnic and religious communities until the armed violence erupted in the early 1908s. Its social indicators (literacy, health and education), were the envy of much of the developing world in the decades of the 1960s and 1970s, and they remain the best in South Asia. Nobel prize-winning economist Amartya Sen was fond of referring to Sri Lanka and its particular development model and trajectory as an ‘outlier’ because of high levels of social development despite relatively low per capita income. Later it was expected that the island, given its size and ethno-religious mix, would develop like Singapore rather than Malaysia which was seen to have an uneasy ethnic peace.1 Lee Kuan Yew’s Singapore was indeed the role model for the J. R Jayawardena regime in the late 1970s and 1980s. However, somewhere along the way, the country’s politicians and policy-makers seemed to lose the plot and were subsequently ambushed by the LTTE, which in its early days was funded by India’s intelligence agency, Research and Analysis Wing (RAW), during the period of proxy wars of the Cold War. Although the LTTE was started locally in the late 1970s to secure the rights of a minority marginalised by the state, it subsequently morphed into one of the world’s most ruthless terrorist groups. After the ethnic riots of 1983 which may be better described as a pogrom, the LTTE grew exponentially. A quarter of a century of violence killed over 70,000 people, mainly in the north and east of the country, and displaced between 5-10 percent of the island’s 20 million people. The LTTE forcibly evicted the Muslim minority population from the northern Jaffna Peninsular in 1990, claiming they were a security threat to the Tamil homeland. A significant number of Tamils displaced in the conflict between the Sri Lankan government and the LTTE have formed a powerful disapora in North America, Europe, Australia and parts of South Asia and Southeast Asia, and from afar, they have contributed to sustain family members and communities as well as subsidise the conflict in their homeland. It was largely with the funds 1

Sri Lanka’s success was often posited in comparison with Southeast Asia’s emergent nations. Thus Donald Horowitz stated in a retrospective on Sri Lanka that “any knowledgeable observer would have predicted that Malaysia was in for serious, perhaps devastating, Malay-Chinese conflict, while Sri Lanka (then Ceylon) was likely to experience only mild difficulty between the Sinhalese and Tamils” (1993, 1).

generated from the diaspora that the LTTE was able to run a de facto state for almost a decade in the northern and eastern parts of the country. However, its territory has been slowly but surely retaken by the ongoing military offensive of the government to ‘liberate’ the Tamil people. It was against this backdrop that the first week of 2009 saw the fall of the capital of the LTTE’s de facto state in the north of the country. A few days later, troops gained control of the Elephant Pass base and the A-9, the main trunk road that links the southern capital, Colombo, to Jaffna, the cultural capital of Sri Lanka Tamils. Celebrations were held throughout the country while government institutions hoisted the national flag. The capture of the LTTE’s capital was termed ‘an incomparable victory’ and the President used the rhetoric of the ‘war on terror’: “What our heroic troops have achieved is not only the capture of the great fortress of the LTTE, but a major victory in the world’s battle against terrorism”. For 23 years, parts of the A-9 highway had been controlled and sealed off by the LTTE. The securing of the highway means that travel between Jaffna and Colombo would no longer need to be by sea or air and would bring down the cost of living in the Jaffna peninsular. The Sri Lankan government also plans to roll out reconstruction and development plans for Kilinochchi, now a ghost town vacated by civilians fleeing the military onslaught and air force bombing campaign to dislodge the LTTE from bunkers dug deep in the earth. Simultaneously, the first two weeks of 2009 saw a dramatic rise in refugees arriving in South India. According to the International Committee of the Red Cross, the only humanitarian organisation operational in the conflict areas, 200,000 people have been displaced. It is axiomatic that, as externalised threats are perceived and nations go to war, civil liberties and rights in the domestic sphere are eroded. This phenomenon was observed by Max Weber, a founding father of the discipline of sociology. Within days of the celebrations following the capture of LTTE’s de facto capital, one of the island’s leading journalists, Lasantha Wickrematunge, Editor-in-Chief of the Sunday Leader newspaper, a liberal antiestablishment paper known for exposing corruption and nepotism in the state apparatus, was assassinated in broad daylight in Colombo. At his funeral, where thousands gathered, an effigy of the Sri Lanka’s President, Mahinda Rajapaksa, was burnt. The slain journalist’s funeral was attended by political leaders, media representatives, civil society organisations and senior foreign diplomats in Colombo. The slain journalist, who was also a lawyer, had penned his own obituary three day’s before his assassination: “And then they came for me”, naming in all but words his killers. His final editorial published posthumously which has come to be known as the ‘letter from the grave’ constitutes a powerful indictment on the regime that would be hard to shake off in a country where astrology, the symbolic and uncanny, carries significant weight in politics. Minimally, the state is accused of promoting a ‘culture of impunity’ that has rendered Sri Lanka ‘one of the world’s most dangerous places for journalists’ according to the organisation, ‘Reporters without Borders’. In the past two years, at least eight journalists have been killed in the country, according to the Committee to Protect Journalists. As the war (including an information war) has escalated, the phenomenon of extra-judicial killings has risen. Wickramatunge’s assassination was in the wake of a series of killings and intimidation of journalists and lawyers, and attacks on independent media institutions in the south. A few weeks earlier, the largest independent television station in the capital, MTV, criticised by segments of the state of being unpatriotic, was attacked by a masked gunman in a city teaming with security forces. A few months earlier, the house of a leading lawyer and

head of Transparency International, Sri Lanka, who had appeared in several fundamental rights cases, was struck by grenades. In August 2008, Sri Lanka lost its seat in the United Nation’s Human Rights Council and has since turned down several requests of the United Nations Human Rights Commission to set up an observer mission to monitor the situation in the country.

Needed: An Exit from Violence Implicit in renaming the conflict in Sri Lanka a ‘war on terror” is the suggestion that the current war is a ‘just war’, which has elicited considerable support from members of the international community engaged in the global war on terror. The challenge of war, be it a ‘just war’, ‘humanitarian war’, a ‘war on terror’ or even an oxymoronic ‘war for peace’ is to avoid destruction of the lives, institutions, values and ideals sought to be liberated or protected. The LTTE, which began as a movement for the rights of a minority community against state discrimination, over time morphed into a self-sustaining war machine that has sapped the strength of the very community it sought to protect. During the decades of conflict, there have been several rounds of negotiation with the assistance of the international community. However, the LTTE has failed to grasp the opportunity to negotiate peace for the war wary and depleted population that it seeks to ‘liberate’. The armed group has been, for some time now, fighting a war of diminishing returns. The globally networked organisation, which draws support from a significant diaspora in North America, Europe and Asia, has been banned in many countries. Likewise, successive regimes in Sri Lanka have periodically used an emergent ‘war economy’ to benefit from violence, while extended periods of Emergency Rule has seen the attenuation of the rule of law, while a growing culture of impunity has stymied investigation of grave human rights violations, corruption, and rent-seeking behaviour by state actors, non-state actors and paramilitaries. Hence the conflict has been also referred to as a ‘dirty war’. Over the two and a half decades of conflict, a variety of politicians, members of the defence industry and paramilitary groups had acquired illegal personal profit and political power as the economy periodically morphed into a ‘war economy’. Sri Lanka seems to be in the midst of one such cycle. At the same time, the regime may be increasingly dependent on the use of majoritarian nationalism and the militarisation for survival, given the soaring cost of living with one of the highest inflation rates in South Asia. Sri Lanka has the largest defence budget in South Asia in percentage terms. At the November 2008 budget, President Rajapaksa, who is also the Minister of Finance and whose brother is the Minister of Defence, promised to raise defence spending by seven percent to a record US$1.6 billion in 2009, according to figures presented to the Parliament. In his inauguration speech, Franklin D. Roosevelt remarked, “the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyses needed efforts to convert retreat into advance”. Naming a complex conflict such as Sri Lanka’s ‘war on terror’ may be counterproductive. Indeed as John Sidel, a specialist on Indonesia noted in his book, “Riots, Pogroms, Jihad”, that since 9/11 an industry of terrorism experts has reframed diverse types and forms of complex political conflict in South Asia and Southeast Asia. To call Sri Lanka’s complex conflict simply a ‘terrorist war’ or an ‘ethnic conflict’ is to get history and indeed geography wrong. For it is necessary to talk of state terrorism in the same breath, as the LTTE is no doubt vicious terrorism which has included violence against the very

community it seeks to liberate, including the assassination of those who do not agree with it, recruitment of women and child soldiers, and perfecting the suicide bomb. There is little doubt that the LTTE engages in terrorist acts and combating it requires special measures. However, renaming Sri Lanka’s complex conflict a ‘war on terror’ may leave little space for the reasoned analysis required to understand and address the root causes of the conflict so as to ensure a lasting political solution that would underwrite sustainable peace. The quarter of a century-long conflict in the country cannot be solved by military means alone. It would require a political solution that ensures power-sharing with the minorities in the north and east. Otherwise the LTTE would very likely regroup and return to fight another day, as has occurred in the past. However, because the current regime in Colombo has key nationalist parties as its allies, it seems unlikely that it would be able to deliver a genuine power sharing package at this point in time. The All Party Representatives Committee, convened almost three years ago to formulate a political solution, has yet to deliver a solution acceptable to all Sri Lankans, particularly the island’s minority communities.

Epilogue Arguably, it was in recognition of the collateral damage that the global ‘war on terror’ inflicted on democratic rights, values and the rule of law that United States President Barack Obama, in his inauguration speech, signalled a change in strategy and method to deal with threats to peace, “As for our common defense, we reject as false the choice between our safety and our ideals. Our founding fathers faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world and we will not give them up for expedience’s sake”. The global ‘war on terror’ may no longer be expedient for states that are required to address complex domestic identity conflicts through genuine power sharing agreements.

oooOOOoo References Horowitz, Donald, 1989, “Incentives and Behaviour in the Ethnic Politics of Sri Lanka and Malaysia”, Third World Quarterly October, 1989. Sen, Amartya, 1993, “Capability and Well being” in The Quality of Life. Amartya Sen and Nussbaum, Martha C. eds. Oxford. Clarendon Press. Sidel, John, 2007, “Riots, Pogroms, Jihad: Religious Violence in Indonesia”. Cornell University Press.

ISA S Insights No. 46 – Date: 29 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

President Barack Obama, the United States and the Sino-Indian Balance C. Raja Mohan 1 As President Barack Hussein Obama begins to revamp United States (US) foreign policy, the debate in South Asia has focused on one seemingly simple question – Will Obama depart from his predecessor George W. Bush and re-hyphenate US policies towards Islamabad and New Delhi as part of a new strategy towards the sub-continent? A less-debated second question, however, could be far more consequential for the Indo-US relationship and for the future of balance of power in Asia. Will Obama de-hyphenate India from China in crafting a new policy towards Asia? Within 48 hours of taking charge, President Obama and his Secretary of State, Hillary Clinton, muddied the answers to the first question when they announced that veteran diplomat and trouble-shooter, Richard Holbrooke, would be “US Special Representative for Afghanistan and Pakistan”. 2 The Obama-Clinton decision not to include either India or its dispute with Pakistan on Kashmir in Holbrooke’s mandate has been widely seen as a major success for New Delhi’s lobbying power in Washington. American South Asia hands who were hoping for a comprehensive and integrated regional approach that saw the interconnections between Afghanistan and Kashmir were clearly disappointed at the Obama team’s reluctance to displease India. 3 New Delhi, however, will not be impressed by the left-handed compliments in Washington about India’s capacity to influence the Obama Administration. It is acutely conscious of the reality that there always has been and there always will be a triangular dynamism between India, Pakistan and the US. Whether India and Kashmir are a formal part of the Holbrooke mandate or not, New Delhi knows that India-Pakistan relations will indeed figure prominently in US policy towards the region. New Delhi’s challenge now lies in finding

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 on-going 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. For a transcript of Secretary of State Hillary Clinton’s announcement on 22 January 2009, see, http://www.state.gov/secretary/rm/2009a/01/115297.htm accessed on 28 January 2009. Laura Rozen, “India’s stealth lobbying against Holbrooke’s brief”, 23 January 2009, available at http://thecable.foreignpolicy.com/posts/2009/01/23/india_s_stealth_lobbying_against_holbrooke accessed on January 28, 2009.

ways to work with the US as Washington devotes greater attention to what Obama calls the central front in the war on terror – the borderlands between Afghanistan and Pakistan. 4 New Delhi is even more acutely conscious of the fact that the nature of the Sino-American relationship has always been a powerful determinant of India’s security environment in its immediate neighbourhood as well as Asia. India’s apprehensions on Obama’s policies towards Pakistan and China underscore President Bush’s very positive legacy on US relationship with India. It is not for nothing that Indian Prime Minister Manmohan Singh chose to publicly express India’s deep affection towards President Bush who engineered two big changes in American geo-political thinking about India. President Bush declared that he would not view New Delhi through the narrow prism of its conflict with Islamabad. Instead, he promised to deal with India as a rising power that had the potential to reshape the Asian balance of power and contribute to the management of all major global issues. These two premises were clearly articulated during Bush’s presidential campaign in 2000 by his would-be national security adviser, Condoleezza Rice. 5 These were translated into the policy domain in the first and controversial national security strategy document of the Bush Administration released in 2002. 6 Under the first premise, President Bush took Jammu and Kashmir off the table in US engagement with India and embarked on separate strategies to improve relations with both Pakistan and India. 7 The second led to a conscious strategy of strengthening New Delhi as part of the effort to secure a new balance of power in Asia and the world, according to the Bush Administration, in favour of freedom. 8 Yet in his first term, President Bush found it impossible to elevate India to a new level of importance in US strategic policy making. The events of 9/11 helped bring Pakistan back to the centre-stage of US policy towards South Asia and the new preoccupation with Afghanistan and Iraq meant Washington needed a reasonable relationship with Beijing. It was at the very beginning of the second term that President Bush began to put a new emphasis on India enlarging New Delhi’s room for manoeuvre with both Pakistan and China. In March 2005, the Bush Administration announced its intent to assist India in its rise to great power status. 9 This was followed by two very important agreements between Washington and New Delhi. The first was a 10-year defence cooperation framework that opened up the sale of advanced American weapons to India and defined joint missions by the armed forces of the two countries. The other was the now well-debated civil nuclear initiative that sought to end India’s three and a half decades of isolation from the global non-proliferation regime. Together they marked a fundamental transformation of how the US viewed India. 10 America’s decision to sell advanced weapons to India and maintain the Western arms 4

See C. Raja Mohan, “How Obama can get South Asia right”, in The Washington Quarterly, Vol. 32, No. 2, April 2009, forthcoming. Condoleezza Rice, “Promoting the National Interest”, Foreign Affairs, Vol. 79 No.1, January-February 2000, pp. 45-62. The White House, The National Security Strategy of the United States of America (Washington DC: 2002), section VIII. Available at <www.whitehouse.gov/nsc/nssall.html> accessed on 15 January 2009. For an assessment of this policy, see, Ashley Tellis, “The Merits of Dehyphenation: Explaining U.S. Success in Engaging India and Pakistan”, The Washington Quarterly, Vol. 31, No.4, Autumn 2008, pp. 21-42. Condoleezza Rice, “The Promise of Democratic Peace: Why Promoting Freedom is the only Realistic Path to Security”, Washington Post, December 11, 2005 available at <http://www.washingtonpost.com/wpdyn/content/article/2005/12/09/AR2005120901711.html> accessed on 28 January 2009. See the “Background Briefing by Administration officials on U.S.-South Asia Relations”, Washington DC, March 2005; available at <http://www.state.gov/r/pa/prs//ps/2005/43853.htm> accessed on 15 January 2009. For details, see, C. Raja Mohan, Impossible Allies: Nuclear India, United States and the Global Order (New Delhi: India Research Press, 2006).

embargo against China underlined the essence of US commitment to alter the Sino-Indian balance in New Delhi’s favour. The nuclear deal, in turn, ended the long dominant perception of nuclear equivalence, in American and international eyes, between India and Pakistan. India had long sought a nuclear differentiation between itself and Pakistan, and President Bush allowed the realisation of this objective much to the discomfiture of both Islamabad and Beijing. Given this background, President Obama’s promise to repudiate many of the Bush Administration’s foreign policies did create anxieties in New Delhi that both the triangular relationships – the one between the US, India and Pakistan, and the other between Washington, Beijing and New Delhi – might face turbulence. While the triangle involving Pakistan invariably stirs political passions in New Delhi, it is the other involving China that may define India’s strategic environment in more enduring ways. Throughout the last six decades, the twists and turns in Sino-US relationship have had major effects on India’s security environment. As rising powers, China and India are bound to have many areas of difference with the US. But both of them value their bilateral ties with the dominant power in the international system. Not surprisingly, Beijing and New Delhi are also deeply wary about Washington’s ties with the other. Even the subtlest shift in US policy towards Asia causes intense reactions from New Delhi and Beijing. Recall June 1998, a month after India’s nuclear tests, when President Bill Clinton travelled to Beijing and declared that the US and China would work together in reversing India’s nuclear programme. In a visceral reaction, New Delhi denounced what it called the attempt to create a Sino-American condominium over Asia. 11 Under President Bush, it was Beijing’s turn to protest the deepening Indo-US relationship. Analysts in Beijing believed that the Indo-US nuclear deal was less about energy and more about building an anti-China alliance between the two nations. No wonder Beijing was extremely reluctant to endorse the nuclear deal at the Nuclear Suppliers Group, and many in India suspected it of attempting to undercut it from behind the scenes. 12 Under President Bush, Beijing also warily watched the significant expansion of defence and security ties between New Delhi and Washington. Beijing also noted with apprehension the Japanese proposal to build an alliance of Asian democracies, including the US, India and Australia. China was also angry at the large five-nation naval exercises that India convened in September 2007 in the Bay of Bengal that included the US, Japan, Australia and Singapore. Despite their many reservations about the Bush Administration, both New Delhi and Beijing had reasons to prefer Republican nominee John McCain over Obama in the November 2008 elections. New Delhi and Beijing see the Republicans as less protectionist and more committed to free trade than the Democrats. The two nations also believe that while it is possible to engage the Republicans on a broad-based geo-political understanding, the Democrats tend to be more inchoate and driven by the disparate agendas of the many single issue groups that dominate the left liberal spectrum of American politics. If Beijing is angered by the liberal noises on human rights in Tibet, New Delhi is irritated by the talk of renewed American activism on Kashmir under the Obama Administration. Both China and 11

Ted Galen Carpenter, “Roiling Asia: U.S. Coziness with China Upsets the Neighbors”, Foreign Affairs, Vol. 77, No. 6, November-December 1998, pp. 2-6. For an Indian view, see, Bhaskar Roy, “China Unmasked – What Next?”, South Asia Analysis Group Paper No 2840, 12 September 2008. Available at < http://www.southasiaanalysis.org/papers29/paper2840.html > accessed on 28 January 2009.

India are leery at the prospect of greater emphasis on climate change in Washington and the consequent pressures on them to contribute to carbon reductions. While there are many issues on which Beijing and New Delhi might find themselves at the same receiving end from Washington, it is the nature and strength of US political relationship with the other Asian power that generates some concern in both capitals. From the Indian perspective, the following are some of the factors that could shape the triangular relationship with China and the US in the next four years. The first is the broad philosophical understanding of the Obama Administration about China and India. In the first peek into the foreign policy of the Obama Administration, Hillary Clinton suggested some continuity in the Bush policy towards India and China. She listed India among US friends and allies in Asia, after Japan, Korea and Australia. Mrs Clinton said, “We will build on our economic and political partnership with India, the world's most populous democracy and a nation with growing influence in the world.” China, however, remains in the doubtful category of neither friend nor foe. Clinton reaffirmed American commitment to build good relations with Beijing but insisted that “this is not a one-way effort. Much of what we will do depends on the choices China makes about its future at home and abroad.” 13 Clinton’s formulations on China and India were surprising given the widespread criticism in Washington, especially among the Democrats, of the Bush premise of building up India as a counter to China. Beijing’s decision to censor the derogatory reference to communism in President Obama’s inaugural address underlined the irresolvable ideological differences between Washington and Beijing. 14 While the Democratic Party too tends to value Indian democracy, it is prone to seeing the importance of China in managing the larger American interests around the world, especially during the current global financial crisis. That brings us to the second factor shaping the triangular relationship. Although both China and India are rising powers, the weight of the former is far stronger in the global economy and must necessarily be expected to figure much higher than India in the changing American calculus on global economic management. It is also not surprising that China might be in a better position to take advantage of the geo-political consequences from the weakening of the US and the West than India is. 15 Amidst the financial crisis that have enveloped the world since 2008, a growing number of American analysts have begun to call for a deeper partnership between the US and China to manage and stabilise the world economy. Many of these analysts point to the extraordinary complementarity of interests between the US and China and underline the importance of creating a new structure of Sino-American cooperation. Historian Niall Ferguson has called it “Chimerica” and other strategic thinkers such as Zbigniew Brzezinski, who served as national security adviser to President Jimmy Carter during 1977-81, have declared that Washington must tend to its relationship with China as the most important 21st century partnership, or simply the Group of Two (G-2), in the

See the statement by Secretary of State-designate Hillary Clinton at the Senate confirmation hearings, 13 January 2009, available at < http://www.state.gov/secretary/rm/2009a/01/115196.htm> accessed on 28 January 2009. See for example, Anne Applebaum, “Democracy They Can’t Imagine”, Washington Post, 27 January 2009; available at < http://www.washingtonpost.com/wp-dyn/content/article/2009/01/26/AR2009012601850.html> accessed on 28 January 2009. Roger Altman, “The Great Crash, 2008: A Geopolitical Setback for the West”, Foreign Affairs, 88, No. 1, January-February 2009, pp. 2-14.

management of the world. 16 India has every reason to worry at the talk of a G-2, which has the potential to undermine the very basis of the Indo-US strategic partnership in Asia and which could relegate India to the status of a bit player on the world stage. Throughout the Bush period, US strategy was to hedge against China’s rise by strengthening other powers in the region, especially Japan and India. If the formation of the G-2 were to become the core strategic objective of the US, from a global and economic perspective there would no longer be a case for a strong Indian counterweight from the American perspective. Contrary to widespread expectations in Washington, the financial crisis has become the source of the first major discord between the Obama Administration and Beijing. In his Senate confirmation hearings as the new Secretary of Treasury, Timothy Geithner accused China of manipulating its currency to the utter disadvantage of the US. Beijing reacted quickly to dismiss these allegations and pointed out that the US needs China’s cooperation in managing the global financial crisis. Although the White House has sought to downplay the issue, it is unlikely to go away. 17 The squabbling between Washington and Beijing on global finance does not necessarily reflect the future direction of the Sino-US relationship. Both of Obama’s predecessors had started off on a hostile note against China, but ended their tenure with a deeper engagement with Beijing. President Clinton, who had called the Chinese leaders the ‘Butchers of Beijing’ for their 1989 Tiananmen Square crackdown, oversaw the creation of a permanent trading relationship with China, eased Beijing’s entry into the World Trade Organization, and proclaimed a strategic partnership with China to the discomfiture of both Japan and India. President Bush in turn began by questioning the strategic partnership with China but concluded his term by claiming his success in managing the relationship with Beijing as a major foreign policy triumph. President Bush made a ‘strategic economic dialogue’ the centerpiece of his engagement with China and refused to attack Beijing for what many Americans perceive as currency manipulation. The Obama Administration, facing a daunting crisis at home, is unlikely to be as indulgent towards Beijing. All indications are that the Obama foreign policy will locate the strategic economic dialogue between the two nations within a broader political and strategic framework. The third factor that could affect the triangular relationship between India, China and the US is the kind of approach that the Obama Administration might adopt towards the construction of a new security architecture for Asia. If the Obama Administration persists with the Bush strategy of hedging against the rise of China, it is likely to strengthen its traditional alliances in Asia and the new strategic partnership with India. If Washington, however, takes the view that China is the most important interlocutor in Asia, it would be compelled to lower the profile of India in its strategic calculus. Many Democrats tend to prefer the idea of developing collective security in Asia. Realists in America, however, see that as a pipe dream. 16

Niall Ferguson, “Team ‘Chimerica’”, Washington Post, November 17, 2008; available at <http://www. washingtonpost.com/wp-dyn/content/article/2008/11/16/AR2008111601736.html> accessed 28 January 2009. See also, Zbigniew Brzezinski, “The Group of Two that could change the world”, Financial Times, 13 January 2009, available at <http://www.ft.com/cms/s/0/d99369b8-e178-11dd-afa0-0000779fd2ac.html> accessed on 28 January 2009. Sebastian Mallaby, “An OPEC Lesson for China”, Washington Post, January 25, 2009; available at <http://www.washingtonpost.com/wp-dyn/content/article/2009/01/23/AR2009012303291.html> accessed on 28 January 2009.

This in turn brings us to the fourth factor – the future of defence ties between New Delhi and Washington forged under the Bush Administration. It is no secret that the Pentagon during the Bush years had been a major champion of stronger relations with India and also the most sceptical about the ‘peaceful rise’ of China. It had issued alarming annual reports on the expanding Chinese military power capabilities. It must be reasonable to expect that the Pentagon will resist any attempt in Washington at developing a China-first strategy in Washington. That Obama has asked the Secretary of Defence, Robert Gates, to continue his work at the Pentagon also assures a measure of policy continuity. However, new tensions between Washington and New Delhi on Pakistan/Afghanistan and other political issues could slow down, if not undermine the blossoming security partnership between the two nations. The fifth factor is the direction of Obama’s policy towards nuclear energy, arms control and non-proliferation. While most top leaders of the Democratic Party, including Senators Obama and Clinton, had supported President Bush’s civil nuclear initiative towards India, there is no doubt that the non-proliferation community in Washington has been strongly opposed to this and many of its leading lights are set to take important positions in the Obama Administration. Although Washington cannot now reverse or undo the Indo-US civil nuclear initiative, there could be new complications. Unlike in the Bush Administration, there is little support for greater worldwide use of civil nuclear energy in the Obama Administration even as a partial solution to the challenge of global warming. If the Bush team was supportive of the civil nuclear deal from a geo-political perspective involving the balance of power between China and India, the bias in the Obama Administration might be towards working with Beijing to strengthen the non-proliferation regime. There is the danger that the Obama team might want to narrowly interpret the various bilateral and international agreements that New Delhi and Washington have agreed to during 2005-08 and constrain nuclear cooperation between the two countries. Any attempt by President Obama to force the Comprehensive Test Ban Treaty and the Fissile Materials Cutoff Treaty could also undermine the current nuclear warmth between New Delhi and Washington. Unlike the Bush Administration that was ideologically committed to missile defence and sharing related technologies with friends like India, the Obama Administration is biased against it. If it turns away from missile defence, Washington would please Beijing but if it persists with the Bush framework, India would have reasons to look forward to stronger high-technology cooperation. The rise of these two Asian giants demands extraordinary political adjustment from among the current great powers, especially the US. As the US juggles its relations with China and India, this triangular relationship is likely to be highly dynamic and will redefine the framework of regional security across the Asia-Pacific region.

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ISAS Insights No. 47 – Date: 30 January 2009 469A Bukit Timah Road #07-01,Tower Block, Singapore 259770 Tel: 6516 6179 / 6516 4239 Fax: 6776 7505 / 6314 5447 Email: isasijie@nus.edu.sg Website: www.isas.nus.edu.sg

The Mumbai Terrorist Attacks: An Assessment of Possible Motives for the Mayhem Ishtiaq Ahmed1 On 26 November 2008, a series of terrorist attacks were launched on India’s megalopolis and financial capital, Mumbai, by suspected members of the Pakistan-based jihadist organisation, the Lashkar-e-Toiba (LeT). While earlier attacks such as the July 2006 Mumbai commuter train bombings had caused 209 deaths,2 the Mumbai attacks attracted greater worldwide attention. The culprits had not only placed the bombs stealthily; they also carried out their operation in a very public manner. For some 60 hours, the Indian security forces battled with the terrorists. Finally only one, Ajmal Amir Kasab, was captured alive. Indian authorities claimed to have found nine dead bodies of the alleged terrorists. The attackers had apparently come from Pakistan’s port city of Karachi, taken the sea route and landed at the Mumbai coast in boats. Indian coastal defence and intelligence apparatuses failed completely to detect them.3 Some writers described the Mumbai attacks as India’s 9/11 because the culprits had deliberately targeted symbols of Indian affluence and grandeur such as the Taj Mahal and Oberoi Trident hotels and places where westerners gathered such as the Leopold Café. Targeting the Jewish centre at Nariman House was certainly meant to create maximum effect and capture international attention. A group calling itself the ‘Deccan Mujahideen’ claimed to have carried out the attacks. Such a label suggested that it was the doing of Indian Muslims having roots or affiliation with Hyderabad Deccan in southern India but the Indian authorities dismissed it as a fake name and a diversion.4 However, it is to be noted that the Indian police had allegedly tortured hundreds of Muslim youths from the Hyderabad Deccan areas during investigation into the bomb blasts some months earlier in that city and some other places; hence the reference to Deccan to indicate resentment against the treatment of the Muslim youths. It has been widely observed that the Indian Muslim minority is economically far behind the other communities, illiteracy is widespread and unemployment is rampant among them. A government study, known as the Sachar Report, pointed out that the economic situation of poor Muslims is worse than the so-called ‘Untouchables’ who have benefited from affirmative action of the government while the Muslims have not been given any assistance by the state in overcoming 1

2 3 4

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. The Mumbai attacks claimed 183 lives. Indian Express, 28 November 2008. Daily Times, 27 November 2008.

their depressed economic situation.5 Considering that Hindu extremists have been targeting Muslims in the recent past, it should not be surprising that the sophisticated and thoroughly executed attacks in Mumbai were facilitated by some Indian Muslims recruited by Pakistanbased militant groups. It is interesting to note that Indian Muslims in general protested against the terrorist attacks. They refused to give a proper Islamic burial to the terrorists and refused permission to bury their bodies in Muslim graveyards. On the other hand, Pakistani and foreign journalists and TV channels visited Kasabâ&#x20AC;&#x2122;s village, Faridkot, in southern Punjab and interviewed his parents, friends and neighbours. They admitted that the man shown on Indian television was indeed Kasab. That created a furore in India. The Indians believed that such evidence sufficed to incriminate him. However, the Pakistani authorities imposed restrictions on any journalists visiting Faridkot. I arrived in Pakistan on 29 November 2008. The trip had been planned months ahead as part of my research for the Institute of South Asian Studies on the role of the military in Pakistan. Eliciting the views of senior Pakistani military officers and other public figures on how they explained the role of the military was my main concern. I also wanted to probe the Indian perceptions of the Pakistani military.6 I used that trip to record reactions to the Mumbai attacks as well. There was no doubt that relations between India and Pakistan had turned dangerously tense. The peace process in which both sides had invested much effort had been subverted. The clouds of war seemed to have descended on the South Asian horizon. Whoever masterminded the Mumbai attacks succeeded in bringing the two countries to the brink of war. What other objectives motivated the attacks? These questions were uppermost in my mind as I followed the media discussions and met well-informed people who could throw light on these concerns. The insights I gained are given below. Within hours after the attacks, Indian Prime Minister Manmohan Singh alluded to Pakistani involvement. Other spokespersons also emphasised such a connection. The initial response from Pakistan was conciliatory and sympathetic, and it offered cooperation.7 Newly-elected President Asif Ali Zardari and Prime Minister Yousaf Raza Gilani denied their government had ordered the attacks. Foreign Minister Shah Mehmood Qureshi was in deep sympathy for the victims and promised full cooperation in investigating the incident. Prime Minister Gilani even agreed, on Indiaâ&#x20AC;&#x2122;s request, to send the Director-General of the Inter-Services Intelligence (ISI), Lt. General Ahmed Shuja Pasha, to India to examine the evidence the Indians claimed they had to prove that the attacks had been carried out by Pakistanis. Later, however, the Pakistan government retracted the offer, presumably under pressure from the military and no one from the ISI was sent to India. In any event, diplomacy forthwith went into action to defuse the situation. While the international community, including key players such as the United States and the United Kingdom, expressed sympathy for India and condemned terrorism, they despatched troubleshooters to the region to urge restraint from both sides. United States Secretary of State Condoleezza Rice and Britainâ&#x20AC;&#x2122;s Prime Minister Gordon Brown were among those who paid

5 6

Sachar Committee Report 2006. Between 29 November and 29 December 2008, I visited Karachi, Lahore and Islamabad. On 29 December 2008, I travelled to New Delhi and finally back to Singapore on 5 January 2009. Daily Times, 28 November 2008.

visits.8 Considering that the two South Asian rivals are nuclear powers, an escalating armed encounter between them could spell disaster not only for the region but for the world as well. The international concerns were understandable. There is little doubt that the Mumbai attacks reinforced Pakistan’s already sullied reputation as ‘a rogue state’, ‘the epicentre of terrorism’, and so on. Former United States Secretary of State Madeline Albright succinctly captured the apprehensions being felt in the United States about Pakistan in the context of the Mumbai attacks when she said, ‘Pakistan has everything that gives you an international migraine. It has nuclear weapons, it has terrorism, extremists, corruption, very poor and it’s in a location that's really, really important to us.’9 In the same statement, Mrs Albright emphasised that President Asif Ali Zardari was trying very hard to deal with the situation. She was expressing a view widely shared by the Bush administration and even India that it was not the elected Pakistani government which ordered the attacks. On the other hand, the role of the military and intelligence agencies remained a matter of speculation. India rejected the official Pakistani position that the attacks had been carried out by non-state or independent actors. This position was stressed by no less than Indian President Pratibha Patil in her address on the eve of India’s independence anniversary. Without naming Pakistan she said, ‘Arguments that terrorism is being perpetuated by independent actors are self-defeating and cannot be accepted. Countries must own up their responsibilities as must the international community in defeating terrorism.’10 Her reiteration of the accusation made earlier by other Indian leaders reflected the frustration that India felt with regard to the denial mode in which Pakistan had been moving after the initial calm and reasonable statements by the government. Such frustration was partly the product of the so-called ‘media war’ between India and Pakistan. Some Indian commentators demanded an all-out military attack on Pakistan, others advocated surgical strikes on the offices and training camps of the LeT – Indian anger had manifestly assumed jingoistic overtones. Pakistani warmongers warned India of dire consequences for any military adventure because Pakistan was after all a nuclear weapon state. Some went on to suggest that the Indian intelligence agencies had masterminded the whole operation with a view to tarnishing Pakistan’s image and exploiting it to order a military offensive. Agitated Indian commentators began to sound even more belligerent and so-called experts counted the troops and weapons on both sides and concluded that India had a definite upper-hand. In reaction, the direction in Pakistani media discussions changed from explaining if there was a Pakistani connection to projecting an imminent threat posed by a belligerent India. Responding to the growing sense of insecurity, Prime Minister Gilani invited all political parties to a national discussion on the perceived Indian threat. A resolution was adopted, which expressed condolences for the loss of lives but the main thrust was on all parties pledging support for the government in case war broke out. Even the Pakistan Taliban, who were engaged in daily violent conflict with government troops, announced that if war broke out, they would fight shoulder-to-shoulder with the Pakistan army. As the days passed by, Indian leaders increased the pressure on Pakistan by demanding that Pakistanis suspected of involvement in the attacks should be handed over to stand trial in 8 9 10

Daily Times, 3 December 2008. Indian Express, 2 December 2008. Tribune, 26 January 2009.

India. As no extradition treaty existed between the two states, Pakistan refused to comply with such a demand. However, it kept assuring India that if evidence was provided which proved the guilt of some Pakistanis, they would be punished severely through due process of law. International pressure mounted on Pakistan as the United Nations declared the Jama’atud-Da’wah, a charitable front organisation representing the LeT (which had formally been banned by Pakistan in 2002) a terrorist origanisation. Pakistan followed suit. Some of the top leaders were put under house arrest and its offices sealed.11 Moreover, India supplied both the United States Federal Bureau of Investigation (FBI) and Pakistan with material it claimed incontrovertibly established the Pakistani origin of Kasab and the other men. The FBI declared the Indian evidence reliable and authentic, and declared that its own independent investigations clearly established a link with the LeT. The Indians again began to demand that Pakistan hand over culprits involved in terrorism in India. The names of the LeT’s chief, Hafiz Muhammad Saeed, and of Jaish-e-Muhammad’s Maulana Masud Azhar, among others, were on the list. Later, the Indian authorities asserted that during interrogations, Kasab had named Zaki-ur-Rahman Lakhvi as his immediate mentor who ordered him to carry out the killings in Mumbai. He as well as another leader of the LeT, Yousaf Muzzamil, were named as directly responsible for masterminding the Mumbai attacks. On 7 January 2009, the Pakistan government admitted that Kasab could be of Pakistani origin.12 Views of senior Pakistani military officers on Mumbai attacks For analytical purposes, one can distinguish between the Sandhurst-type orientation of the erstwhile Pakistan military establishment and changes in a more populist nationalist direction that began to take place after the 1965 war with India. Later, a radical Islamist orientation also took place during Chief of Army Staff General Zia-ul-Haq’s time as president (1977-88). He made concerted efforts to foster a strong Islamist character in the military. After his death in 1988, his successors were not committed to Islamism in any strong ideological sense. Apart from his immediate successor, General Mirza Aslam Beg, who though not an Islamist was a radical nationalist, his successors, the generals Asif Nawaz Janjua, Abdul Wahid Kakkar, Jahangir Karamat and Pervez Musharraf were middle-of-the-road army chiefs who considered Islamism at best a resource they could exploit in some situations. Ordinarily they viewed it as a liability that detracted from the high standards of a professional fighting force. Brigadier (Retd) Yasub Ali Dogar even argued that although General Zia was personally a strict Muslim, his interest in Islamism was more instrumental than ideological. At any rate, it was reported in 2002 that some 30 percent of the officers harboured Islamist sympathies. I was assured by General (Retd) Jahangir Karamat and Lt. General Javed Ashraf Qazi, who had served earlier as Director-General of the ISI and until recently as a federal minister in the outgoing government of General Prevez Musharraf, that following 9/11, the Islamists had been purged from the military and intelligence services. They conceded, however, that retired Islamists could still wield influence as they were part of different networks. Most of the mainstream senior officers were of the opinion that India was largely to blame for continuing to provide the jihadists an axe to grind by refusing to solve the Kashmir issue, notwithstanding the fact that General Musharraf had gone out of the way to placate Indian fears by announcing that Pakistan no longer insisted on the implementation of the United 11 12

Daily Times, 12 December 2008. Daily Times, 8 January 2009.

Nations Security Council resolutions pertaining to Kashmir; and was willing to consider any solution that could reasonably satisfy India, Pakistan and the Kashmiri people. Since that opportunity had been missed the jihadis were again up in arms. A general who did not want to be named made a clean breast of the Pakistan military and ISI’s culpability in creating the Islamist monster that was now striking terror within Pakistan. He said, ‘The Americans wanted us to produce Islamic warriors that could be deployed in the Afghanistan jihad. We obliged without thinking out the consequences such brainwashing would carry for our own society. We trained them to become jihadists. We trained them to kill. We sent them into Afghanistan and in the Indian-administered Kashmir. Now, they have unleashed their terror on our own people. They are killing our soldiers and will stop at nothing to impose their brutal ideology on us. I recently saw a video in which the throat of a man was being split open with a long knife, while some bearded men in the background were shouting “Allah-o-Akbar”. Lt. General (Retd) Naseer Akhtar, who as Corps Commander of Karachi in the early 1990s had considerable experience of dealing with terrorism fomented by the Mohajir Quomi Movement and Sindhi nationalists, was of the opinion that the Mumbai attacks bore the signature of Al Qaeda and that huge amounts of money from Arab patrons must have gone into its preparations. He was of the view that the Kashmir dispute needed an early resolution and converting the Line of Control into some sort of porous border was the only thing the Indians were likely to agree to. He too stressed that the Indian leadership missed a very good opportunity when General Musharraf’s overtures on Kashmir were not given a proper response. A senior officer who until recently held key portfolios in the ISI and was directly responsible for planning national security confided in me on assurances that his identity will not be disclosed that if India had proceeded with military strikes on Pakistan it would have resulted in very extensive losses and damages. He believed that the Indians had gained a lot by behaving as a responsible regional power. He lamented that Islamism and extremism had been imposed on Pakistan because of the Afghanistan jihad. He dismissed suggestions that someone serving at present in the military or the ISI may have ordered the terrorist attacks on 26 November 2008. According to him, Pakistan did not stand to gain anything from such a misadventure. It had much to lose. India derived maximum advantage as a responsible and peace-loving state by not resorting to force while Pakistan was being demonised in the world as a rogue state. He believed that Pakistani Taliban and Al Qaeda had co-operated to carry out the attacks in Mumbai. He was of the view that the extremists had no problem in getting hold of funds to finance their jihad. Huge amounts of money from the drugs trade and donations from Arab patrons in Saudi Arabia and the United Arab Emirates furnished abundant resources and incentives to promote extremism and terrorism. The well-known Islamist, General Hamid Gul, dismissed all suggestions that Pakistan or any Pakistani-based group had carried out the attacks. He asserted that the ISI was wrongly blamed for placing a bomb on the Samjhauta Express in February 2007. Later, it was established by Indian investigators that Hindu terrorists, including some from the Indian military such as Colonel Purohit, were responsible for it. He was emphatic that the Mumbai attacks too were an inside job and Hindu extremists masterminded it. On reports that he had been placed on a terrorist list by the United States General Gul observed, ‘I have been told that after the Mumbai attacks I have been placed on a terrorist list by the Americans. What hypocrisy? When they needed us to fight in Afghanistan, they described us as freedom

fighters; now we are terrorists. I am not worried about such a label being put on me. In fact it is an honour to be declared a terrorist by a government that is guilty of unforgivable crimes against humanity by invading Iraq and Afghanistan. The fact is that socialism failed some years ago. Capitalism is now in tatters. The United States is a power in irreversible decline. The future belongs to Islam.â&#x20AC;? Indian views During my brief visit to India, I was able to interview Lt. General (Retd) Dr B. S. Malik, former Chief of Western Command. He was of the view that since Pakistan lacked strong democratic institutions, it was not surprising that the most efficient organisation in the country, the military, began to call the shots from quite early times. He did not believe that the military had ordered the Mumbai attacks but observed that the situation in Pakistan was out of control. Besides the LeT, any set of conspirators could have been involved in the Mumbai attacks. In meetings with the South Asian Cluster at the Indian Defence Studies and Analysis and the Indian Centre for Land Warfare Studies, it became clear that India had been rudely shaken by the Mumbai attacks. While the experts were aware of the grave dangers a war between the two rivals could pose, they expressed strong scepticism on the normalisation of relations between the two countries unless Pakistan came out clean, co-operated sincerely in the investigation and the culprits were properly punished. An Indian theory about the Mumbai attacks While the market abounds with theories about the intentions and origins of the terrorists, one theory put forth by some senior Indian analysts is presented below since it is reflective of some level of sophistication. It is argued that the Pakistan army was directly involved in masterminding the Mumbai operation. The reason for doing so would be to compel India to send forces to the border with Pakistan. That in turn would provide an excuse to the Pakistan army, whose troops have been suffering heavy casualties at the hands of the Taliban at the Afghanistan border and were not eager to fight them, to disengage from that bloody conflict. If that were to happen, only the United States and the North Atlantic Treaty Organization (NATO) troops, and the poorlytrained Afghanistan soldiers would be left to take the Taliban head on. The Pakistani generals, the Indian analysts argued, were convinced that such a turn of events would result in the defeat of the Americans who would be forced to exit from Afghanistan. That would enable the Taliban to return to power in Afghanistan. From the Pakistani military point of view, once again, the balance of power would be established in favour of Pakistan, theorise the Indian defence experts. Now, intriguing as this theory is, it is too neat to be plausible. Its explanatory power is contingent upon the assumption that once the terrorist attacks take place, the result will unfold according to plan. In other words, the attacks would suffice to set in motion all those necessary reactions for it to achieve the exact results the Pakistan military had calculated. The facts, however, indicate very different reactions. Thus, for example, the primary assumption that India would amass troops on the Pakistan border did not transpire. The Indian government proved smarter than what the Indian experts believed the Pakistanis believed.

Therefore, Pakistan could not disengage its troops from the Afghanistan border and send them to the Indian border. The second assumption that the United States would lose the battle in Afghanistan and thus be forced to decamp remained a matter of something between pure speculation and wishful thinking. The contrary seems more likely to happen. President Barack Obama is much more determined than was his predecessor George W. Bush to crush the Taliban. Within days of assuming office on 20 January 2009, he ordered an air-strike on a suspected Taliban hideout in the Pakistan tribal areas. It resulted in several deaths. More significantly, Vice President Joe Biden declared on 25 January 2009 that the United States will not hesitate to order military action inside Pakistan against â&#x20AC;&#x2DC;an actionable target, of a high-level Al Qaida personnelâ&#x20AC;&#x2122;.13 The main flaw in the theory is that the Indian analysts have not invested enough effort to work out other important implications and ramifications of the Taliban returning to power in Afghanistan. Would not a Taliban government in Afghanistan serve as an incentive to the Pakistan Taliban to extend their writ in Pakistan and make a bid for capturing power? All indicators point out that the Taliban are hell-bent in imposing their version of severe and brutal Islam on Pakistan. Their latest outrages include the destruction of more than 200 girl schools in Swat, stoning to death and beheading of alleged sexual offenders and informers, and abominable treatment of Sufism-oriented Muslims. The News International of Karachi released on 26 January 2009 a Taliban list with 43 names of politicians and representatives from the North-West Frontier Province, whom they want to capture and put on trial and punish according to their version of Sharia. The same newspaper reported that the Pakistan military has ordered a curfew in Swat with orders to kill on sight. Such confrontations have been going on for a long time, and even a casual familiarity with the lifestyle of the Pakistani officer class should leave no doubt that it would go to any extent to preserve its privileges. Colonel (Retd) Aslam Cheema readily agreed that the privileges of the military officers were almost unique in the world and nobody wanted to barter them away for some extremist ideology. Quite simply, the Talibanisation of Pakistan would necessitate a fundamental transformation of the character of the Pakistan military into a jihadist institution constantly on the lookout for going to war with infidels. That is hardly how the Pakistan military sees its patriotic role. A Pakistani theory about Indian support for the Taliban Brigadier (Retd) Dogar drew my attention to a theory upheld by some Pakistani military and defence analysts that the success of the Taliban in their armed conflict with Pakistani forces is indicative of foreign help being rendered to them. Besides drug money and Arab donors, it is suspected that Indian intelligence is actively involved in strengthening the Taliban. India has been establishing several consulates near the Pakistan border in Afghanistan. These serve as sources for the supply of money and materials through clandestine networks to the Taliban. The conflict with the Taliban has been bleeding the Pakistan military the same way that Pakistani militants such as LeT despatched into the Indian-administered Kashmir have been bleeding the Indian military through ambush and sabotage. Quite simply it is tit-for-tat.

Times of India, 26 January 2009.

A close examination shows that such a theory is equally implausible. If India was providing aid to the Taliban, which helped them expand their power and influence, then such a process could end up with the Taliban capturing power in Pakistan as well as control over nuclear weapons. Such an outcome would be far more threatening to India. An all-out war with India would become even more likely as the Taliban represented the most fanatical and irrational branch of radical Islam. Consequently, in any Indian rational calculation, promoting the Talibanisation of Pakistan made no sense. What sort of developments promted the attacks? The civilian, democratically-elected Pakistani government has not shown any willingness to accommodate the Islamist agenda. The Pakistan military has been fighting the Taliban in the tribal areas and Swat, the jihad in the Indian-administered Kashmir has been virtually abandoned, the United States and NATO forces have been provided facilities to conduct their war in Afghanistan, and India and Pakistan have been moving towards greater trade and people-to-people interaction. The Indians seem determined not to make any concessions on Kashmir, however. Moreover it is emerging as powerful regional power backed by the United States. The Israelis continue their ruthless suppresson of the Palestinians. All such developments hurt some interests badly. Whose interests were served most? The Pakistan Taliban, the LeT, its reincarnation Jamaâ&#x20AC;&#x2122;at-ud-Daâ&#x20AC;&#x2122;wah, the Jaish-e-Mohammed in cooperation with Al Qaeda and international donors seem the most likely plotters of the attacks. They share a common ideology even when their operational priorities have differed in the past. Such differences can always be put aside to achieve common goals and objectives. It is possible that the attacks were plotted outside South Asia. Why target Mumbai? Bomb attacks within Pakistan and fighting the Pakistan and United States and NATO troops had become routine. Therefore, a target had to be found that would demonstrate dramatically the power and ability of the Islamists to strike terror wherever they chose. From an Islamist ideological point of view, undermining India as a secular-democratic state would cause widespread communal rioting between Hindus and Muslims, which if it gains momentum, could encourage separatists in the north-eastern Indian states as well as to intensify their struggle, while the Naxalites and other disgruntled elements could exploit such a situation to begin a class war. In such a situation India would disintegrate. That would be some achievement. Even if the longer term gains may not be forthcoming readily, an attack on the symbols of Indian affluence and rise as an economic power would produce maximum effect in terms of global attention. Thus the mayhem in Mumbai would serve that purpose amply. It would serve as a warning to the US and Israel and other Western detractors of Islam. This train of thinking most probably resulted in choosing Mumbai as a target. Could some rogue elements from the Pakistan military and ISI be involved? This is, of course, the most difficult question to answer. As argued earlier, retired Islamists who served in the military and ISI are dispersed throughout Pakistan. Some may still be serving because they were not shunted out. They maintain support networks within Pakistan

as well as in the Arab world and beyond. It is possible that they too were involved in the attacks. Could Hindu extremists or Indian intelligence have masterminded the attacks? While the exact facts are yet to be uncovered about the group involved in the Mumbai attacks, this study has argued that theories suggesting the Pakistan military ordering the attacks or that the Indians helping the Taliban against Pakistan are untenable. Conspiracy theories thrive on irrationalism and sensationalism. The theories that Hindu extremist and/or the Indian intelligence staged the terrorist attacks belong to such a mindset. What great gain could be made by attacking their own symbols of pride and causing the deaths of mostly Hindus besides demonstrating the lack of preparedness of the Indian security services? And to further tarnish Pakistanâ&#x20AC;&#x2122;s reputation as the centre of terrorism? Hindu extremists hardly need to go to such lengths; the Pakistan Taliban have done enough damage already. Such a theory, therefore, must be discarded. What needs to be done? A war between India and Pakistan must be avoided at all cost. To believe that India could fight a limited conventional war without Pakistani committing its nuclear weapons to it can be a fallacy because Pakistani reaction cannot be anticipated with certainty in such an explosive situation. Equally the belief in Pakistan that because both countries possess nuclear weapons, a war between them is impossible could be another colossal miscalculation. Cumulative terrorist attacks on India could provoke India to strike back with force. In such a situation too, a lethal nuclear exchange cannot be overruled. Wisdom suggests that whereas initiating hostilities can be planned, bringing them to an end cannot be predicted. Therefore, both sides must desist from provoking a war. As argued above, it is neither in the interest of the Pakistan military and its political class nor that of India that the Taliban should takeover Pakistan. Pakistan should make all efforts to combat and defeat extremism and terrorism. It would not be an exaggeration to say that these forces will eventually destroy Pakistan and enslave its people to an unreflective, un-intellectual and obscurantist way of life that the Taliban believe is sanctioned by God. The Islamist mindset has been cultivated in far more insidious ways than simply training in jihadist camps. Pakistani educationists and scholars have been pointing out that the educational curricula developed during the time of General Zia imparts anti-India and anti-Hindu prejudices to young people. The distortion of history and the demonisation of perceived enemies that ensue defeat the purpose of education, which is to promote a tolerant and open-minded value system. Therefore, enlightened curricula needs to be developed to enable Pakistanis to think rationally and positively. Most importantly, both India and Pakistan must revive the peace process. India must show courage and leadership in finding a solution to the Kashmir dispute which has rendered the people of these two countries perpetual hostages to destructive nationalism. The dividends from peace in the form of increasing prosperity need not be emphasised. References The Sachar Committee Report on the Social, Economic and Educational Status of the Muslim Community of India, Delhi: Ministry of Minority Affairs, 2006.

Newspapers Daily Times, Lahore, Pakistan The News International, Karachi, Pakistan The Indian Express, Mumbai, India. The Times of India, Delhi, India. The Tribune, Chandigarh, India. Interviews Pakistan General (Retd) Jahangir Karamat, Chief of Army Staff. Lt. General (Retd) Javed Ashraf Qazi, former Director-General ISI Lt. General (Retd) Hamid Gul, former Director-General ISI Lt. General (Retd) Nishat Ahmad Maj. General (Retd) Ghulam Umar Maj. General (Retd) Sarfraz Iqbal Maj. General Athar Abbas, Director-General Inter-Services Public Relations Brigadier (Retd) Yasub Ali Dogar, former ISI Head of Afghanistan Desk Colonel (Retd) Aslam Cheema Colonel (Retd) Imam India Lt. General (Retd) Dr B. S. Malik, Former Chief of Staff Western Command Discussions Brigadier (Retd) Gurmeet Kanwal Brigadier (Retd) S. K. Saini Dr Arvind Kumar Gupta, Indian Foreign Service Colonel Arvind Dutta Wing Commander Krishnappa Comd Cndd Om Prakash Jha Dr N. Manoharan Dr Ashok Kumar Behuria Dr M. Mahtab Alam Rizvi Dr Shah Alam Dr Ravi Prashad Narayanan Dr Udal Bhanu Singh Ms Sumita Mr Vishal Chandra Mr Nihar Nayak Mr. Vinod Kumar Ms Sewonti Ray Dadwal

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ISAS Insights No. 48 – Date: 2 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

Indian General Elections 2009 – National and Regional Political Parties, their Leaders and Strategies Paranjoy Guha Thakurta 1 Preface India will hold its 15th general elections in April/May 2009. The elections will take place in challenging circumstances. A variety of cross-cutting political, security, economic and sociocultural issues will influence the elections. The exercise will be impacted by multiple parties, personalities and positions from India’s vast political spectrum. As India moves into the election mode, the Institute of South Asian Studies will bring out a series of papers analysing different aspects of the forthcoming elections. These will include, among others, the key national and regional parties, and their strategies, key political personalities, and the issues that are likely to have an impact on the elections. This paper, the first in the series, provides an overview of India’s main political parties participating in the elections, along with their strategies and key leaders. Introduction For two decades up to 2004, one of the most significant aspects of India’s polity was the decline of the centre-left Indian National Congress and the rise of the Hindu nationalist, rightwing Bharatiya Janata Party (BJP), the two largest political parties in the world’s largest democracy. The 2004 general elections, the 14th in the country, saw the position of the Congress improve for the first time since 1991 – it became the single largest party in the Lok Sabha or the Lower House of Parliament (winning 145 out of 543 seats). In 2004, for the first time in two decades, the BJP lost ground with the number of members of Parliament owing allegiance to the party coming down from 182 to 138. From 1996 onward, no government in New Delhi has been formed by a single party – each government has been run been run by a coalition of parties. Although two coalitions, one led by the Congress, called the United Progressive Alliance (UPA), and the other by the BJP, 1

Mr Paranjoy Guha Thakurta is a Journalist and Founder of the “School of Convergence” in India. This paper was prepared as part of an on-going consultancy project for the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. Mr Thakurta can be contacted at paranjoy@gmail.com.

called the National Democratic Alliance (NDA), dominate the Indian polity, it would not be accurate to describe India’s polity as bipolar with smaller parties, including regional parties and caste-based parties, having no choice but to become appendages of either the BJP or the Congress either before or after the elections. A non-Congress, non-BJP political formation, with outside support from the Congress Party, called the United Front, was in power between 1996 and 1998. Such formations, amorphous though their composition may be, could continue to exert influence on the working of the polity. Political parties in India are becoming increasingly adept at managing contradictions and are now even able to co-exist at the Union or federal level with their major rivals in the provinces or states. The two largest political parties together (minus their allies and coalition partners) obtained roughly half the votes cast in successive general elections that were held in 1996, 1998, 1999 and 2004. The remaining votes were cast in favour of dozens of political parties, some of which have opportunistically switched allegiance between the UPA and the NDA coalitions. Such patterns of voter behaviour could continue in the forthcoming 15th general elections scheduled for April/May 2009. Key National Parties Indian National Congress The Congress is India’s ‘grand old’ political party that was set up in December 1885. It is the only major Indian political party in which a substantial section still believes it can singlehandedly rule a diverse country like India. After independence in 1947, the leadership of the Congress has been dominated by the Nehru-Gandhi family. The assumption of the reins of the party in 1998 by Sonia Gandhi, the Italy-born widow of former Prime Minister Rajiv Gandhi, and the gradual rearing and induction of her son, Rahul Gandhi, as general secretary of the party, have reinforced this view of the Congress. Though it is not at all certain that 38year-old Rahul Gandhi will be projected as the Prime Ministerial candidate of the Congress, he is playing an increasingly proactive role in the party’s affairs. What has been a source of considerable worry for the Congress is its dramatic decline and marginalisation in the northern Indian states of Uttar Pradesh (the country’s most populous province) and Bihar. In the recent past, sections of the population, including minorities (such as the Muslims), the scheduled castes and scheduled tribes, are not supporting the Congress as communities or ‘vote banks’. After the general elections of 2004, the centre-left UPA coalition led by the Congress, formed the government in New Delhi with crucial ‘outside’ support from a group of 60-odd members of parliament belonging to four Left parties, led by the Communist Party of India (Marxist) [CPI-M] on the basis of a national common minimum programme (NCMP). On 22 July 2008, the UPA won a vote of confidence in the Lok Sabha after parting ways with the Left, following a bitter dispute over the nuclear agreement between India and the United States, and after obtaining the support of the regional Samajwadi Party and with the help of ‘defectors’ who voted across party lines. Sonia Gandhi It was only after the Congress lost power in the 1996 general elections that Sonia Gandhi became a primary member of the Congress. She officially took charge of the Congress Party as its president in 1998 and was elected to the Lok Sabha from Rae Bareilly, Uttar Pradesh, in 1999. She became leader of the Opposition in the 13th Lok Sabha in 1998. After the results of

the 2004 general elections were announced, she was unanimously chosen to lead a 15-party coalition government with the support of the Left. Instead of becoming Prime Minister, she nominated Dr Manmohan Singh to lead the Union government in New Delhi. She, however, retained the post of chairperson of the UPA and president of the Congress. She also headed a National Advisory Council, a body comprising eminent persons with different areas of expertise that was set up to advise the government and interface with civil society on the implementation of the NCMP. The NCMP later became virtually defunct following a controversy over whether legislators could hold an ‘office of profit’. Most political observers have perceived her as not merely the de jure leader of the Congress and the UPA but the de facto head of the government, although she has always argued that the Prime Minister is the head of the government of India. Manmohan Singh Dr Manmohan Singh is India’s 17th Prime Minister and the first one never to have won a Lok Sabha election – he lost the only one he contested in 1999. He has been a Congress member of Parliament in the Upper House of Parliament, the Rajya Sabha (from Assam in north-east India) since 1991 and is known as the ‘architect of economic liberalisation’ during his tenure as Finance Minister between 1991 and 1996 in the P. V. Narasimha Rao government. Perhaps the most controversial decision he took as Prime Minister was the signing of the India-United States civilian nuclear cooperation agreement with the George W. Bush Administration in 2008 when he drew flak from several political parties (in particular, the Left) who endorsed the view that the deal would compromise the country’s sovereignty and its ability to develop its own nuclear weapons programme. Seeking to counter the claim of his political opponents that he was ‘weak’, Dr Singh asserted his position after the UPA government headed by him won a vote of confidence in Parliament in July 2008. Strategy The Congress party is emphasising its economic achievements in the run-up to the elections. These include the fact that India’s economy grew by nearly nine per cent each year four years in a row for the first time since the country became politically independent in 1947; the farm loan waiver scheme; the National Rural Employment Guarantee programme that legally assures a minimum of 100 days of manual work to each family in rural areas; the enactment of the Right to Information Act; and the strengthening of the country’s ‘energy security’ after the nuclear agreement with the United States. Bharatiya Janata Party The BJP has for long rightly been perceived as the political wing of the ‘social organisation’ called the Rashtriya Swayamsevak Sangh (RSS). The BJP has periodically toned up or subdued its Hindu nationalist rhetoric to come to power and retain it. The party’s leadership took pains to project a more moderate and secular face, while the BJP-led NDA was in power in New Delhi even though the veneer kept slipping from time to time. After its debacle in the 2004 general elections, the BJP has found it difficult to reconcile itself to the fact that it has lost power. The BJP, that once prided itself on its discipline, is today seen as faction-ridden and corrupt as any other political party and has lost whatever claims it had to being ‘a party with a difference’. The party has also been accused of narrow parochial activities when it was in power: saffronising education, controlling the organs of the State, reworking caste equations, living down the past and legitimising the ‘Hindutva’ agenda.

In Atal Behari Vajpayee, the BJP gave India its first Prime Minister who had never been a member of the Congress party. After the defeat of the NDA in the 14th general elections held in April-May 2004, Vajpayee quietly slipped into the shoes of the ‘elder statesman’ and, of late, has not been keeping good health. In recent months, the BJP has found itself in the throes of internal power struggles time and again. In January 2009, former Vice President of India, 84-year-old Bhairon Singh Shekhawat (and the senior-most leader of the party by age), said he was not unwilling to contest the 2009 Lok Sabha elections. His move was perceived by political observers as an attempt to challenge L. K. Advani who is the party’s Prime Ministerial candidate though he denied this was his intention. L. K. Advani L. K. Advani, the president of the BJP for three separate terms, is also leader of the Opposition in the 14th Lok Sabha. He was second-in-command in the Vajpayee government holding the rank of Deputy Prime Minister over and above the post of Union Minister for Home Affairs. In 1989-90, Advani turned the BJP into a significant force in Indian politics by undertaking a ‘rath yatra’ (chariot tour) to mobilise public support for the building of a temple dedicated to Lord Rama at Ayodhya at the site where the 11th-century Babri mosque had stood. The yatra culminated in the demolition of the mosque on 6 December 1992 that adversely affected India’s image as a secular nation-state. More recently, while touring Pakistan in June 2005, Advani made apparently laudatory remarks about Mohammed Ali Jinnah, the founder of Pakistan, which created a huge controversy in his own party. Many interpreted his remarks as an attempt to make the BJP a party that would be ‘acceptable’ to India’s minorities, especially Muslims. Within the BJP, Advani has always had a reputation of being widely-read and, contrary to his public image as a hawk, he is believed to be a liberal and an agnostic of sorts. Strategy The BJP is attacking the Congress and the UPA primarily on the issue of inflation, for being ‘soft’ on terrorists and for having compromised the country’s sovereignty by signing a nuclear deal with the United States. The party further claims the UPA government is corrupt and has not been able to effectively govern the country as well as the NDA governments earlier did. Key Regional Parties Political parties with a base only in specific regions or states have been around for as long as India has been independent. Until recently, such parties often appealed to narrow, parochial sentiments of the electorate in particular parts of the country or even to a specific section of people within that geographical area. In recent years, many regional parties have acquired a national outlook just as the two large national political parties, the Congress and the BJP, have had to become more sensitive to the demands and aspirations of these smaller parties, particularly if they are coalition partners or provide outside support to governments. Samajwadi Party and Bahujan Samaj Party The two main regional political parties in Uttar Pradesh, India’s most-populous state that elects 80 out of the 543 Lok Sabha members of Parliament, are the Samajwadi Party (SP) and the Bahujan Samaj Party (BSP). The fact that the Congress and BJP have become marginal

political forces in the state is to a large extent responsible for India entering a phase of coalition politics since 1996. The SP appeals to a constituency that is largely caste-based. Headed by Mulayam Singh Yadav, it has drawn sustenance from the Muslim-Yadav combine that consolidated following the demolition of the Babri mosque in the state in December 1992. The Yadavs are considered a numerically significant and influential middle caste, especially in Uttar Pradesh. The BSP has, from its very inception, defined itself as a party of the low-caste ‘dalits’ and other oppressed castes. It has made no bones about the fact that it has no compunctions about aligning with anybody in its attempts to come to power. It has, in the last decade, made alliances with the SP, the Congress and the BJP at different points of time in Uttar Pradesh. Both the SP and the BSP are now attempting to expand beyond their sectarian vote banks and reach out to new sections. The BSP has actively wooed sections of the upper castes like the Brahmins though it was once staunchly in opposition to the upper castes. The SP’s attempts at expanding its support base have been less blatantly caste-based. Mulayam’s right-hand man in the SP, Amar Singh, has spearheaded the effort to woo important individuals from different parts of the country, including industrialist Anil Ambani and popular film actor Amitabh Bachchan. On 8 January 2008, the SP announced the candidature of Sanjay Dutt, another ‘Bollywood’ star who was convicted in the 1993 Mumbai bomb blasts case, from the Lok Sabha constituency of Lucknow, the capital of Uttar Pradesh. Even as the SP attempts to widen its appeal, its critics have pointed out that it is becoming increasingly desperate about retaining the support of the Muslims and in the process encouraging fundamentalist elements from within the community. Even after it supported the UPA to win the 22 July 2008 vote of confidence, the SP’s relations with the Congress are less than cordial. It appears that, in 2009, it will be difficult for the SP to be able to repeat its 2004 electoral performance when the party won 35 out of the 80 Lok Sabha seats from the state. Mayawati Kumari The rise of Mayawati Kumari in Indian politics has been truly phenomenal. Her political career formally began with the establishment of the BSP in April 1984. Following the victory of the BSP in the 2007 assembly elections in Uttar Pradesh, in her fourth stint as Chief Minister, she appears to have become more politically influential. The BSP had won 19 Lok Sabha seats from the state in 2004 and appears all set to improve its performance in 2009. Mayawati has made no secret of her ambition to one day become the Prime Minister of India. The BSP, the four parties led by the CPI-M comprising the Left, the Telugu Desam Party and the All India Anna Dravida Munnetra Kazhagam (AIADMK) could together form an important ‘third front’ if these parties perform well in the forthcoming fifteenth general elections. Left Parties There are four major Left parties in Indian politics – the two communist parties, the CPI-M, the Communist Party of India, together with the Revolutionary Socialist Party, and the All India Forward Bloc. These parties that are part of the Left Front have been running the state government in West Bengal since 1977, a record in Indian politics, and also have a similar formation in Tripura (in north-east India) and in Kerala. The 2004 general elections saw the Left becoming more powerful than ever before in national politics with the four parties obtaining 61 seats in the Lok Sabha. The Manmohan Singh government, formed by the

Congress-led UPA coalition, was completely dependent on the ‘outside’ support extended by these four Left parties for a majority in the Lok Sabha. However, in July 2008, the Left withdrew its support to the UPA over the signing of the nuclear deal between India and the United States. The public outcry and agitations over acquisition of land for setting up industrial ventures in Singur and Nandigram in West Bengal and infighting within the CPI-M in Kerala has hurt the image of the Left in these two states and elsewhere. The Left would find it exceedingly difficult to retain all the Lok Sabha seats it has at present. Strategy The CPI-M general secretary, Prakash Karat, has intensified his party’s attacks against the Congress and is attempting to stitch together a so-called anti-Congress, anti-BJP ‘third front’ that would include the BSP, the Telugu Desam Party (TDP) and the AIADMK. In its campaigns, the Left is emphasising the inability of the UPA government to control inflation, its ‘pro-rich’ economic policies, its alleged compromise with ‘American imperialism’ (including the nuclear deal) and for allegedly encouraging corruption. Rashtriya Janata Dal and Janata Dal (United) The Rashtriya Janata Dal (RJD) is led by Union Railways Minister Lalu Prasad Yadav and the Janata Dal (United) [JD(U)] is headed by the current Chief Minister of Bihar Nitish Kumar. The RJD and the JD(U) are the two principal political parties in the state of Bihar; the former is supported by the Congress and the latter by the BJP. After Lalu Yadav had to resign his post as Chief Minister of Bihar in 1997 when corruption charges were levelled against him, he ensured that his party nominated his wife, Rabri Devi, as his successor. She thus became the first woman Chief Minister of Bihar. The social support base of the RJD in Bihar, like that of the SP in Uttar Pradesh, is largely among the Yadavs and the Muslims. Lalu Yadav has carefully cultivated his image of being a rustic buffoon and has certainly been one of the most media-savvy politicians in India. In recent months, he has taken considerable credit for having improved the working of the Indian Railways. Nitish Kumar, who became Chief Minister of Bihar for the second time in 2005, has sought to improve the performance of the state government that is notorious for its sloth, inefficiency and corruption. However, the manner in which those affected by the devastating floods that took place in the Kosi river in the state in August 2008 were provided relief and were rehabilitated by the state government has attracted considerable criticism. Nevertheless, the JD(U) is expected to improve its performance in the 15th general elections. In 2004, the party won only six out of the 40 Lok Sabha seats in Bihar, with the RJD winning 22. Telegu Desam Party N. T. Rama Rao founded the TDP in Andhra Pradesh in 1982. In 1996, his son-in-law, N. Chandrababu Naidu, split the party and eventually took over the reins (even before Rama Rao died that year). He turned out to be a durable and opportunistic politician who, in 1998, switched his party’s allegiance from the centre-left United Front to the BJP-led NDA. He sought to promote his state as a hub for information technology. He was perceived to be elitist, as a result of which his party lost the 2004 state assembly elections to the Congress that was led in the state by Y.S. Rajsekhar Reddy who personally campaigned against the

TDP by walking from village to village. Out of power, Naidu was contrite and apparently apologetic for having ignored the poor. He later tried briefly to revive a ‘third front’ by aligning with the SP and making overtures to the Left by distancing the TDP from the BJP. He is now being supported by the Left as well as by a sub-regional party, the Telengana Rashtra Samithi (that demands that the state be bifurcated and the Telengana region be made into a separate state). The TDP won only five out of the 42 Lok Sabha seats in Andhra Pradesh in 2004. However, Naidu’s electoral prospects have looked up since the incumbent Rajsekhar Reddy government has been accused of having favoured the Satyam group of companies that is embroiled in a major financial scandal. Dravida Munnetra Kazhagam and the All India Anna Dravida Munnetra Kazhagam The Dravida Munnetra Kazhagam (DMK) and the AIADMK are the two principal political parties in the southern Indian state of Tamil Nadu. The two have exchanged positions to head the state government for more than two decades on account of strong anti-incumbency sentiments that have prevailed in the state. The DMK, formed in 1949, is headed by current Chief Minister of Tamil Nadu, M. Karunanidhi. The AIADMK was formed in 1972, when M.G. Ramachandran broke away from the DMK. He sought to project the image of the AIADMK as a party of the downtrodden. After Ramachandran’s death in 1987, J. Jayalalitha emerged as the leader of the AIADMK. The language issue (Tamil versus Hindi) and the Dravidian movement that spawned the two parties had been the catalyst that precipitated the decline of the Congress in Tamil Nadu and the ascendance of the Dravidian parties. In recent years, both the DMK and the AIADMK have been opportunistic in aligning themselves with both the Congress and the BJP, and being part of coalitions led by the two contending national parties. The incumbent regime in the state led by the DMK is expected to lose ground in the coming general elections. Allegations of corruption have been levelled against two important DMK ministers in the Manmohan Singh government in New Delhi – Surface Transport Minister, T. R. Baalu, and Communications and Information Technology Minister, A. Raja. The AIADMK, which is presently being supported by the Left, expects to improve its performance significantly after the 15th general elections. The party has no representation in the Lok Sabha at present; it had 18 members of parliaments (out of 39 from the state) after the 1998 elections and 10 members of parliament after the 1999 general elections. Biju Janata Dal Current Chief Minister of the eastern Indian state of Orissa, Naveen Patnaik, entered politics after his father Biju Patnaik’s death in 1997. That year, the Janata Dal in Orissa split to form the Biju Janata Dal (BJD) under his stewardship. In alliance with the BJP, the BJD has been in power in the state since 1999. In his second term as Chief Minister, Naveen Patnaik’s government has been criticised for its inability to prevent a series of attacks against the Christian community in different parts of the state in 2008. Patnaik has attempted to attract major investments to Orissa, especially for mining and steel projects. He has matured as a politician and is no longer a person dependent entirely on his father’s legacy. However, he has a long way to go before he is able to improve the economic condition of the majority of the people living in Orissa. Still, the BJD may perform creditably in the coming elections. In 2004, the party won 11 out of the 21 Lok Sabha seats in the state, with its partner winning in seven constituencies.

Trinamool Congress In September 1997, Mamata Banerjee broke away from the Congress in West Bengal and formed the Trinamool Congress. In the 1998 general elections, she threw her weight behind the BJP-led NDA and was subsequently made Union Minister for Railways. In March 2001, she ditched the NDA to form a ‘mahajot’ or grand alliance with the Congress against the CPIM-led Left Front in West Bengal but was back with the NDA after the alliance performed poorly in the assembly elections held in the state in May 2001. She is often described as a maverick and her behaviour has been unpredictable. In 2008, she was instrumental in driving away Tata Motors that had wanted to establish a factory at Singur in West Bengal to manufacture the ‘world’s cheapest car’, the Nano, over issues relating to land acquisition. In Nandigram too, she was able to thwart the attempt of the state government to set up a special economic zone. While these two issues have helped her return to the political limelight, she has also become unpopular among sections of the electorate in the state. Be that as it may, the Trinamool Congress is likely to improve its performance in the next general elections. The party had won only one Lok Sabha seat (out of a total of 42 seats in West Bengal) in 2004 against eight in 1999. Shiv Sena The Shiv Sena’s strident rhetoric against ‘outsiders’ and in favour of ‘sons of the soil’ has been a very useful tool for the party to gain a foothold in the western Indian state of Maharashtra. The period since 1984 has seen the Sena acquire the image of a rabidly antiMuslim organisation and one that believes in violence as a means of getting its point of view accepted. It has aligned with the BJP since then. However, just as the BJP has time and again accused the Congress of ‘appeasing minorities’, the Sena has been critical of the BJP for its alleged appeasement of ‘secularists’. Sena supporters were accused of playing an active role in the violence against Muslims in the state capital Mumbai in December 1992 and January 1993. With Balasaheb Thackeray announcing that his son, Uddhav Thackeray, would succeed him as the Sena president, his nephew Raj Thackeray quit the party in January 2006 to set up his own political outfit, the Maharashtra Navnirman Sena (MNS). In 2008, the MNS launched a virulent campaign of hatred against non-Maharashtrians residing in the state. Raj Thackeray’s goons hounded and beat up students and workers not belonging to Maharashtra (particularly those from Uttar Pradesh and Bihar) in a series of episodes reminiscent of the senior Thackerey’s hate campaign against South Indians in the state in the 1970s and 1980s. Nationalist Congress Party The Nationalist Congress Party (NCP) was formed on the issue of the foreign origin of Congress President Sonia Gandhi. On the eve of the 1999 Lok Sabha elections, three Congress leaders (Sharad Pawar, P.A. Sangma, Tariq Anwar) decided to part ways with the parent party and formed the NCP. However, following the defeat of the NDA in the Lok Sabha elections in 2004, Pawar decided to extend support to the Congress to form a government in New Delhi which was a complete volte face in relation to his earlier stance at a time when Sonia Gandhi was still perceived to be the person most likely to head a Congress-led coalition government. A former Chief Minister of Maharashtra and a former Union Defence Minister, Sharad Pawar went on to become Agriculture Minister in the UPA

government. Congressmen have suggested that it would be best if Pawar returned to his parent party but the NCP chief himself has made it quite clear that he has no such intentions. His party is especially influential in Maharashtra. The NCP had won nine out of the 48 Lok Sabha seats in the state in 2004 and may increase its hold over Maharashtra, India’s most industrialised state. Shiromani Akali Dal The Shiromani Akali Dal (SAD) traces its origins to an organisation set up primarily for religious reform within the Sikh community in the northern Indian state of Punjab. As it has evolved, the SAD has remained a political party almost solely of Sikhs and one that provides expression to the aspirations of the community. With the collapse of the United Front government in 1998, the SAD joined the BJP-led NDA. Since the party has a strong base in rural Punjab, one of India’s most agriculturally prosperous states, and since the support base of the BJP was almost entirely among the Hindus in Punjab’s urban centres, the alliance won the overwhelming majority of Punjab’s Lok Sabha seats in 1998 – 11 out of 13. Since then, although the alliance performed badly in the general elections held the following year in 1999 and the assembly elections in the state in 2002, the SAD stuck with the NDA despite occasional friction with the BJP. The outcome of the February 2007 assembly elections in Punjab cemented the ties between the two parties. The SAD-BJP alliance obtained a comfortable majority winning 67 seats in the 117-member assembly. However, because of anti-incumbency sentiments, the SAD would find it difficult to hold on to the eight Lok Sabha seats (out of 13 in the state) it won in 2004. Jammu & Kashmir National Conference Jammu & Kashmir is India’s northernmost state and the only state with a Muslim majority. The state’s relationship with India (or with Pakistan) remains a live and often contentious political issue. The National Conference (NC) has always adopted an aggressively proautonomy posture while distancing itself from those demanding secession of the state (if not the Kashmir valley) from India. In July 2003, the NC’ President, Omar Abdullah, pulled his party out of the NDA and its government. In July 2008, the NC aligned itself with the UPA and helped the Manmohan Singh government win a confidence vote in Parliament. In the December 2008 assembly elections in the state, the NC managed to retain the number of seats it had in the state assembly and forged an alliance with the Congress to form a government in Jammu & Kashmir, replacing the earlier coalition government between the People’s Democratic Party and the Congress that had ruled the state since 2002. The son of the NC’s head and former Jammu & Kashmir Chief Minister, Farooq Abdullah, Omar Abdullah took oath as Chief Minister of Jammu & Kashmir on 5 January 2009. At 38, he is the state’s youngest-ever Chief Minister. Conclusion The 15th Lok Sabha elections, scheduled to take place in April/May 2009, could be spread over seven to nine phases over a period of three weeks to a month. The Election Commission of India is likely to announce the schedule for the elections in the second week of March 2009. The last session of the 14th Lok Sabha is expected to begin in mid-February 2009 and should last a fortnight or less. The main task of the session would be to pass a vote-onaccount to ensure government expenditure takes place in a smooth manner till a new government is constituted and new budget approved. The current Chief Election

Commissioner, N. Gopalaswami, demits office on 20 April 2009, around the time polling begins. Navin Chawla, the controversial Election Commissioner, who has been accused by the Opposition BJP of being sympathetic towards the Congress, is to take charge as Chief Election Commissioner since he is the senior of the two Election Commissioners. It would be hazardous to try and anticipate the outcome of the forthcoming general elections in the world’s largest democracy. Few would be surprised if the two largest political parties in the country, the Congress and the BJP (minus their allies and coalition partners), obtain between 120 seats and 140 seats each in the 543-member Lok Sabha – the two together may not be able to cross the half-way mark of 272 MPs. The so-called ‘third front’, comprising the BSP, the Left, the TDP and the AIADMK, may also obtain a similar number of seats. Depending on the arithmetic of the new Parliament, smaller parties could shift their loyalties. This possibility makes the political situation in India rather fluid and unpredictable.

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The Growing Influence of Business and Media on Indian Foreign Policy 1 Sanjaya Baru 2 “I sincerely believe that, in the modern world, the relationship between governments is increasingly mediated through and influenced by the relationship between civil society and the business community. It is on the foundation of people-to-people and business-to-business relations that we in government try to build state-to-state relations.” Prime Minister Manmohan Singh Sixth India-European Union Business Summit, New Delhi 7 September 2005 Introduction Dr Manmohan Singh was perhaps the first Indian Prime Minister to so clearly articulate the rising influence of civil society and business in the making of Indian foreign policy. Turning a 19th Century aphorism on its head, the Prime Minister seemed to suggest that it is no longer trade that ‘follows the flag’, but ‘the flag’ that follows trade. It is of course clear that this view of international relations is intimately related to the nature of society we are talking about. It is only in democratic societies that civil society has any significant influence on the foreign policy. Business interests could still influence foreign policy in non-democratic societies, if the regime in question has commercial, business and wider economic interests to pursue through its foreign policy. However, public opinion can shape foreign policy only by influencing domestic politics. Needless to add, business and media have for long been instruments of diplomacy. However, this paper is not about diplomacy. Its purpose is to examine the influence of business and media on foreign policy. The interaction between people in the form of migration, and between businessmen and merchants through trade, has always been at the centre of the relations between nations. As 1

An earlier version of this paper was presented at the Conference on “The Future of India’s Foreign Policy”, Centre for the Advanced Study of India, University of Pennsylvania, United States, 18 and 19 April 2008. I am grateful to Devesh Kapur for comments on the earlier draft Professor Sanjaya Baru 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 sppsb@nus.edu.sg.

the Nobel Prize economist and the guru of strategic economics, T. C. Schelling claimed, “Aside from war and preparations for war, and occasionally aside from migration, trade is the most important relationship that most countries have with each other.” 3 In an influential essay entitled ‘Trade Policy is Foreign Policy’, 4 Richard Cooper took the view that while traditionally trade policy had dominated ‘high foreign policy’, the Cold War had brought political issues to the fore and reduced the salience of business interests in shaping foreign policy. The end of the Cold War, the economic transformation of China, and the processes of globalisation, accelerated by the Uruguay Round of multilateral trade negotiations and the spread of regional trade blocs, have raised the profile of business and economic factors in the foreign and strategic policy considerations of most nations. The past decade has also witnessed increased global migration and the globalisation of media, with new satellite technologies and the internet making McLuhan’s ‘global village’ truly global. These trends have impacted on the choices available to governments in dealing with national and international issues and bilateral, regional and multilateral relations. This has had its inevitable impact on India, which has been transformed this past decade by its increased economic openness. This in turn has shaped India’s relations with the world economy and global communities. I

The Influence of Business on Foreign Policy

Indian foreign policy in the post-independence period was shaped essentially by geo-political considerations and the priorities of nation-building. The requirements of economic development did have a direct bearing on foreign policy, as India’s first Prime Minister Jawaharlal Nehru clarified in his very first speech on foreign policy in the Constituent Assembly in December 1947. 5 However, the Nehruvian era in economic policy was one of central planning and the public sector occupying the ‘commanding heights’ of the Indian economy. Hence, business-to-business relations willy-nilly became state-to-state relations. It was only in the 1980s that Indian business, especially the private corporate sector, came into its own and began to influence political thinking on foreign policy issues. Prime Minister Rajiv Gandhi was the first Indian Prime Minister to invite business leaders to join him on official visits abroad. This practice received further boost during the tenure of Prime Minister Narasimha Rao. The liberalisation of economic policy in 1991 opened a new chapter in government-business interaction in India. Not only did business leaders accompany the Prime Minister, External Affairs Minister and Union Finance and Commerce Ministers on their visits abroad, but their views began to be better articulated through the two principle chambers of business, the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII). The CII’s Partnership Summit, in fact, became a major diplomatic event with foreign leaders invited to it. FICCI’s initiatives through the South Asian Business 3

4 5

Thomas C Schelling, Report of the US Congress Commission on National Security Considerations Affecting Trade Policy, Washington DC, 1971. R. N. Cooper, ‘Trade Policy is Foreign Policy’, Foreign Policy, No.9, Winter, 1972-73. See Sanjaya Baru, Strategic Consequences of India’s Economic Performance, Academic Foundation, Delhi, 2006/ Routledge (London, 2007) & Francis & Taylor (New York, 2007), Citic Press (Beijing, 2008). (Chapter 2: ‘The economic dimension of India’s foreign policy’). Nehru said, “Talking about foreign policies, the House must remember that these are not just empty struggles on a chessboard. Behind them lie all manner of things. Ultimately, foreign policy is the outcome of economic policy, and until India has properly evolved her economic policy, her foreign policy will be rather vague, rather inchoate, and will be groping.”

Forum were another such effort in the South Asian Association for Regional Cooperation (SAARC) region. In the immediate post-independence period, Indian business had little influence in shaping political thinking on foreign policy issues. Nehru’s dominating personality, India’s immediate concerns with its geo-political neighbourhood and the larger dynamics of decolonisation, post-colonial development and cold war shaped India’s foreign policy options. To be sure, national economic interests did play an important role in shaping foreign policy, as already mentioned. Contrary to more recent thinking, Nehru did not adopt a hostile view either towards the West or towards western business. On his first visit to the United States as Prime Minister in 1945, Nehru sought out United States business and sought greater United States economic engagement with India. It was the United States that spurned Nehru largely because the United States was focused on post-war reconstruction in East Asia and Western Europe and also because it was not enthusiastic about Nehru’s plan for public sector-led industrialisation in India. In subsequent years, India’s inward-oriented industrialisation strategy meant that even Indian business was more focused on the domestic market and was satisfied with protectionist policies. This ensured that the normal synergy one expects between the interests of business and foreign policy choices democratic governments make was weak. India’s non-alignment policy did not yield any significant economic benefits for Indian business, perhaps also because Indian business was not outward-oriented and did not seek markets and investment opportunities in developing countries. India’s friendship with the Soviet Union had spin-offs in defence and strategic industries which were all in the public sector. The only important private sector beneficiaries of India’s relations with the Soviet Union were tobacco growers in Andhra Pradesh (many of whom liberally funded the local communist parties!) and a few traders who dipped into the rupee based trading opportunities. It was only in the 1980s, when Indian business began to look at market opportunities abroad, especially during the term of Prime Minister Rajiv Gandhi, that the external economic and business interests of Indian business began to shape official thinking on foreign policy. The CII became actively involved in projecting Indian interests abroad and in pursuing Track-II Diplomacy at home and abroad. 6 The real turning point, however, was 1991. Several factors contributed to increased business engagement in Indian diplomacy: i)

First, the economic crisis of 1990-91 and the end of the Cold War;

ii)

Second, the change in India’s negotiating stance at the World Trade Organization (WTO);

iii)

Third, though only towards the end of the 90s, the outward orientation of large Indian companies; and

For a discussion of trends in economic diplomacy and the role of economics in bilateral diplomacy see I.P. Khosla (Ed.), Economic Diplomacy, Konark Publishers Pvt Ltd., Delhi, 2006. and Kishan S. Rana, Bilateral Diplomacy, Manas Publications, Delhi, 2002.

iv)

Fourth, India’s success in software and the globalisation of Indian information technology (IT) and software business.

The Economic Crisis of 1990-91 and the End of the Cold War The timing of India’s external payments crisis in 1990-91 was significant. It occurred almost in parallel with the collapse of the Soviet Union. Facing for the first time the prospect of external debt rescheduling, the Indian government tried hard to secure multilateral and bilateral support. It found great difficulty in securing such support without adopting policies that would open up the Indian economy to greater play of market forces. It also found it had very few friends in G-7 capitals. Hence, the policy of economic liberalisation was launched in part to address the problem of India’s economic isolation in the context of the post-Cold War world. The factors driving external economic liberalisation were independent of the felt and expressed need of domestic enterprise. Domestic enterprise was keen on internal liberalisation but was not very enthusiastic about external liberalisation. In fact, as tariffs came down and quantitative restrictions on imports were removed, domestic business enterprise became restive. While the Chambers of Commerce officially welcomed these initiatives, some leading business groups mobilised themselves to campaign against what they called the wrong sequencing of reform. The ‘Bombay Club’, a group of businessmen who met in Bombay to draw a charter of demands laced with protest against the government’s external liberalisation policies, argued that the latter should wait till internal liberalisation had been completed and Indian business had secured ‘a level playing field’ visà-vis global multinationals. The negative middle class reaction to such ‘trade unionism of business elites’ forced Indian business to rethink its strategy and encouraged it to back off. Such middle class reaction was increasingly shaped in the 1990s by the global success of Indian professionals, especially in the field of information technology. 7 Consequently, the three Chambers of Commerce – CII, FICCI and the Associated Chambers of Commerce – began to offer compromise formulas that would combine the interests of domestic business with the imperatives of economic liberalisation. They understood the imperatives of balance of payments management, where mollified by a liberalised exchange rate mechanism, easing of foreign exchange controls, greater access to external finance and the trade-offs secured on internal economic policies. They also understood the imperatives of the post- Cold War world and India’s need to seek new external relationships. In fact, CII embraced enthusiastically India’s new ‘Look East’ policy, inviting Singapore’s Prime Minister Goh Chok Tong as the Chief Guest to its Centenary Celebrations in Calcutta in January 1995. India’s ‘Look East’ policy, of engaging the Association of Southeast Asian Nations’ (ASEAN) economies and also Japan and South Korea was a direct outcome of the end of the Cold War and India’s outward-economic orientation. As the key architect of the reforms of 1991, the then Finance Minister Dr Manmohan Singh openly acknowledged the experience of South Korea and ASEAN in re-orienting Indian economic policies. This gained

See Baru (2007), Ch. 20: ‘Sizing up the competition’, Ch. 37: ‘IT and the e-economy: The ballast for IndiaUS Relations’; and Ch. 63: ‘An India of Narayana Murthy or Sudarshan?’

for India new access to Asian capitals. India got on to the fast-track in being invited to be a partner country of ASEAN by the late 1990s. 8 Change in India’s Negotiating Stance at the World Trade Organization Almost on a parallel track with these policy changes was the change in India’s negotiating stance at the WTO. Till 1990 India firmly opposed a new round of multilateral trade negotiations under the General Agreement on Trade and Tariffs. Even after the Uruguay Round was launched, India opposed new areas like trade in services and trade-related intellectual property rights from being brought into trade negotiations. Indian industry played an important role in campaigning against the new agenda being promoted by the developed economies. Sector specific lobby groups were set up by Indian businessmen to campaign against trade liberalisation through the multilateral route. After 1991, India changed course. Interestingly, Indian industry changed course too! Rather than block the Uruguay Round, both the Indian government and industry opted to negotiate and secure an outcome favourable to India. This marked a new phase in Indian business’s diplomatic engagement. CII and FICCI actively canvassed support for the Indian point of view in various world capitals. They invited foreign dignitaries to well-organised and wellattended gala events of Indian business organisations in New Delhi and Bombay and sought to win them over to their point of view. The message was clear – don’t destroy the Indian private sector, we can be your allies in the spread of market capitalism in this part of the world. By projecting private Indian business as an ally in the onward march of market economies in the post-Cold War world, Indian business established new relationships for India in developed industrial economies. India was not wholly satisfied with the outcome of the Uruguay Round, but the process marked a fundamental shift in India’s trade diplomacy. Not only did India emerge as an active participant in the WTO process, it was also able to establish itself simultaneously as a champion of the interests of developing economies and as a willing negotiator with developed economies. This ‘bridge power’ status in multilateral negotiations was new for India, having been a long time leader of the non-aligned and on the wrong side of the Cold War divide. Indian industry played a crucial role in facilitating this transition. The experience gathered in the Uruguay Round negotiations helped Indian business to take a more pro-active role in the Doha Development Round process. Indian business chambers took the initiative, for the first time, and played a pro-active role in trade diplomacy. Rather than wait for the government to take the lead, business chambers began crafting their own strategy for the Doha Round. FICCI constituted a trade policy group in 1999, drafting the services of an officer of the Indian Administrative Services (on secondment from the government to FICCI), that outlined broad parameters for the Doha Round negotiating strategy. The investment CII and FICCI made in trade diplomacy was of great use for Indian business and for the Indian government. Indian business also emerged as an important participant in ‘Track-II’ diplomacy on the trade front. CII set up an office in Geneva and representatives of Indian business accompanied the Indian commerce minister on important travels abroad

See Sanjaya Baru, India and the World – Economics and Politics of the Manmohan Singh Doctrine in Foreign Policy, ISAS Working Paper No. 53, November 2008. http://www.isasnus.org/events/working papers/52.pdf

related to trade diplomacy. Abandoning the ‘protectionist’ rhetoric of the ‘Bombay Club’ of the early 1990s, both CII and FICCI adopted a pro-active negotiating stance. Trade liberalisation in the 1990s and the increased exposure of Indian business to external competition forced Indian business to adopt a pro-active role in Indian trade diplomacy. This then became an important route through which business associations began to influence Indian foreign policy options. Since ‘trade policy is foreign policy’, and since in the era of globalisation trade policy has strategic consequences, the growing involvement of Indian business in crafting Indian trade policy options gave them a new profile in influencing foreign policy outcomes. Another important factor that contributed to a greater engagement of business with foreign policy was the rise of China, as a business rival. China’s entry into the WTO opened a new chapter in India-China trade relations. By year 2000, Indian business became worried about dumping of cheaper Chinese goods. 9 While China has emerged as India’s biggest bilateral trade partner overtaking the United States (though still lagging behind the European Union), fear of China grips Indian business. It has begun to shape business thinking on relations with other Asian economies, including the strategic importance of the India-ASEAN Free Trade Agreement. Like in so many other countries, business pro-activism in foreign policy has been greatly influenced by the rise of China as a trading power. The Outward Orientation of Large Indian Companies A third factor, a more recent one, that has contributed to the increased involvement of business in foreign policy, has been the growing interest of Indian business groups in overseas investment. Major Indian business groups began investing abroad in the 1980s. However, it is only in the past five years that there has been a quantum increase in foreign investment. 10 The main stimulus for this was the policy of the National Democratic Alliance government to increase capital outflows as part of its strategy to manage a surge in capital inflows since the early 2000s. Outward investment by Indian entities increased sharply from around US$2 billion in 2003-04 to US$14.4 billion in 2006-07. 11 Outward investment by Indian firms has a wide geographical spread, including the United Kingdom (where Indian investors top the charts on inward investment into United Kingdom), the United States, China, Russia, Southeast Asia, South Asia and Africa. In each of these bilateral equations, the role of prominent business leaders, in particular, and of business interests, in general, has increased considerably. Business leaders increasingly ‘facilitate’ meetings between officials and politicians of countries, they influence the bilateral agenda, and they contribute funds to political parties or leaders when asked to. The rising interest of Indian firms, both in the services and manufacturing sector, in foreign trade and foreign investment has increased their interest in shaping India’s diplomatic 9

At The Financial Express, where I was Chief Editor at the time, we were constantly bombarded by information from Indian business about ‘unfair’ trade competition from China. The FE ran a series of news reports under the banner ‘Enter The Dragon’, drawing attention to the ‘China threat’ in the Indian market. Soon China began increasing its imports from India. This created a business lobby in India that saw a ‘China opportunity’. At The Financial Express, we began a new series, in 2002, called ‘Beyond The Great Wall’. A forthcoming book discusses in some detail the phenomenon of Indian multinational enterprise - Ravi Ramamurti & Jitendra V. Singh, (Ed.) Emerging Multinationals from Emerging Economies, Cambridge University Press, forthcoming 2009. Economic Survey, 2007-08, Ministry of Finance, Government of India, 2008.

initiatives with respect to various regional forums and specific countries. Indian business delegations now routinely accompany the Prime Minister when he travels abroad. The Prime Minister meets accompanying business leaders before he goes in for a bilateral meeting with the host head of government to understand their concerns with respect to the country being visited. Regional forums like SAARC, the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, ASEAN and the European Union invite Indian business leaders to participate in parallel meetings along with the Prime Minister. It would be incorrect to dismiss such travel as mere diplomatic and business tourism. The views of business leaders are discussed even within closed door meetings between high officials, and issues like market access, investment opportunities, visa regimes, are increasingly focused on business perspectives. High profile global acquisitions by business leaders like Lakshmi Mittal (steel) and Ratan Tata (steel and auto), high profile global contracting out by major Indian companies like Reliance and India’s energy diplomacy have given such business leaders great influence in bilateral relations. Perhaps one must make a distinction between the diplomatic influence and interest of nonresident and largely globalised business leaders of Indian origin, like the Hindujas and Mittals, and the more nascent business diplomacy of increasingly globalising Indian business leaders like the Tatas and the Ambani Brothers. The Hinduja Brothers, for example, have been known to be influential in various capitals of the world for many years. The legendary ‘continuity’ in their influence in Iran, from the days of the Shah to those of the Ayatollahs, has earned them a special place in the business lobbyists hall of fame. However, they are no longer unique. Several other businessmen have emerged with similar ‘bipartisan’ influence in the corridors of power in various capitals. They lubricate the system and help Indian diplomats and politicians secure access and strike deals. The Hindujas have been ‘diplomatically active’ in a wide range of countries including the United States and the United Kingdom. They played a helpful role in the political lobbying associated with India’s civil nuclear cooperation agreement with various member countries of the Nuclear Suppliers Group. Similarly, Lakshmi Mittal has been diplomatically active in Central Asia and Europe. The lower profile of business leaders of Indian origin in South-east Asia, as compared to their Chinese-origin counterparts, may have meant that Indian business played a less important role in shaping India’s relations with the region, though even here wider business interests have without doubt shaped India’s strategic relations. 12 ‘Track-II’ Diplomacy An important consequence of this is the willingness of Indian business groups to invest in ‘Track-II’ diplomacy and in shaping foreign policy perspectives. One of India’s largest business houses has funded a think tank focused on strategic policy and foreign affairs, with several former diplomats hired as faculty. This is the Observer Research Foundation, funded by Mukesh Ambani’s Reliance Industries. While Mukesh Ambani has directly funded a foreign policy research institute, other Indian companies have funded ‘Track-II’ diplomatic initiatives through CII and FICCI.

See Baru, ISAS Working Paper No. 58 (2008).

CII runs several ‘Track-II’ dialogues funded by various member companies. The countries covered so far include the United States, Japan, Singapore and Malaysia. Business leaders with country specific interests invest in these dialogues and also participate in them. Thus, Ratan Tata has consistently funded, and often participated in, the CII-Aspen Strategy Group dialogue on India-United States relations. Launched in 1999, partly to contain the diplomatic damage of the Pokhran II nuclear tests and build bridges between Indian and United States opinion makers, business leaders and legislators, the India-United States Dialogue has been sustained over eight years, with two meetings every year, one in the United States and another in India. Other business leaders like Sunil Mittal, Sunil Munjal, Harpal Singh and Gautam Thapar have invested and participated in these and other such dialogues. FICCI has also initiated a similar effort with the Woodrow Wilcon Center and the Heritage Foundation. An important initiative of FICCI has been the Forum of Parliamentarians set up to engage elected representatives from India and their counterparts in the United States, the United Kingdom, Germany, the European Union, Singapore, Japan and Pakistan. According to FICCI’s Secretary-General, Dr Amit Mitra, “The IUFP (India-United States Forum of Parliamentarians), constituted six years ago along the lines of the ‘India Caucus’ and ‘Senate Friends of India’ Group in the United States Congress, provides an important platform to the Indian Parliamentarians to develop and strengthen India-United States relations through Track-II initiatives. Encompassing all aspects of bilateral relations, the forum makes an earnest effort to facilitate wider exchange of views, dialogue and discussions on bilateral and global issues between Indian parliamentarians and their counterparts in the United States, senior Administration officials, business leaders, opinionmakers and the Indian-American community, thereby adding an important parliamentary dimension to bilateral ties.” 13 FICCI has also recently launched similar forums with Commonwealth of Independent States, Russia, China and Italy. The India-United States Forum played an important role in shaping the thinking of young Parliamentarians on the issue of India-United States civil nuclear cooperation agreement, and in providing a forum for newly elected Parliamentarians from Pakistan to interact with their Indian counterparts. The Forums of Parliamentarians is a multiparty body of seven Forums with 130 members belonging to various political shades of India with many of its members serving on important parliamentary committees. The forums with the United States, the United Kingdom Germany, the European Union, Singapore, Japan and Pakistan launched consecutively since the formation of the IUFP in March 2002, have played a significant role in promoting interparliamentary exchange and dialogue with its counterparts in these countries. The Forums have gone beyond and facilitated dialogue with senior government officials, leading think tanks experts, business leaders and civil society at large, in these countries on several issues of bilateral and global concerns. 14 In 2007, FICCI’s India-United States Forum of Parliamentarians took the initiative to launch ‘The India-Yale Parliamentary Leadership Programme’, a first of its kind for Indian parliamentarians. This programme gives parliamentarians an opportunity to spend time at 13 14

Interview to author, September 2008. This information was provided by Dr Amit Mitra, Secretary-General, FICCI and Mr. Ramesh Chandran, FICCI.

Yale University to reflect on a wide range of issue they deal with as members of parliament. The Second India-Yale Parliamentary Leadership Programme, conducted in June 2008, covered topics like ‘The Economics of Mitigating Climate Change and Sustainable Development’; ‘Global Economic Risks and the New Financial Order’; ‘Three Decades of Reform, Rule of Law and Governance Challenges in China’; ‘Poverty and Economic Development’; ‘Religion and Politics’; ‘Reform of Higher Education in India’; ‘2008 US Presidential Election – Predictions and Realities’; ‘India and Globalisation’; ‘Effective and Strategic Political Communications’; and so on. There has always also been a ‘below the radar’ role for business in diplomacy. This is normally confined to a few influential business leaders who may provide ‘facilitation’ for unofficial contacts between diplomats and political leaders. A business leader could act as a ‘conduit’ for ‘backroom’ and unofficial discussion and pre-meeting negotiation between heads of government. As Indian businessmen globalise and become part of the global ‘cocktail and golf circuits’, and fund politicians and political parties in other countries they are also able to shape relations between India and other countries. This ‘below the radar’ role of business leaders is on the rise and can be seen in South Asia, in rest of Asia, in Africa, in large parts of Europe and in India’s relations with major powers like the United States, Russia and China. Another form of ‘below the radar’ influence for business is their funding of politicians, lobbies and interest groups in foreign countries. While some of this activity would normally be regarded as ‘illegal gratification’ of policy makers, some countries permit public funding of lobbying efforts, ranging from payment to advertisements in the media to sponsoring interest and focus groups, supporting ‘Track-II’ diplomacy and other public diplomacy efforts, including support for university chairs and research centers. India’s Success in Software and the Globalisation of Indian IT and Software Business The Indian IT, software and business process outsourcing industry has without doubt changed India’s global profile. Its impact on Brand India is well known. Visiting Heads of State and Government now routinely add Bangalore and Hyderabad to their itinerary. A visit to the Infosys or Wipro campus or to Cyberabad is a high profile part of India’s economic diplomacy. India’s success in these areas, as well as in the entertainment sector, has contributed to enhancing India’s ‘soft power’. Indian IT and software capabilities now open doors for Indian diplomats abroad in the corridors of power. This has given business leaders in these sectors high level access both within India and in other world capitals. More importantly, the economic importance of software business and business processing outsource for the Indian economy has ensured that such business interests can no longer be ignored by Indian foreign policymakers. In fact, the promotion of Indian capabilities and business interests in these areas is intrinsic to the projection of Indian ‘soft power’, both in developed and developing countries. All this cannot be dismissed as mere diplomacy. It is having a palpable influence on foreign policy as well. Today India can not ignore the business interests of its burgeoning IT, knowledge and data processing sectors in crafting its foreign policy options. Indeed, India’s relations with the United States, in particular, and with the ‘English-speaking’ world, in general, has increasingly been influenced by the enormous pull of business and professional interests involved in this sector. Billions of dollars are now at stake for Indian software, data

and business processing companies in western markets. The sharp decline in India-Russia economic relations in the 1990s, as compared to a similarly dramatic increase in India-China trade and the importance of United States and Asian markets for Indian business have become important determinants of India’s foreign policy options. II

The Influence of Media on Foreign Policy

The media has an obvious role in shaping public opinion on foreign policy issues in a democracy. However, the influence of media on foreign policy is shaped by two important factors, first, the extent of domestic political disagreement or consensus on foreign policy issues; and second, the relationship between the government of the day and the media. Indian foreign policy was marked by a high degree of domestic political consensus in the initial years after Independence. Few in the national press questioned Jawaharlal Nehru’s overall foreign policy orientation. During the Cold War there was a weakening of this consensus in the press, with some favouring a closer relationship with the West and the others favouring a stronger ‘anti-imperialist’ stance. The mainstream public and political opinion in India favoured Nehru’s path of ‘non-alignment’ in the Cold War. Contrary to popular western, especially United States, view of ‘non-alignment’ as an ‘ideological anti-West and pro-Soviet’ stance, Nehru’s non-alignment was essentially a pragmatic and nationalist assertion of India’s independent and autonomous stance in international affairs. Nehru was in favour of good relations with the West as well as with Soviet Union, but sought for India an ‘independent’ voice in world affairs. This stance had broad national support and the media of the time went along with this stance. Given the political dominance of the Congress Party and a high degree of consensus among mainstream political parties the media had at best a marginal role to play. There is no doubt, however, that the Cold War played itself out through the columns of the Indian media but the moot point is that this did not influence official thinking in any significant way. 15 Given the high degree of freedom that Indian media enjoys, foreign governments have, from time to time, tried to win friends and influence opinion in the media. The Indian government also seeks to do this. However, its approach is to ‘win’ over the media to its point of view, rather then be influenced by any independent thinking within the media. The media is viewed as an instrument for promoting the government’s view point, not as the ‘Fourth Estate’ whose ‘independent’ voice must be heard. During the Cold War period, the governments of the day were fairly successful in securing broad media support for their foreign policy. The Indian Ministry of External Affairs has traditionally maintained a close connection with influential editors and columnists to ensure, what a high ranking Indian diplomat has dubbed, a ‘cozy relationship’. 16 While some journalists view this with deep suspicion and may even 15

There is continuing controversy in the Indian media and on the internet about allegations made in the papers of the ‘Mitrokhin Archives’ regarding KGB funding of Indian journalists. Similar allegations have been made about CIA funding of media personalities. More recently there have been allegations that countries like China, Iran and Pakistan have been active in winning friends and influencing people in the Indian media. But all these remain unsubstantiated charges and rumours. http://www.southasiaanalysis.org /%5Cpapers16%5Cpaper1549.html The cozy relationship at the time between the foreign policy establishment and the media was best summed up by the current Spokesperson of the Ministry of External Affairs, “In the comfortable old days – again, we need to look no further than 15 years ago – the world of diplomacy in India was covered by a set of about 20 erudite, polite gentlemen of the press and the dutiful Doordarshan and All India Radio. Briefings were

refuse to accept the government’s hospitality as a way of defending media freedom, one must not exaggerate the success that the governments have in winning over the media to their viewpoint. 17 In India’s increasingly fractious political environment and given rising budgets of private media organisations, government freebies and junkets have declining influence in shaping media thinking on major policy issues. Ironically, a substantial part of the work of the External Publicity Division of the Ministry of External Affairs has in fact been in dealing with domestic media rather than international media. The Division is more often engaged in seeking internal publicity for external policy rather than external publicity for internal policy. 18 It is difficult to point to any important example where the Indian government shaped thinking on Indian policies in any significant way in any foreign media. Equally, it is difficult to offer any example where the government of the day has altered its policy in foreign affairs or bilateral relations due to pressure from the media. In fact, Indian diplomats often take pride in claiming that they can ‘get the media they want’. This is, without doubt, changing with the breakdown of the domestic political consensus on foreign policy issues, and the pervasive influence of 24x7 television news channels. The electronic media, like Parliament, has become an arena in which party political differences on foreign policy do get articulated more forcefully because of the nature of the medium. In fact, television news channels may have contributed to increased public discord on foreign policy by deliberately strait-jacketing all ‘discussions’ into binary, conflictual ‘for-and-against’ debates. Rather than facilitate a consensus such ‘argumentative’ debates foster divergence. While television resorts to this practice to increase viewer attention and make news more ‘entertaining’, this has increased the role of the media in shaping political thinking on foreign policy issues. 19 The last decade, therefore, marks a turning point in the role of the media in shaping foreign policy. This is on account of three very different factors:

comfortable, friendly and somewhat leisurely affairs, full of intellectual wit and repartee. The media persons would gather what they could before turning to the chai, samosa and gulab jamun and thereafter find, their way back to their offices to type out the stories for the rest of the evening. Today, we have to deal with not only a hugely expanded print media but also more than 30 24-hour TV news channels, several news agencies and even on-line journals.” Navtej Sarna, ‘Media and Diplomacy’ in Atish Sinha (Ed.), Indian Foreign Policy, Challenges and Opportunities, Academic Foundation & Foreign Service Institute, New Delhi, 2007. See for example, Rajdeep Sardesai’s comment, “The other ministry which equally effectively manipulates the media is the Ministry of External Affairs. When they take you on a summit being attended by Atal Behari Vajpayee, they ply you with the choicest whisky and caviar on the flight and in turn it is expected that you will follow, hook, line and sinker what the ministry is saying. For instance, if the prime minister’s recent visit to China is a success or if the Ministry of External Affairs feels it is a success, then you have to say that it is one. If you choose then to interpret that somewhere down the line there has been a compromise on Tibet, you are not supposed to use the word, ‘compromise’ because the overarching philosophy is that since they paid for you to come to China, how can you now write that the prime minister has sold out on Tibet? …because the media does not have the means of resisting the pressures from them (the reason being that sources of information will be completely cut off) it often toes the line.” Rajdeep Sardesai, “Manipulations and Bias in News,” in Uday Sahay (ed.), Making News: Handbook of the Media in Contemporary India Oxford University Press, 2006, p. 166-171. Sarna’s essay on “media and diplomacy”, published in a major official publication of the ministry of external affairs and proclaimed as an authoritative and comprehensive survey of Indian foreign policy is almost entirely focused on the domestic media, with only a passing reference to foreign media! The pro-active role of Indian media on human rights abuses in Tibet is a good recent example of media activism exerting pressure on the government.

the gradual erosion of the domestic political consensus on foreign policy, giving the media the role of an arbiter and an independent analyst of contending political views;

ii)

The media revolution and expansion, with the rise of television and business journalism and the growing importance of private corporate advertisement revenues, as opposed to government support for media, in influencing media economics; and

iii)

Finally, the increasing influence of the middle class and the business class in the media has also influenced media thinking on foreign policy.

i) An early example of the media playing an important role in shaping public opinion and government policy with respect to a foreign and strategic policy issue, in the context of domestic political discord, was the role played by The Times of India in 1996 on the issue of India signing up on the Comprehensive Test Ban Treaty (CTBT) agreement. 20 Indian political parties were divided on the issue of India’s stance on the CTBT since India had for a long time advocated such a test ban and had, in fact, sponsored the CTBT. However, when CTBT got linked to Nuclear Proliferation Treaty renewal and India felt it was being discriminated against on the question of its nuclear status, the view gained ground that India should not sign CTBT. A major debate took place in the columns of Indian newspapers in which the Times of India editorially called for India rejecting CTBT in the form in which it was then being proposed. India can be a signatory only as an acknowledged nuclear weapons power and not as a non-weapon state. This finally became the official Indian position. The entire mainstream media has been a strong and consistent supporter of the India-United States agreement on cooperation in civil nuclear energy. Overwhelming media support for the civil nuclear agreement, with the exception of The Hindu, under the pro-Communist Party of India editorship of N. Ram, and The Asian Age, during the editorship of M. J. Akbar, strengthened the government’s hand in politically defending its case at home, against political criticism from Left and Right opposition. More than print, television played an extremely influential role in generating public support for the nuclear accord. No major television news channel campaigned against the agreement, while many of them took a strong supportive stance. Some critics of the media may dismiss its role as peripheral given the limited reach of media in an educationally backward society. To be sure, foreign policy always engages the elite much more than the masses. Hence, it is rarely a subject for mass politics, except perhaps in the case of India- Pakistan relations, and that too in northern India. 21 However, the fact remains that with the decline of large pan-Indian national political parties and the emergence of fractured coalitions, difference between political parties on national policy issues, including foreign policy, is bound to grow. With such diversity of opinion in the political arena, the national media can secure for itself an influential autonomous role provided it is 20

See C. Uday Bhaskar, ‘KS: Vamana of Indian Nuclear Theology?’ in C. Uday Bhaskar (Ed.) ‘A Bouquet of Tributes to K Subrahmanyam at 75’, New Delhi, 2004. Bhaskar observes, “Through seminars, workshops, lectures and his steady stream of newspaper articles, K Subrahmanyam(KS) shaped the Indian response to the nettlesome nuclear issue and the media became a contested domain. …. The TOI’s op-ed page became a veritable battle-field. Sanjaya Baru, the editorial page editor, played a central role in shaping the Indian debate and from my modest perch at the time, I would aver that KS through his searing columns helped steer the debate over the CTBT so that the government of the day could take a firm decision in the matter.” (p.55) Smruti S. Pattanaik, Elite Perceptions in Foreign Policy: Role of Print Media in Influencing India-Pakistan Relations, 1989-1999. New Delhi, Manohar, 2004.

able to articulate a national policy that will find wide public acceptability and will stand the test of professional scrutiny. ii) The objective basis for such independent and informed view on foreign policy options within the media exists, even if in actual fact nothing is done to tap into that potential. Large media groups no longer look to the government alone for their survival. The phenomenal growth in the advertisement budgets of private corporates has increased the autonomy of the media with respect to the government, even if this has resulted in growing corporate influence on the media. In the context of our discussion what this means is that media can adopt a stance independent of the government, perhaps reflecting the interests of business and the professional classes, on foreign policy issues. News coverage of countries in the Indian media is increasingly influenced by revenue considerations. 22 However, this, in turn, does not have any significant impact on government policy, as yet. iii) This increased relevance of business and middle class preferences for media policy implies that their world view will count for more in shaping media thinking on foreign policy. This is demonstrated by the near-unanimous support for the India-United States nuclear agreement in the business and English-language media. The policy preferences of these two segments of the media in the foreign policy arena do tend to influence Indian language media also. However, perceptions on foreign policy in Indian language media vary, due to local political, social and cultural factors. For example, the national media is less interested in India’s policy towards Sri Lanka than the Tamil language media. Similarly, there is much less coverage on developments in the Islamic world in the national media as compared to the Urdu language media, that caters largely to a Muslim readership. The thinking of these categories of readers, who may be politically influential in specific regions and constituencies, do not always get reflected in the national media, including television. It is the views of the more articulate middle classes that gets a greater play in national and mass media. What this means, of course, is that any news about the United States or Pakistan is almost always front page and headline stuff, while news about most other developing countries makes no waves. The visit of the United States President, for example, secures saturation coverage in the Indian media, but the India-Africa Summit meeting in 2008 was not even reported on the front pages of most papers. Such preferential bias in the media’s treatment of different regions, countries and international issues may influence public opinion and even the thinking of politicians. However, in the corridors of decision-making, especially when it comes to the permanent civil service, contrarian thinking in the media and disagreeable media coverage is at best a nuisance to be tolerated, not a viewpoint to be taken account of in formulating policy. Finally, we do believe that Indian media does not as yet view itself as an active player in foreign policy, even if some newspapers give more coverage to foreign affairs than others. One important reason for this is that Indian media has not found a business plan to justify greater foreign coverage and the posting of foreign correspondents. Among the world’s ‘major powers’ Indian media has the least number of foreign correspondents. Only a handful of print and television organisations have correspondents posted in major world capitals and 22

One must not exaggerate the significance of this factor. Despite high business interest in Africa, Indian media’s coverage of Africa is abysmal. On the other hand, the large presence of Indians in the Middle East and Persian Gulf has contributed to high media coverage of the region, including in the regional media in States like Kerala, which is home of a large proportion of migrant labour to that region.

in neighbouring countries. There has, in fact, been a scaling down of foreign correspondents, with most Indian media drawing on news put out by foreign news agencies and foreign media partners. While China has emerged as India’s largest trade partner and is India’s biggest neighbour, only three media organisations (one subsidised by the government) have correspondents stationed in China. Conclusion In this paper, we have defined ‘media’ in its normal limited sense of news media. However, if we were to examine the role of the entertainment media, especially Indian cinema, and its ‘soft power’ dimension, one could argue that in a wider sense Indian media is helping project India globally. But there’s little proof as yet of Indian ‘soft power’ shaping ‘foreign policy’ of other countries towards India, or India’s policy towards others. The ‘soft power’ of Indian media is at best an adjunct to foreign and strategic policy, if that, and not an active component of such policy. India’s economic globalisation and the rise of the globalised professional middle class have raised the profile of business and media in Indian foreign policy making. International trade and capital flows, as well as the economic importance of Indian migrants abroad have increased the importance of people-to-people and business-to-business relations in India’s state-to-state relations with other countries. In turn, these factors are beginning to shape Indian foreign policy thinking and will perhaps count for more in years to come.

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ISAS Insights No. 50 – Date: 13 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

Indian Elections 2009: Why the ‘Y’ Factor Matters Tridivesh Singh Maini1

Preface India will hold its 15th general elections in April/May 2009. The elections will take place in challenging circumstances. A variety of cross-cutting political, security, economic and sociocultural issues will influence the elections. The exercise will be impacted by multiple parties, personalities and positions from India’s vast political spectrum. As India moves into the election mode, the Institute of South Asian Studies is bringing out a series of papers analysing different aspects of the forthcoming elections. These will include, among others, the key national and regional parties, and their strategies, key political personalities, and the issues that are likely to have an impact on the elections. This paper, the second in the series, examines the role of the youth in influencing the outcome of the elections.

Introduction India’s imminent parliamentary elections will be interesting to watch for the impact of a variety of interesting variables. These include the delimitation of electoral constituencies, importance of regional parties, and local agendas and increasing significance of fruitful electoral alliances. Added to this, another critical factor which is important to study is the ‘youth factor’. With 65 per cent of India’s voters being under the age of 35 (including one hundred million first-time voters), the young make up a sizeable chunk of the electorate. In fact, the Indian electorate of 2009 will be the youngest since 1952.2 It is tough to ignore the importance of the youth in the elections after the role played by the youth in the historic victory of President Obama. The youth wing of his campaign was enthusiastic in mobilising support for

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 Indian Express, “When Pappu goes to vote”, Seema Chishti, 28 December 2008.

America’s 48-year-old president by making use of the internet and by selling the fact that he was someone with whom the youth could easily connect. Seeing the significance of the large percentage of young voters in the upcoming election, massive campaigns have been kicked off by Non-Government Organisations (NGOs) and political parties for encouraging youngsters to vote. One of these campaigns, “Jaagore (which means ‘wake up’)! One billion votes campaign”, is trying to get approximately four million young people across 35 cities to register as voters. The ‘Jaagore’ experiment is using the internet and has received support from leading corporate brands like Tata Tea. While such campaigns and efforts are significant and show the interest of civil society stakeholders in involving the youth in elections, it is also interesting to see overtures being made by political parties for attracting young voters. All political parties appear to have realised that the ‘y factor’ will be crucial in the upcoming elections of 2009.

Political Parties and Their Thrust on Wooing Younger Voters If one were to look at the initiatives being taken by political parties to woo the youth, it would not be wrong to say that the Congress Party has taken the lead in recognising the fact that young voters have a pivotal role to play in the upcoming elections. This might be because of the key role being played by Mr Rahul Gandhi, one of India’s most prominent young leaders, in Congress Party’s election campaign. Indeed, Rahul Gandhi, the General Secretary of the Congress Party and being tipped by many as a future Prime Minister, has been travelling all over the country to focus on strengthening the state units of the youth congress, revamping election procedures as well as strengthening the enrolment drives. He has aired his discomfort on the excessive centralisation of decision-making in the Congress Party and wants the youth to play a more proactive role in the decision-making process. He has also reiterated his intention of demolishing the “wall”, which is obstructing the young from joining politics.3 According to him, “In India, political parties have a nomination system in their parties. Who holds which position is decided at the top. In this system, the voice of the youth is drowned".4 It is also important to note that Rahul Gandhi has also admitted on more than one occasion that a major lacuna of Indian polity is that politics in India is dynastic – in order to to rise in India’s polity, it is important to enjoy support and patronage of the family. He has been further quoted, “I would not have been here, if I was not from a political family. If you do not have money, a family or friends, you cannot enter politics.”5 His emphasis on a more transparent system of elections to the Youth Congress and National Students Union of India is reportedly an attempt to induct more young people who do not have family patronages in the party. In this regard, the services of former Chief Election Commissioners, J. M. Lyngdoh and T. S. Krishnamurthy, who now run an NGO called the Foundation for Advanced Management of Elections (FAME), are being used to ensure transparency and efficiency in the election process.6 Rahul Gandhi has also proposed that at least 30 per cent of seats to be contested by the Congress Party should be reserved for younger leaders. This proposal was supported by the senior leaders of the party like Veerappa Moily. In the recently held 3 4 5 6

The Mint, “Give more tickets to youth leaders: Rahul Gandhi”, 8 February 2009. The Times of India, “Rahul wants to end dynasty politics”, 20 October 2008. Ibid. The Indian Express, “For clean polls in Cong youth wings, Rahul turns to former ECs”, Suman K. Jha, 1 September 2008.

assembly elections for six states, several new youth leaders got tickets from the Congress Party. Apart from Rahul Gandhi, there are several prominent young leaders from the Congress Party who are active in wooing the youth. The ‘young brigade’ in the Congress Party comprises Jyotiraditya Scindia, Jitin Prasad, Sachin Pilot, Milind Deora and Sandeep Dikshit. These young leaders are being supported in their efforts by senior leaders like Veerappa Moily, Janardhan Reddy, G. B. Patnaik and Digvijay Singh. Indeed, a key senior leader like Mr Pranab Mukherjee (Minister of External Affairs and concurrently holding the Finance portfolio) and Digvijay Singh have gone to the extent of suggesting that Rahul Gandhi is capable of handling the position of Prime Minister. This is clearly an attempt by the Congress Party to project a ‘young’ leader as a possible prime ministerial candidate and attract the young votes. The Bharatiya Janata Party (BJP) is also leaving no stone unturned in order to attract the ‘Gen-Next’ of India’s voters. The BJP’s prime ministerial candidate Mr L.K. Advani has also been trying to ensure that the party connects meaningfully with the youth of the country. For this purpose, he has decided to use the internet extensively. Mr Advani has set up his own website (www.lkadvani.in) and is also trying to attract the youth through popular interactive online forums like the ‘Facebook’. Apart from using internet instruments, the youth wing of the party also plans to distribute stickers like “Advani for PM”. The octogenarian leader also plans to visit schools and colleges to attract more young people towards the BJP. Mr Advani admits that he is trying to successfully reproduce the Obama campaign. Addressing a gathering in Bangalore on 12 January 2009, he announced the launch of a national service mission ‘ek kaam desh ke naam’, wherein he exhorted young minds to "undertake voluntary activities across the nation."7 Interestingly in Advani’s own constituency of Gandhi Nagar in the state of Gujarat, there are a large number of first-time voters, out of which approximately 40 per cent are below the age of 35. One more method which the party is using for wooing the youth is the attempt to attract celebrities to campaign for the party and contest elections. There was recently speculation that the party is trying to rope in former Indian captain and well-known cricketer Anil Kumble in contesting elections. Other political parties such as the Samajwadi Party (SP) and the Bahujan Samaj Party have also been making statements that in the coming elections they will allot large numbers (up to 50 per cent) of seats to young candidates. Mr Akhilesh Yadav, the son of Mr Mulayam Singh Yadav, a prominent leader and ex-Chief Minister of Uttar Pradesh, is an upcoming leader of the SP. The party is also focussing on popular youth icons, such as the famous Bollywood film star Sanjay Dutt, on contesting the elections. In regional parties such as the National Conference, Shiv Sena, All India Anna Dravida Munnetra Kazhagam (AIADMK) and the Shiromani Akali Dal (SAD), younger leaders are playing key roles. Mr Omar Abdullah’s nomination as the Chief Minister of Jammu & Kashmir is a significant milestone marking the enhanced importance of the youth in India’s contemporary politics. It needs to be noted, however, that despite larger participation and growing prominence of the younger leaders, most of them are actually products of dynastic politics. This holds true for leaders from both national parties like the Congress Party (such as Rahul Gandhi, Jyotiraditya Scindia, Sachin Pilot, Milind Deora and Sandeep Dikshit) as well as those from the regional

The Indian Express, “Advani plans to rope in youth”, Suman K. Jha, 13 December 2008.

parties [such as Omar Abdullah (National Conference), Uddhav Thackeray (Shiv Sena), Sukhbir Badal (SAD) and Dayanidhi Maran (Dravida Munnetra Kazhagam (DMK))].

Are the Youth Active Participants in the Democratic Process? A recent study on “Indian Youth in a Transforming World: Attitudes and Perceptions”, by the Centre for the Study of Developing Societies (CSDS) and its civil society partners Lokniti and Konrad Adenauer Stiftung (KAS), provides some interesting insights on the attitude of the Indian youth towards the Indian democracy. According to the report, while 48 per cent of the Indian youth believe strongly in democracy, 27 per cent are indifferent, with two per cent having a weak faith in democracy. Further, more than two-thirds of the Indian youth realise that their votes make a difference to the outcome of elections. At the same time, 66 per cent feel that their vote makes a difference to how things are run in India.8 The report clearly reiterates the point that the Indian youth cannot and should not be taken as insignificant and indifferent segments of the electorate; they are actually capable of making significant differences to the electoral outcomes. It is too early in the day, however, to assume that the youth would vote on any one issue for a number of reasons. First, it is important to note that the youth of India may not vote merely as youth but typically on familiar lines of caste, region and religion. The CSDS study clearly brings out the fact that the Muslim youth in the country feel alienated from the mainstream as they perceive discrimination with respect to employment opportunities. These sentiments might indicate a voting pattern guided by communal sentiments. Similarly, there could be other age-neutral social and cultural factors that are significant in determining the votes of the youth. Second, it is crucial to understand that apart from divisions like caste and religion, there are also multiple opinions among the youth on what are the perceived ‘important’ issues. This is similar to what prevails in other segments of the electorate as well, thereby making it difficult to ascertain which way ‘young’ Indians will vote. In terms of critical issues, the CSDS report reveals that more than half (54 per cent) of the Indian youth were most concerned about unemployment and poverty. While 44 per cent feel that unemployment is most important, 25 per cent of them are concerned about terrorism. With regard to India’s relations with the United States, 39 per cent oppose United States’ domination, while 34 per cent favour a good relationship with the country. Seeing these figures, it would be safe to assume that apart from bread and butter issues, matters of terrorism and foreign policy are also important and cannot be relegated to the background. However, what remains to be seen is that to what extent the youth, irrespective of their concerns, actually vote, since in the recent past the youth have at times shown their indifference to elections. One more significant statistic emanating from the CSDS report is that 70 per cent of the youth are not familiar with the concept of globalisation. So the majority of India’s ‘GenNext’ is not familiar with globalisation, a fact which may not determine the outcome of the elections, but is definitely an eye-opener as far as working out strategies for reaching out to the youth is concerned. Similarly, another finding smashes the assumption that the internet is a safe way to connect with India’s youth since only 12 per cent of India’s youth are found 8

The Indian Express, “When Pappu goes to vote”, Seema Chishti, 28 December 2008.

using the internet frequently. So unlike the United States, where the Obama campaign could rely extensively on the internet, it would be tough to replicate this model in India. Further, among the young accessing the internet frequently, many might not be influenced to vote one way or the other simply because they are being asked to do so through the internet. While it is not possible to specify the exact nature of the impact the youth are likely to have on the outcome of the 2009 elections, there is no denying that they will play a vital role in shaping the final results. This makes preparation for elections that much tougher for political parties. At the same time, this also makes the current Indian elections one of the most interesting in recent times.

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ISAS Insights No. 51 – Date: 23 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

Indian Elections 2009: The Economic Backdrop Bibek Debroy 1 Preface India will hold its 15th general elections in April/May 2009. The elections will take place in challenging circumstances. A variety of cross-cutting political, security, economic and sociocultural issues will influence the elections. The exercise will be impacted by multiple parties, personalities and positions from India’s vast political spectrum. As India moves into the election mode, the Institute of South Asian Studies (ISAS) is bringing out a series of papers analysing different aspects of the forthcoming elections. These will include, among others, the key national and regional parties, and their strategies, key political personalities, and the issues that are likely to have an impact on the elections. ISAS had earlier prepared two papers, providing an overview of India’s political parties and the role of the youth in India’s elections. 2 This third paper in the series examines the economic backdrop to the general elections. The Economic Backdrop The Indian economic story is increasingly turning dismal. Till fiscal year 2007-08, there was a nine percent gross domestic product (GDP) growth story, driven by a savings rate of 38 percent and an investment rate of 39 percent, fairly close to East Asian levels. When the external shock hit India in September 2008, there was initial speculation that India might be decoupled. That hypothesis has been buried. India cannot be decoupled with an export to GDP ratio of 14 percent with goods, and 21 percent with goods and services. Export growth has turned negative and this shaves off at least two percent from GDP growth. The slowdown in growth had started before the external shock hit, thanks to a tight monetary policy.

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. In the second paper in this series (ISAS Insight No 50: “Indian Elections 2009: Why the ‘Y’ Factor Matters?”), ‘one billion first-time voters’, as mentioned in the first sentence of the last paragraph on page 1, should be read as ‘one hundred million first-time voters’. The error is regretted.

Recent GDP figures from the Central Statistical Organization (CSO) show growth of nine percent in 2007-08 and 7.1 percent in 2008-09. This suggests the baseline growth had already dropped from a trend of around nine percent to around seven percent, thanks to higher interest rates. With the shock of the global slowdown superimposed, growth will drop further. There is near consensus that growth will be even lower in the year 2009-10. Recently, the Prime Ministerâ&#x20AC;&#x2122;s Economic Advisory Council submitted a report projecting a seven-percent growth in 2009-10. This is based on the consumption to GDP ratio increasing by four percent, a savings rate of 31 percent and an investment rate of 32 percent. However, there are not too many takers for this optimistic projection. Non-government growth projections for 2009-10 are more like five percent, certainly for the first half of the financial year. There is some difference of opinion about whether five percent will remain for the entire financial year or whether there will be a mild recovery to six percent in the second half. Recent increases in savings and/or investments have been across all three groups â&#x20AC;&#x201C; households, the private corporate sector and the public sector. While savings may recover, there is no obvious reason why investment should since there is also lumpiness in investments. Consequently, there is also an employment angle, both in terms of jobs that will not be created because of lower growth and slashing of existing jobs, though there is some cushion because the agriculture sector has performed well and large chunks of the rural sector are not integrated into the national and global markets. Having said this, using aggregate employment elasticities, growth reduction from nine percent to five percent means loss of six million jobs. In the early days of the global shock, the industry chamber, the Associated Chambers of Commerce and Industry of India produced a report that the industry would shed 25 percent of its jobs. Partly under government pressure, this was subsequently withdrawn. There is now a report from the Indian Ministry of Commerce and Industry (MOCI), another from the Labour Ministry and yet a third from the Federation of Indian Exportersâ&#x20AC;&#x2122; Organization (FIEO) on job losses. For the export sector, MOCI talks of one million jobs lost by March 2009, the FIEO of 10 million and the Labour Ministry of about five million jobs lost across the board. Some of these losses will be in the organised sector, others in the unorganised sector, and others in the contractual or informal segment within the organised sector. Firm employment figures date to 2004-05 since there is a time-lag in data. However, there is a labour market issue, with India adjusting from a nine-percent to a five-percent growth. Towards the end of February 2009, the CSO will disseminate figures for the third quarter of 2008-09 and one will know how bad the slowdown really is. One reason why the present general elections are important is because the incoming government will have to grapple with this problem and come out with sensible policy measures. There were few structural reforms under the United Progressive Alliance (UPA) government. Had these been introduced, counter-cyclical options would have been available and sources of growth perhaps become more endogenous, less susceptible to external sector developments. There have been monetary policy changes too and the transmission mechanism is not working satisfactorily yet, with no sharp increase in bank lending or a reduction in interest rates. However, with further loosening and with a time-lag, the monetary policy should begin to work.

The more interesting question for the new government will be on fiscal policy. There is a Fiscal Responsibility and Budget Management (FRBM) Act, with terminal goals in 2009-10 of a revenue deficit to GDP ratio of zero percent and fiscal deficit of three percent. The budget estimates for 2008-09 promised a revenue deficit of 0.5 percent and a fiscal deficit of 2.5 percent. However, this was without providing for items such as farmers’ debt relief, the 6th Pay Commission and National Rural Employment Guarantee Act that should have been budgeted for. As a result, the revised revenue and fiscal deficits for 2008-09 are at much higher levels of 4.4 percent of GDP and six percent of GDP respectively. There was little fiscal consolidation and reform under the UPA government. Indeed, reforms are easier when there is growth and buoyant tax revenue. Reforms are difficult when there is a downturn. That growth opportunity was missed. There will be an attempt to find a scapegoat in the external slowdown for the widening in deficits. However, that is not true. The additional fiscal stimulus because of the slowdown does not amount to more than five percent of GDP. The rest of it is due to populist expenditure and so-called flagship programmes of the UPA government. The centre’s revised fiscal deficit is at six percent of GDP. With the inclusion of off-budget items, we will be at nine percent. The aggregate statelevel deficit is 2.5 percent of GDP. However, this will increase, since it is contingent on tax revenue growth. Therefore, the overall deficit (not just the technical fiscal deficit) will be 12 percent of GDP, a horrendous figure, unparalleled since 1991. The issue is not the inevitable downgrading of India’s sovereign credit rating. More importantly, there was a consensus on fiscal rectitude across every government since 1991. That disappeared under the UPA government and the incoming government will find it difficult to reverse the trend. Instead, there will be pressures to dilute and relax the FRBM Act and the states will follow suit. As a corollary, other structural reforms will also be difficult to introduce. In the 2009 general elections, there is certainty that neither of the two major parties will obtain a majority. There is also certainty that the Congress Party and Bharatiya Janata Party (BJP) together will obtain less than 270 seats. Depending on whom one asks, the range for the BJP is between 100 and 120, while that for the Congress Party is between 110 and 130. In principle, one of three configurations is possible after the elections and in decreasing order of probability, they are Congress-led, the Third Front and BJP-led. Both the alliance of the UPA and the National Democratic Alliance are in tatters, with neither alliance fighting the elections as a coherent pre-poll alliance. Therefore, government-formation will be post-poll. These elections are also important because they should witness a decline in the importance of the Left. The Communist Party of India (Marxist) [CPI(M)] is in bad shape in Kerala and if there is a Congress Party and Trinamool Congress tie-up in West Bengal, it will be in worse shape there. With a West Bengal tie-up, the Left should be down to 30 seats and without the tie-up, it will be at around 40. Meanwhile, the Bahujan Samaj Party is certain to increase its tally to around 40 seats. These elections are interesting in that sense too, with a certain decline in the importance of many political parties that have hitherto been important – the CPI(M), the Samajwadi Party and the Rashtriya Janata Dal. The field is, therefore, wide open, both in terms of who will form the government and in terms of who the Prime Minister will be. Perhaps the only thing certain is that Dr Manmohan Singh will no longer be the Prime Minister, since the Left will make that conditional on offering support to a Congress-led government. It is also palpably clear it is too early for either of the two major political parties to transit to a leadership from the next generation.

Interpreted thus, these elections are an inter-regnum, paving the way for a more complete polarisation in 2015, if not earlier. During this inter-regnum, substantive economic reforms seem unlikely. Coinciding with a global recovery, the nine percent-plus growth in India too will have to wait. These elections only mark time. And looked at in this light, the perennial talk of instability is perhaps unwarranted. What is the point of a stable government in 2009 that does nothing for five years? Is it not preferable to have an unstable government that lasts for a couple of years, before giving way to a more functioning government in 2011? It is tempting to argue the state-level elections in Delhi, Madhya Pradesh and Chhattisgarh demonstrated that people voted for development and governance. In a first-past-the-post system, life is rarely that simple. For similar reasons, 2009 will not be a vote on secularism versus fundamentalism, or on a hard versus soft state, interpreted in the sense of terrorism. oooOOOooo

ISAS Insights No. 52 – Date: 24 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 Rivalry in the Western Indian Ocean C. Raja Mohan 1 Introduction The Chinese President Hu Jintao’s brief stopover in Mauritius in February 2009, as part of his four-nation African tour, does not fit in with the widespread perceptions of Beijing’s resource diplomacy. On the eve of President Hu’s second African tour in barely two years, which included Mali, Senegal, Tanzania and Mauritius, Chinese officials were eager to counter the notion that China’s African diplomacy was all about resources. Pointing out that the four African states on Hu’s itinerary were not known for mineral wealth, Chinese officials insisted that Beijing’s interest in Africa “isn’t confined to energy and resources”. 2 New Delhi, it appears, has every reason to take Beijing at its word, and focus on the very different strategic dynamic that appears to be shaping Beijing’s interest in the Western Indian Ocean and its island states like Mauritius. To be sure, India is concerned about the scale and depth of China’s resource diplomacy in Africa. It is no secret that India has been chasing China’s tail in its quest for equity oil and acquisition of mineral resources all around the world, including Africa. New Delhi has also followed Beijing in giving a greater coherence to its diplomatic efforts in Africa. Following the first China-Africa summit in Beijing at the end of 2006, India organised a smaller version of its own Africa summit in mid-2008. None of this competitive dynamic, however, captures the incipient Sino-Indian rivalry in the Western Indian Ocean. While China’s attempts to build maritime infrastructure in Gwadar in Pakistan and other South Asian ports has received widespread attention in India and beyond, their competition for strategic influence in the important islands states of the Indian Ocean has not been adequately analysed. That the two recent trips of President Hu to Africa in February 2007 and February 2009 ended in the Western Indian Ocean islands has not gone unnoticed in New Delhi. If the former trip concluded in Seychelles, the latter terminated in Mauritius. That these two island nations have had strong political and security ties to India has made the Chinese forays all the more interesting for those interested in the shadow boxing between Asia’s rising powers. 1

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 on-going 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. The statement on the eve of the visit by Chinese Assistant Foreign Minister Zhai Zun in Beijing, 6 February 2009; see, Xinhua, “FM: energy coop only part of Sino-Africa coop”, 6 February 2009, available at <http://news.xinhuanet.com/english/2009-02/06/content_10775342.htm> accessed on 18 February 2009.

China’s Outreach The fact that the President of the world’s largest nation chose to show up, in quick succession, in two of the world’s smallest countries – Seychelles (population: 85,000) and Mauritius (1.25 million) – speaks of the strategic significance of the two island nations. For centuries, these and other islands such as Madagascar, Comoros, Reunion, Djibouti, and Socotra have been critical links in the flow of goods and people across the Indian Ocean, from east and west and north and south. In the colonial era, they acquired a military significance amidst the efforts of European powers to control the sea-lanes of the Indian Ocean. During the Cold War, the island territories of Western Indian Ocean were at the very heart of American power projection into the region. Before it freed Mauritius in 1968 and began to withdraw from the East of Suez, Great Britain separated the island of Diego Garcia and handed it over to the United States. After the Cold War, Diego Garcia has been the pivot of United States naval operations in the Indian Ocean and the many wars it has fought in the Persian Gulf. The French granted independence to the Comoros but retained control over Reunion; they also maintained the second largest naval presence in the Indian Ocean after the United States. Through the Cold War, the Soviet Union continually jockeyed for influence with occasional successes as in Seychelles. Many of these island states were fragile and were easy targets for not just great power intervention but also threatened by attacks by small mercenary groups. If there was a relative decline in the military significance of the western Indian Ocean territories since the end of the Cold War, the rise of China has once again put them back on the global geopolitical map. Beijing’s growing strategic interest in the Western Indian Ocean is firmly rooted in the dramatic expansion of the Chinese economy over the last three decades. Most of China’s exports to Europe, South Asia, Middle East and Africa as well as China’s growing imports of energy from the Gulf and mineral resources from Africa are transported through the sea-lanes of the Indian Ocean. The faster the economic growth in China, the greater is its dependence on imported natural resources. It was inevitable then that energy and resource security considerations would increasingly compel China to pay attention to the protection of its seaborne trade in the Indian Ocean. This in turn became an important justification for a more modern and powerful navy that would look beyond the traditional security concerns vis-à-vis Taiwan. 3 These concerns were further accentuated by the fact that the energy and resource supplies from the Gulf and Africa have to transit through the narrow choke points in the eastern Indian Ocean. That resource supplies to China could be squeezed by powerful potential adversaries such as the United States has come to be defined in the celebrated phrase, Beijing’s “Malacca Dilemma”. Ever since the Chinese political leadership reportedly referred to the problem in 2004, there has been considerable outpouring of internal and external discourse on this theme. 4 China’s perceived vulnerability in the Malacca Straits has been useful in explaining Beijing’s efforts to develop alternatives such as building a canal across the Kra Isthmus in 3

“As China Grows, so does its Long Neglected Navy”, Wall Street Journal (New York), 16 July 2007, p. A1; Zha Daojiong, “China’s Energy Security: Domestic and International Issues”, Survival, Vol. 48, No. 1, Spring 2006.; see also Lee Jae-Hyung, “China’s Expanding Maritime Ambitions in the Western Pacific and the Indian Ocean”, Contemporary Southeast Asia, Vol. 24, No. 3., December 2002. See for example, Ian Storey, “China’s ‘Malacca Dilemma”’, China Brief, Vol. 6., No. 8, 12 April 2006; You Ji, “Dealing with the Malacca Dilemma: China’s Effort to Protect is Energy Supply”, Strategic Analysis, Vol. 31, No. 3, May 2007, pp. 467-89; and Marc Lanteigne, “China’s Maritime Security and the ‘Malacca Dilemma’”, Asian Security, Vol. 4, No. 2. 2008, pp. 143-61.

Thailand, developing the Irrawaddy corridor in Myanmar that is linked to the Yunnan province, and building the Gwadar port in Pakistan and connecting it to Xinjiang in Western China through the Karakoram highway. Impressive as these efforts have been, they have been widely seen as inadequate in addressing China’s maritime vulnerabilities. As it became clear that China must find a way to operate in the Indian Ocean by securing access to bases and facilities in the littoral, Beijing’s new focus on island territories had begun to draw widespread attention. In what came to be described as the ‘string of pearls’ strategy, China appeared to devote special attention to developing access arrangements to ports along the sea lanes linking the energy sources in the Persian Gulf with the consumption centres in coastal China. 5 Many analysts, including some in the United States, question the alarmist nature of the initial assessments on China’s island strategy in the Indian Ocean. Some in China, on the other hand, appear to have dismissed the ‘string of pearls’ strategy as unsustainable without a significant blue-water navy that is free to operate in the Indian Ocean. Nevertheless, for many in India, China’s new activism in the Indian Ocean and in the immediate vicinity of South Asia has renewed the old perceptions on “Chinese encirclement” of India, this time from the seas. 6 As India geared up to limit the Chinese search for access in and around the South Asian waters, it was surprised to find Beijing’s unexpected new thrust in the Western Indian Ocean, especially towards Seychelles and Mauritius. 7 Although China’s initiatives towards both these island territories were framed within Beijing’s Africa policy, there was no mistaking the centrality of maritime considerations from the perspective in New Delhi. Breaching India’s Sphere of Influence Unlike in Myanmar, Sri Lanka, Maldives and Pakistan, there has been no public evidence of China seeking military access arrangements or new port contracts in Seychelles or Mauritius. India, nevertheless, is anxious about the scale and intensity of the diplomatic and political energies that Beijing seems to be devoting to the two island nations. India’s concerns are not about a major immediate move by China in the two island states but about Beijing’s strategic intentions underlying its high profile outreach to Seychelles and Mauritius. For now, India enjoys rather strong political and security ties to the two island nations. The big question for New Delhi is whether China is laying the foundation for wresting these two small states out of what has been widely perceived as India’s sphere of influence in the Western Indian Ocean. While it cannot prevent an intensification of economic cooperation and political cooperation between China and the Western Indian Ocean island territories, New Delhi is aware that Beijing, by its own declaration, is keen to promote bilateral military and security cooperation

Christopher J Pehrson, String of Pearls: Meeting the Challenge of Rising Power Across the Asian Littoral (Carlisle, PA: Strategic Studies Institute, United States Army War College, July 2006). Gurpreet S. Khurana, “China’s ‘String of Pearls’ in the Indian Ocean and its Security Implications”, Strategic Analysis, Vol. 32, No. 1, January 2008, pp. 1-39; see also, Amit Kumar, “A New Balance of Power Game in the Indian Ocean: India Gears up to Tackle Chinese Influence in Maldives and Sri Lanka”, IDSA Strategic Comments, 24 November 2006, available at <http://www.idsa.in/publications/stratcomments/ AmitKumar241106.htm> accessed on 19 February 2009. C. Raja Mohan, “Beijing is Testing Strategic Waters in India’s Backyard”, The Indian Express (New Delhi), 30 January 2007, p. 1; and C. Raja Mohan, “Circling Mauritius”, The Indian Express (New Delhi), 11 February 2009, p. 13.

with all the African states. 8 After years of avoiding them, China is now stepping up its contribution to international peacekeeping operations around the world, including Africa. There have been reports about China’s growing arms transfers to the African states. 9 India, which already has close military and security ties with these island nations, would not want to be outflanked by Beijing. 10 There have been indications that concerns about Beijing stepping in to supply arms to Seychelles compelled New Delhi to embark on a pre-emptive move in early 2005 when the Indian Naval Chief, Admiral Arun Prakash, gifted the “INS Tarmugli”, a fast attack craft, to the Seychelles Coast Guard. The Indian Naval Headquarters considered the request from Seychelles so urgent that it decided to pull the ship out of its own fleet barely three years after commissioning. 11 For the moment though India’s economic and security cooperation with Seychelles is robust. India has trained large numbers of police and military men from Seychelles. A memorandum of understanding on defence cooperation was signed when then Vice President Bhairon Singh Shekhawat visited Seychelles in 2003. India has also gifted a few helicopters to Seychelles over the years. Indian naval ships routinely visit Seychelles. High-level visits between India and Seychelles have been frequent, and have included a visit by Prime Minister Indira Gandhi way back in 1981. However, China now is all set to compete with its intense highlevel political attention. Seychelles President James Michel was in Beijing in November 2006 to participate in the first China-Africa Summit. Barely three months later, President Hu went on a return visit to Seychelles. Given the small size of Seychelles’ economy and the limited nature of its requirements, China has few difficulties in rapidly expanding its influence in the island state. New Delhi will closely monitor any attempt by Beijing to explore Seychelles’ expansive waters for oil and natural gas. Although the land area of Seychelles is only 435 square kilometres, it has an Exclusive Economic Zone of nearly 1.3 million square kilometres. A few international oil companies are beginning to test the waters for hydrocarbons. Even more important from New Delhi’s perspective is to prevent a major move by Beijing to sell arms or establish listening posts and monitoring stations on the island. There has been some speculation in Seychelles political class that Beijing might be looking for precisely such arrangements in the island. 12 India’s links with Mauritius are in fact deeper and more enduring. Few other countries in the world are as intimately linked to India as Mauritius. Nearly 68 percent of its population is of Indian origin and deeply values the relationship with the mother country. India’s profile in every aspect of the life of Mauritius remains significant and high. 13 China, too, has its historical links with Mauritius and there are nearly 30,000 Mauritians of Chinese descent. 8

11 12

See, China’s African Policy, January 2006, available at <http://english.peopledaily.com.cn/200601/12/print 200060112_234894.html> accessed on 19 February 2009. Ian Taylor, “Arms Sales to Africa: Beijing’s Reputation at Risk”, China Brief, Vol. 7, No. 7, 18 May 2007; see also Andrei Chang, “China Expanding African Arms Sales”, UPI Asia, 26 January 2009, available at <http://www.upiasia.com/Security/2009/01/26/china_expanding_african_arms_sales/1148/> accessed on 19 February 2009. Alex Vines and Bereni Oruitemeka, “India’s Engagement with the African Indian Ocean Rim States”, Africa Programme Paper No.1/08 (London: Chatham House, 2008). Author’s conversations with senior naval officials in New Delhi, March 2005. See for example, the speech by the founding president of Seychelles, James R. Mancham, at the Westminister College, Salt Lake City, Utah United States, 25 September 2007; available at <http://www.seychellesreview.com/node/120/print> accessed on 19 February 2009. For an official review see, “India-Mauritius Bilateral Relations”, available at <http://www.mea.gov.in/ foreignrelation/Mauritius.pdf> accessed on 19 February 2009.

Beijing now appears determined to step up its relations with Port Louis and President Hu’s visit in February 2009 was an expression of that political will. In the first-ever visit to Mauritius by a Chinese Head of State, President Hu announced a US$260 million loan for the modernisation and expansion of the airport in Port Louis and the speeding up of the completion of the US$730 million dollar special economic zone. 14 If the former represented Beijing’s interest in picking up a stake in the infrastructure of the island nation, the latter is about taking full advantage of Mauritius as the gateway to Africa. The massive special economic zone project is expected to become a hub for Chinese commercial activity in Africa. 15 It is also the largest single injection of foreign capital into the island and is expected to generate up to 40,000 jobs and generate exports of up to US$200 million annually. While India’s bilateral trade and economic engagement with Mauritius is deeper and larger than that with China, President Hu’s visit signaled that this might not remain uncontested. As India assesses China’s rapidly rising profile in Mauritius, New Delhi would have every incentive to consolidate, expand and protect its role as the principal security and military partner of Port Louis. Within years of its independence, Mauritius turned to New Delhi to secure its vast maritime estate. The Mauritius coast guard was established through Indian assistance, and India has regularly provided ships and helicopters to equip the force and officers to man it. Indian naval ships conduct hydrographic surveys for Mauritius. Recent reports suggest that Mauritius has offered India a project to lease and develop tourist infrastructure on two of its islands called Agalega. Speculation abounds that this project would allow the Indian Navy to develop an important facility in a critical location in the Indian Ocean. 16 India’s growing security profile in the Western Indian Ocean includes the construction of a monitoring station in northern Madagascar and its growing naval cooperation with Mozambique that includes coastal surveillance, and supply of equipment and training of personnel. 17 It is quite clear that Beijing too would like to emulate the Indian Navy’s wide-ranging activism in the Western Indian Ocean littoral. India would, however, be extremely reluctant to see an expanded role for the Chinese Navy in the Indian Ocean. Mitigating the Security Dilemma That there is a security dilemma – the pursuit of legitimate interests by one party is seen as threatening the legitimate interests of the other – between India and China in the Indian Ocean has already been argued quite succinctly. 18 As China seeks to overcome its geographic weakness in the Indian Ocean, it runs headlong into India which is determined to keep out extra-regional powers that it deems hostile. This fundamental tension between the maritime strategies of the two nations has become acute, as both China and India rise, and seek strong and powerful navies as necessary instruments in the protection of their growing interests far from their shores. President Hu had insisted at the end of 2006 that China must ‘build a powerful people’s navy that can adapt to its historical mission during a new century and a

16 17

Richard Lough, “China signs $260 mln airport deal with Mauritius”, Reuters India, 17 February 2009, available at <http://in.reuters.com/article/asiaCompanyAndMarkets/idINLH32372920090217?sp=true> accessed on 19 February 2009. “Mauritius-China: ‘Gateway to Africa’ Aim”, Africa Research Bulletin, 16 February – 15 March 2008, p. 17733. Sidhartha, “India eyes an island in the Sun”, Times of India (New Delhi), 26 November 2006, p. 1. Sudha Ramachandran, “India’s Quiet Sea Power”, Asia Times Online, 2 August 2007, available at <http://www.atimes.com/atimes/South_Asia/IH02Df01.html> accessed on 19 February 2009. See John Garver, Protracted Contest: Sino-Indian Rivalry in the Twentieth Century (New Delhi: Oxford University Press, 2001), esp Ch 10, pp. 275-312.

new period”. 19 India’s Chief of Naval Staff, Admiral Sureesh Mehta has argued that India must pursue its ‘manifest destiny’ by becoming a strong maritime power. 20 Conclusion The fact that China and India attach lofty goals – ‘historic mission’ and ‘manifest destiny’ – to their maritime objectives would not necessarily lead to confrontation. However, the footprints of these two rising powers do overlap in the Indian Ocean. If the initial consequences of this were seen in the Eastern Indian Ocean, we now are seeing the first signs of a potential conflict in the Western Indian Ocean. There is no question that their search for political influence and maritime access is bound to increase the tensions between the two Asian giants. Before this competition becomes antagonistic, China and India must find ways to understand each other’s interests and concerns and embark on maritime confidencebuilding measures.

oooOOOooo

David Lague, “China airs ambitions to beef up naval power”, International Herald Tribune (Singapore), 28 December 2006, p. 1. Sureesh Mehta, “Foreword”, in Freedom to Use the Seas: India’s Maritime Military Strategy (New Delhi: Ministry of Defence, 2007), p. iii.

ISAS Insights No. 53 – Date: 9 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

Indian General Elections 2009 – Key Issues That Could Influence Voting Behaviour Paranjoy Guha Thakurta 1 Preface India will hold its 15th general elections from 16 April to 13 May 2009. The elections will take place in challenging circumstances. A variety of cross-cutting political, security, economic and socio-cultural issues will influence the elections. The exercise will be impacted by multiple parties, personalities and positions from India’s vast political spectrum. As India moves into the election mode, the Institute of South Asian Studies (ISAS) is bringing out a series of papers analysing different aspects of the forthcoming elections. These will include, among others, the key national and regional parties, and their strategies, key political personalities, and the issues that are likely to have an impact on the elections. ISAS had earlier prepared three papers, providing an overview of India’s political parties; the role of the youth in India’s elections; and the economic backdrop to the general elections. This fourth paper in the series examines the key issues that could influence voting behaviour in the elections. Introduction The 15th general elections in India will be held in five phases between 16 April and 13 May 2009; and the results of voting in the world’s largest democracy will be declared on 16 May 2009. Political parties all over the country, both national and regional, are not only drawing up their election manifestoes, but are also firming up campaign strategies and finalising messaging programmes. The larger national political parties are also busy putting together alliances with smaller regional parties in the hope of winning elections in a sufficiently large number of parliamentary constituencies to enable a stable coalition to come to power in New Delhi. However, this may not happen and the likelihood of political instability of the kind seen in India between 1996 and 1999 cannot be ruled out.

Mr Paranjoy Guha Thakurta is a Journalist and Founder of the “School of Convergence” in India. 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. Mr Thakurta can be contacted at paranjoy@gmail.com.

Predicting voting behaviour is a hazardous exercise in the best of times, particularly so when the Indian polity has become fragmented. The opinion polls that have been conducted so far indicate that none of the three dominant coalitions – the Congress party-led centrist United Progressive Alliance (UPA); the right-wing, Hindu nationalist Bharatiya Janata Party (BJP)led National Democratic Alliance (NDA); and the amorphous centre-left, anti-Congress, antiBJP Third Front – are likely to obtain anywhere near a comfortable majority (above 272 seats) in the 543-member Lok Sabha or ‘House of the People’, India’s Lower House of Parliament. In recent years, voter behaviour in India has been highly unpredictable with opinion pollsters, psephologists and political pundits going completely wrong in their calculations of power equations. Nevertheless, a concatenation of issues of both national and regional importance influence electoral behaviour and a brief overview of these issues could provide pointers to how the Indian voters could exercise their franchise in the forthcoming general elections. Four points need to be emphasised at the outset. First, it is likely that not one, or even a few, but a variety of issues, that is, political, economic, socio-cultural and security-related, could influence voter behaviour and would decide which coalition comes to power. Secondly, it would be accurate to perceive the next elections as not one but a combination of elections at local, provincial and regional levels whose outcomes would have to be aggregated across 28 states and seven Union territories to determine the contours of the next federal government in India. Thirdly, pre-election alliances may not necessarily translate into post-election coalitions because of the possibility of shifting allegiances and new coalitions that seek and obtain ‘outside’ support from one or more political parties or formations. In other words, the political situation in India in the run-up to the April-May 2009 elections is exceedingly fluid, holding out a myriad of possibilities for the future. Finally, the ability to anticipate the outcome of the elections has become particularly difficult because the geographical boundaries of 499 out of the 543 Lok Sabha constituencies in the country have changed on account of a recently-concluded ‘delimitation’ exercise. Electoral Alliances Partnerships or alliances among political parties are going to be of crucial importance in deciding the character of the coalition that could come to power. From 1996 onwards, coalition governments have been ruling the country – the United Front government from 1996 to 1998, the BJP-led NDA government from 1998 to 2004 and the Congress-led UPA government from 2004 to 2009. All of them have been coalitions comprising various large and small political parties. For the 2009 elections, the Congress has cobbled up new alliances with the Trinamool Congress of Mamata Banerjee in West Bengal (that was earlier a part of the NDA) and the Samajwadi Party in Uttar Pradesh, besides existing alliances among constituents of the UPA such as the Congress-Nationalist Congress Party in Maharashtra and the Congress-Rashtriya Janata Dal alliance in Bihar. The NDA has three new constituents – the Indian National Lok Dal in Haryana, the Asom Gana Parishad in Assam and the Rashtriya Lok Dal in Uttar Pradesh – over and above its existing alliances with the Shiv Sena in Maharashtra and the Shiromani Akali Dal in Punjab. The Biju Janata Dal in Orissa has broken away from the BJP. Many, if not most, of the alliances mentioned are rather uneasy partnerships and it is certain that there would be a number of so-called ‘friendly contests’ between candidates representing

the constituent parties of the UPA and the NDA coalitions as well as their ‘outside’ supporters and allies. The Telugu Desam Party (TDP), which had supported the centre-left United Front between 1996 and 1998 and then extended support to the NDA between 1998 and 2004, is now with the Third Front – the non-BJP, non-Congress alliance, currently comprising the Janata Dal (Secular), the Communist Party of India (Marxist), the Communist Party of India, the Revolutionary Socialist Party, the All India Forward Bloc, the TDP, the Telengana Rashtra Samiti (that was part of the UPA between 2004 and 2006) and the All India Anna Dravida Munnetra Kazhagam. This amorphous coalition might also attract some of the smaller parties that are at present in the UPA and the NDA in case the Congress and the BJP do not garner the numbers needed to head coalitions that could form a stable government. In the likely event of a close contest among the contending coalitions, there is a possibility that some of the relatively smaller regional parties could exercise a crucial influence on the formation of the new government in New Delhi between 16 May 2009 (the day the results will be declared) and 2 June 2009, the day the term of the 14th Lok Sabha ends and by when a new government will have to be in place. Economic Slowdown and Job Losses Job losses resulting from the ongoing recession and financial meltdown in the economies of the West are emotive issues that could impact voting patterns among sections of the electorate in India. The growth rate of the economy has slowed down considerably in recent months, from an annual average of nearly nine percent between 2004 and 2008 to around five to six percent at present. Labour-intensive export-oriented industries such as textiles and garments, gems and jewellery, leather, handicrafts and processed foods have witnessed job losses while employment opportunities in the information technology sector have shrunk. Exports account for close to a fifth of India’s gross domestic product (GDP) and Indian exporters are estimated to have laid off 10 million workers by early-March 2009 because markets in the United States, Europe and Japan have contracted. An estimated 500,000 workers in the leather industry have lost their jobs since September 2008. The automobiles and auto-components industry is facing a sharp fall in demand, with some 4,000 ancillary units on the verge of closure affecting the livelihood of 200,000 workers. The spectre of job losses is particularly pronounced in the textile and garments manufacturing industry, the second-largest employer in India after agriculture, as roughly half the total production of textiles and garments in the country is exported, 60 percent of it to markets in the United States, the European Union and Japan. According to the Confederation of Indian Textiles Industry, at least 1.2 million workers in this industry will be unemployed by the end of March 2009. Though the ‘advance estimates’ of GDP released by the Central Statistical Organization in early-February 2009 claimed that the Indian economy will grow at 7.1 percent in the fiscal year that ends on 31 March 2009, subsequent data provided by the same organisation indicated that the country’s GDP grew by 5.3 percent in October-December 2008 quarter against 8.9 percent in the corresponding quarter of 2007. Whereas India is unlikely to slip into a technical recession – negative growth for two successive quarters – the economic slowdown has certainly come at a wrong time for the incumbent regime. The government’s

claim that it was not responsible for the economic slowdown that occurred on account of circumstances beyond its control may not convince many voters. Inflation Inflation has politically disastrous consequences and could be an important factor contributing to anti-incumbency sentiments. Economists point out that inflation is akin to a tax on the poor because it leads to an indirect transfer of resources from the rich to the underprivileged sections of society. When inflation is fuelled by high food prices, as it had in India between mid-2007 and mid-2008, this doubly impacts the poor who spend a higher proportion of their incomes on food. Inflation is one economic phenomenon that directly impacts voters in India, especially the economically disadvantaged sections who tend to go out and vote in larger numbers than the affluent sections and the middle classes. Inflationary pressures had been high because of high prices of oil, metals and food prices. Year-on-year inflation, as measured by the official wholesale price index, touched a 13-year high of nearly 13 percent in August 2008 before coming down to around three percent in early-March 2009. Prices of cereals, edible oils, fruits, vegetables, milk and dairy products remain at record highs despite the deceleration in the speed at which the prices of such articles of mass consumption had been rising. Till September 2008, the Reserve Bank of India (RBI) had squeezed liquidity and hiked interest rates to control inflation, thereby sacrificing growth. However, with recession setting-in in the United States, the European Union and Japan, the RBI pumped in liquidity and reduced interest rates. The Union government also cut taxes in the hope of stimulating economic growth. However, these measures have had limited impact in reviving the country’s economy. The government’s spokespersons claim that inflation has been brought under control by, among other things, the reduction in the prices of petrol and diesel. They further argue that the spike in the inflation rate was largely a consequence of the sudden jump in world prices of crude oil till early-July 2008 and, hence, could not be controlled by the government. India currently imports three-fourths of the country’s total requirements of crude oil and petroleum products. Whether such arguments will be understood and appreciated by ordinary voters in the country remains to be seen. Agriculture and Rural Development The Congress as well as all other political parties in India claim they are concerned about the interests of the ‘aam aadmi’ (or common person) in general and farmers in particular, since agriculture directly and indirectly provides a livelihood to more than half the country’s population. The Congress and the UPA claim the incumbent government has emphasised agriculture and rural development much more than its predecessor regimes. The UPA government is taking credit for having enacted the National Rural Employment Guarantee (NREG) Act that provides 100 days of guaranteed employment to a rural family at the official minimum wage, which varies between the equivalents of US$1 to close to US$2 in different parts of the country. The federal government has also waived loans taken by farmers from banks and increased the ‘minimum support prices’ at which various agricultural products are procured. The government’s critics, on the other hand, argue that large numbers of farmers continue to commit suicide (especially in Congress-ruled states such as Maharashtra and Andhra

Pradesh) because of their inability to repay loans obtained at usurious rates of interest from local moneylenders. While the government contends that its policies have resulted in “inclusive growth”, its political adversaries claim that the benefits of economic growth have been confined largely to the country’s elites and not permeated down to the poor – one out of four Indians lives on less than US$1 a day and two out of three earn barely US$2 a day. The Left argues that it has restrained the UPA government from integrating the country’s economy closely with the rest of the world (in the process, saving it from the worst ravages of the ongoing worldwide recession). It also says the government has attempted to practice free enterprise capitalism while claiming it believes in the virtues of socialism, resulting in a widening of inequalities in income and wealth, and a sharpening of the rural-urban divide and regional economic imbalances. Those in government and the supporters of the UPA government, however, refute such claims and contend that its policies and programmes have created jobs in villages and alleviated the conditions of the poor as well as curbed lean season migration to the cities, due primarily to the NREG Act. National Security and Terrorism The year 2008 witnessed a series of terrorist strikes on prominent cities in India culminating in the terrorist attacks in Mumbai, the commercial capital, in November. Earlier, cities such as Bengaluru (Bangalore), Ahmedabad, Hyderabad, Guwahati, New Delhi and Jaipur had witnessed terrorist attacks. The UPA government has been accused by the opposition BJP of being ‘soft’ on terror and of failing to take a tough stand against Pakistan whose citizens were reportedly involved in the Mumbai terror attacks. While the BJP sought to make national security a political issue by accusing the government of not acting in a tough and decisive manner, it failed to influence voters in its favour when provincial elections took place in December 2008 in Delhi and (to a lesser extent) in Rajasthan. Reacting to the BJP’s criticism, the Congress has sharpened its political rhetoric against Pakistan that is being described as an “epicentre of terror”. National security and terrorism, it appears, will not be an important election issue, with many voters believing that the issue is, in a sense, above politics. Religion and the Ram Temple Agenda The pro-Hindu stance of the BJP and the Ram Janmabhoomi-Babri Masjid issue had, in the past, helped the party increase its support base considerably. On 6 December 1992, hooligans reportedly supported by right-wing groups sympathetic to the BJP demolished a 16th Century mosque in Uttar Pradesh to build a temple to the ‘mythical’ Lord Ram. Earlier, the BJP’s Prime Ministerial candidate, L. K. Advani, had undertaken a ‘rath yatra’ (chariot tour) to mobilise public support for the building of a temple dedicated to Lord Ram at Ayodhya at the site where the Babri mosque had stood. The BJP rose from being a party with just two Lok Sabha seats in the 1984 general elections to win 182 seats in 1998 and 1999 to head a coalition government in New Delhi. In power, the BJP placed the temple issue in cold storage because of the opposition of its coalition partners in the NDA. Since then, the BJP has used its pro-Hindu stance selectively and periodically while seeking to project a more liberal and secular image of itself. In the recent past, groups claiming allegiance to the ideological fraternity to which the BJP belongs have indulged in violent acts against minorities (Muslims and Christians) in different parts of India, including Orissa and

Karnataka. In the run-up to the 2009 general elections, the BJP’s president, Rajnath Singh, said at the BJP’s national executive meeting that his party was in favour of building a Ram temple and added that nobody could shake the party’s faith in Lord Ram. However, Advani made it clear at the same meeting that any impression that the BJP was going “back to Ayodhya” was incorrect. Despite this apparent ambivalence, the party leadership appears unwilling to emphasise its Hindu nationalist ideology excessively because its political opponents continue to accuse the BJP of being against the interests of minorities and against the secular character of the Indian Constitution. Nuclear Agreement with the United States India’s civilian nuclear agreement with the United States raised a major political controversy in India in 2007 and 2008. After the agreement was formalised, in July 2008, the Left parties that had provided crucial ‘outside’ support to the Manmohan Singh-led UPA government parted ways with the Congress-led UPA, resulting in the coalition being reduced to a minority in the Lok Sabha. The government, however, survived a vote-of-confidence on 22 July 2008 by obtaining the support of members of parliament belonging to the Samajwadi Party and with the help of defectors who voted across party lines. The BJP as well as the Left were both critical of the nuclear deal on the ground that it compromised India’s national sovereignty and its independent foreign policy. The Left went further by alleging that the UPA government had entered into a wider strategic relationship with the United States which was against India’s interests. Despite the fact that nuclear power accounts for only three percent of the total electricity consumed in the country, the Congress and its supporters said the nuclear deal with the United States would help India’s “energy security”. Prime Minister Manmohan Singh stated on 22 July 2008 that the Left wanted him as their “bonded slave” and vetoed each step in concluding the nuclear agreement. The Communists claimed the government went ahead with the deal although it was not part of the agreed-upon national common minimum programme and that the Prime Minister had become subservient to American interests. Both the Left and the BJP subsequently criticised the Prime Minister for stating, in the presence of George W. Bush on 25 September 2008, that the nuclear agreement “means a lot to me and the people of India…The people of India deeply love you.” The issue of the nuclear deal has not died and is certainly bound to be raised by all political parties in their election campaigns. Conclusion It is extremely difficult to predict the outcome of the 15th general elections that will be known on 16 May 2009. All the three main contending coalitions, the UPA, the NDA and the amorphous Third Front, claim they would perform well. Opinion polls indicate that none of the three coalitions would be in a position to form a stable government in New Delhi which would require the support of more than 272 among the 543 members of the Lok Sabha. New post-poll alliances and splintering of existing coalitions are distinct possibilities. A period of political uncertainty of the kind India went through between 1996 and 1999 (four Prime Ministers, four governments and three general elections) could take place once again. Even such a denouement may not happen – many thought the UPA coalition government would not be able to complete its full term of five years but it did. The only thing that can be

said with a certain degree of certainty is that the next Indian government will be formed by a coalition of political parties even if the exact composition of the grouping would be tough to anticipate.

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ISAS Insights No. 54 – Date: 13 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

Indian Elections 2009: Foreign Policy Will Hardly Matter S. D. Muni 1 Preface India will hold its 15th general elections from 16 April to 13 May 2009. The elections will take place in challenging circumstances. A variety of cross-cutting political, security, economic and socio-cultural issues will influence the elections. The exercise will be impacted by multiple parties, personalities and positions from India’s vast political spectrum. As India moves into the election mode, the Institute of South Asian Studies (ISAS) is bringing out a series of papers analysing different aspects of the forthcoming elections. These will include, among others, the key national and regional parties, and their strategies, key political personalities, and the issues that are likely to have an impact on the elections. ISAS had earlier prepared four papers, providing an overview of India’s political parties; the role of the youth in India’s elections; the economic backdrop to the general elections; and the major domestic issues that are likely to dominate the elections. The fifth paper in the series examines some of India’s key foreign policy concerns and their likely impact on the forthcoming elections. Introduction Elections in a country like India are seldom driven by foreign policy. The voters, concerned generally as they are with the bread and butter, and law and order issues, do not get mobilised by foreign policy dynamics and diplomatic nuances. Even major strategic achievements with global implications do not move ordinary electorates. In 1974, for instance, Mrs Indira Gandhi’s Congress Party lost a keenly-contested provincial election in Uttar Pradesh. This was after India’s decisive victory over Pakistan in 1971 that gave birth to Bangladesh as a new, sovereign nation, and India’s nuclear “implosion” in 1974. Both these impressive developments had taken place under the Congress governments and Mrs Gandhi’s leadership.

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 reached at isassdm@nus.edu.sg.

This is not to say that foreign policy issues that impinge directly on some of the Indian states do not call for consideration in electoral calculations and alliances. The Sri Lankan ethnic conflict and New Delhi’s approach towards this conflict have been significant factors in Tamil Nadu politics since the early 1980s. They have shaped alliances among the Tamil parties as well as between the Tamil parties and the national coalitions such as the National Democratic Alliance (NDA), led by the Bharatiya Janata Party (BJP), and the United progressive Alliance (UPA), led by the Indian National Congress-I. The Tamil issue led to the I. K. Gujral government’s demise in 1998 when the Congress Party used it as a pretext to pull the rug by leaving the coalition. Similarly in Kashmir, the nature of India-Pakistan relations acquires an important place in the state’s electoral and political discourse. In Sikkim, the question of the relations with Nepal and the relevance or otherwise of the India-Nepal Treaty of 1950 has come to acquire some political currency. Other bordering states such as Bihar and West Bengal are also politically provoked by the spillover of radical and turbulent developments in the neighbouring countries. However, their political dynamics is seldom influenced by such developments in any decisive manner. Foreign Policy Issues in 2009 In the forthcoming parliamentary elections, no major foreign policy issue seems to have the potential of stirring the elections at the national level in any significant way. However, the electoral debate may not be completely free of foreign policy issues. Four such issues appear to be reasonably good candidates to figure in electoral debate. They are India’s rising global status; cross-border terrorism from Pakistan; the ethnic conflict in Sri Lanka; and the IndiaUnited States nuclear deal. Not many votes would perhaps be cast on the basis of any of these issues but they would find place in the election manifestos of the political parties and would be raised in the campaign discourses. The UPA seems to have learnt lessons from the 2004 NDA campaign which projected “India Shining” as its main electoral plank. In any case, with a sliding stock market and declining growth rates, there is not much “shine” left to be projected by the UPA as its achievement. However, there would be a subtle attempt to project India’s growing global recognition and credibility during the UPA regime. India’s growing capacity building in space, such as its mission to the moon and the successful missile launches; India’s respectful place in global counsels such as G20; and the growing desire among a number of countries to engage constructively with India may be underlined in campaign speeches. India’s declining economic performance would be blamed on the global economic decline. Thus a global cover may be used to hide the slow rate of economic reforms and administrative inefficiencies. The opposition will blame the UPA for India’s growing dependence on global economic forces and its inadequate preparedness in dealing with the crisis in the financial market. The opposition may also raise the question of India’s failure to secure United States Security Council (UNSC) reforms and a permanent seat for itself in the UNSC. The failure of the Indian candidate to win the United Nations Secretary-General’s election may also figure in the debate. The UPA’s adoption of Jai Ho (Be Victorious), the theme song of ‘Slumdog Millionaire’, may be seen as a clever and effective attempt to send a dual message of concern for the underdog and credit for global recognition (8 Oscar awards) of ‘Incredible India’ and its determination to rise.

Will Terrorism Influence Elections? The question of Pakistan-sponsored terrorism and India’s inability to deal with it, as the Mumbai attack demonstrated, would be on the forefront of the NDA’s campaign. The UPA’s weakness in this respect would be blamed on its “politics of vote banks (Muslims)”. The UPA’s defence would be to highlight its diplomatic success in forcing Pakistan to accept its involvement in the Mumbai attacks. This will be contrasted with the NDA’s failure to make any headway against Pakistan, even after the use of military muscle (Operation Parakram), following the attack on the Indian Parliament in December 2001. In the course of the debate on terrorism, India’s relations with Pakistan, the five-year old India-Pakistan peace process and the internal political instability in Pakistan will come under close scrutiny in the election campaign at the national level. This scrutiny will be all the more focused and sharper in the north Indian states, particularly Jammu and Kashmir, Punjab, Delhi and Rajasthan. The anti-NDA parties will not spare the issue of growing Hindu extremism which has raised its ugly head in Maharashtra, Gujarat and Orissa. The acts of terrorism by these extremists will be recalled before the electorates in specific constituencies. The Sri Lankan government’s military campaign against the Liberation Tigers of Tamil Eelam (LTTE) may be brought to its logical conclusion by the time India’s election campaign picks up its momentum. This is particularly so if the reported attempts by the United States and other members of the international community succeed in rescuing the trapped civilians by the sea route. No matter how the last phase of the ethnic war in Sri Lanka unfolds, this issue will acquire a central place in the Tamil Nadu campaign. The Sri Lankan question is a potentially powerful vote mobiliser in Tamil Nadu and it will swing votes one way or the other, though on a small scale. The UPA’s policy has tried to differentiate between the LTTE terrorism and the interests of the Tamils in Sri Lanka. However, this distinction will be blurred by pro-LTTE groups in Tamil politics such as the Pattali Makkal Katchi. They will attack the UPA for siding with the Sri Lankan government. They may also criticise the Dravida Munnettra Kazhagam for being constrained by its alliance with the UPA and not doing enough to save the Sri Lankan Tamils from “genocide”. The possibility of the extremist Tamil groups encouraging acts of selfimmolation and organising aggressive agitations to emotively charge the election atmosphere on the Sri Lankan issue cannot be ruled out. In the mercurial and emotive Tamil politics, the possibility of change in the existing alliances also cannot be ruled out. However, if any major shift takes place in the alliance structure, the Sri Lankan issue will surely be referred while explaining and justifying the shift. What about the India-United States Nuclear Deal? The UPA government could have lost power in July 2008 on the issue of India-United States civil nuclear deal. However, the fact that the government, especially Prime Minister Dr Manmohan Singh, braved the challenge and survived the threat could make this issue one of the party’s main planks in the elections. However, the issue has lost much of its sheen and punch in the past six months. After the conclusion of the deal, India has signed civilian nuclear cooperation agreements with Russia and France, and not just with the United States. This has blunted the political thrust of the Communist Party of India-Marxist (CPM) of blaming the deal as an act of subservience to the

United States. The UPA’s position on the civil nuclear deal has been further emboldened by the United States National Intelligence’s assessment of India’s foreign policy presented in the United States’ Senate in February 2009. Presenting this assessment, the Director of the National Intelligence, Dennis C. Blair, said, “On the global stage, Indian leaders will continue to follow an independent course characterised by economic and political pragmatism. New Delhi will not automatically support or oppose positions favoured by the United States or any other major power”. This is a fitting reply to the UPA’s domestic criticism of compromising national interests in the course of concluding the nuclear deal. The Congress Party will project its success in finalising the deal and retaining its foreign policy independence in the coming elections, particularly in the campaign in Left-dominated states such as West Bengal and Kerala. The Left, particularly the CPM, may bring in the issues of Iran and New Delhi’s reliance on the United States with regard to Pakistan but that may not bring in electoral gains to it. The BJP may not have much to gain by raising the India-United States civil nuclear deal issue in its electoral campaign. Marginal Impact of Foreign Policy It is, therefore, clear that foreign policy will take a backseat in India’s parliamentary elections of 2009. Issues of economic development and poverty as well as those related to security and terrorism are likely to dominate the campaign. While the UPA can draw some comfort on the basis of its recently-offered economic sops and the declining inflation, the staggering levels of poverty and dampening growth prospects will fuel the opposition fires. Terrorism is a continuing concern in India’s governance and there is not much that either the UPA or NDA can claim as success in this respect. The UPA’s post-Mumbai new Home Minister has created the impression of a hands-on minister but his initiatives will bear fruits, if at all, only after the elections are long over. The UPA will naturally have to project and defend its performance in the areas of economic development and governance, and in fighting terrorism. It should not ultimately come as a surprise to election observers and analysts if the electoral outcome is more decisively shaped by regional alliances, factors of caste, religious and regional identities, and the role of personalities, than by the issues and agendas put forth by the political parties.

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ISAS Insights No. 55 – Date: 23 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

Another Upheaval Averted But Pakistan Remains on the Brink Ishtiaq Ahmed 1 In the second week of March 2009, it seemed Pakistan was on the verge of another bout of volatility, instability and perhaps violent clashes between the police and demonstrators protesting the verdict by a three-judge bench of the Supreme Court declaring Nawaz Sharif and his brother, Shahbaz Sharif, ineligible to hold public office. In addition, they demanded the restoration of the displaced Chief Justice of the Pakistan Supreme Court, Iftikhar Mohammad Chaudhry, and several other judges, who had been deposed during the emergency imposed by General Pervez Musharraf in late 2007. There were also fears that street fighting might break out between the supporters of the opposition Pakistan Muslim League-Nawaz (PML-N), led by the Sharif brothers, and the party in power in the centre and in Sindh province, the Pakistan People’s Party (PPP) of the late Benazir Bhutto, now led by her husband and controversial Pakistan President, Asif Ali Zardari. It was fortunate that just when the long march was about to begin, Prime Minister Yousaf Raza Gilani announced on 15 March 2009, “My countrymen, in accordance with my commitment and the commitment made by the President of Pakistan, I declare reinstatement of Mr Iftikhar Muhammad Chaudhry and all other deposed judges to their positions.” He added that, “On 21 March 2009, on the retirement of the incumbent Chief Justice Abdul Hameed Dogar, Justice Iftikhar Muhammad Chaudhry will assume the office of the Chief Justice.” At the same time, Prime Minister Gilani announced that the government would appeal against the debarring of the Sharif brothers by the Lahore High Court because the public sentiment against that verdict was very strong. The decision came after a high-level meeting in the President House in Islamabad that began on the night of 14 March 2009 and continued till the early hours of 15 March 2009. Did the Prime Minister take these decisions in defiance of President Zardari? It is important to answer this key question for it will allow us to assess the likely impact on the PPP leadership rising from the reversal of this policy. A contest between President Zardari and 1

Prime Minister Gilani is most certainly on. In the latest incident, the former suffered a loss of face and prestige. His powers in the future are likely to diminish, or his position may actually weaken to the point that he may have to leave. He will probably not accept such reversals sitting down and the PPP could be headed for an intense period of internal strife. For quite some time, President Zardari had been ruling Pakistan more in the presidential style of General Musharraf. However, in principle, Pakistan is a parliamentary democracy which means that the head of the government or executive must be the Prime Minister. The controversial 17th Amendment of December 2003 conferred the power to dissolve the National Assembly (effectively the Prime Minister and his government) on the President. As a result of that amendment during the period when General Musharraf was the President, the Prime Minister played the role of a second fiddle. After the PPP came to power in February 2008, there were some discussions that the 17th Amendment would be repealed and real executive powers would revert to the office of the Prime Minister. In the early days of the PPP government, President Zardari had committed himself to letting the Prime Minister exercise executive authority. However, soon afterwards, he began to dodge that issue and there were no signs that he would agree to the 17th Amendment being annulled. However, after the announcements by the Prime Minister to restore the judges and to appeal the debarring of the Sharifs, it is clear that Prime Minister Gilani is staking his right to make the crucial decisions on behalf of the government. Whatever the outcome of the ZardariGilani contest, it is clear that the rising storm of protest which threatened to turn the long march into a massive demonstration of public anger and protest was instrumental in compelling the Prime Minister to make the decisions overruling President Zardari’s political stand. In any event, Pakistan has succeeded, once again, in averting a major political crisis that could have destabilised the democratic process and put in jeopardy the civilian rule. The Sharifs are undoubtedly, at present, the most powerful political family in the dominant Punjab province. The PML-N also has the largest number of elected members in the Punjab legislature. Moreover, Shahbaz Sharif was serving as Chief Minister Punjab when the verdict of his ineligibility to hold public office was announced. The Punjab Governor, Salman Taseer, a leader of the rival PPP, whose relations with the Sharif brothers have been notoriously bad, imposed the Governor’s rule in Punjab. Pakistan’s nascent and fledgling democracy seemed condemned to give way to authoritarian rule. Nawaz Sharif announced a long march that would bring hundreds of thousands of protestors to the capital Islamabad. He claimed that he was willing to risk his life and pleaded with others to join him. The lawyers had, for months, been agitating against the removal of Chief Justice Chaudhry. However, without mass political support, they were not making much headway. They naturally responded enthusiastically to Nawaz Sharif’s call. The rightwing Jamaat-e-Islami (JI) and the charismatic leader of the Tehrik-e-Insaaf, cricket idol Imran Khan, also announced their intention to join the march. The government imposed Section 144 which prohibited groups of more than five people assembling in one place. Arrests took place. The police clashed with demonstrators in Karachi, Lahore, Islamabad and other places. However, it became clear that without the excessive use of force, the long march could not be prevented. The PPP-Muttahida Quami Movement government of Sindh as well as the PPP-allied governments in the North West

Frontier Province and Baluchistan played a responsible role by informing the PPP leadership that, in the case the long march took place, the people of their provinces were likely to join it. It was not surprising that alarm bells also began to ring in Washington D. C. as the United States did not want Pakistan to be destabilised. Secretary of State Hilary Clinton called both President Zardari and Nawaz Sharif urging restraint. United States Ambassador to Pakistan, Anne Petterson, and other officials also conducted hectic diplomatic activities to defuse the conflict. Nawaz Sharif reportedly informed the Americans that he would not budge from his stand and the long march would go ahead if the PPP continued with its authoritarian actions. As the prospects of a showdown loomed large, with Nawaz Sharif planning to start his long march on 16 March 2009, the first signs of major disagreements within the PPP leadership became public in a dramatic manner. Information and Broadcasting Minister, Sherry Rehman, resigned when the transmissions of the popular private television channel, ‘Geo News’, were stopped without her being consulted. Earlier, Mian Raza Rabbani resigned as Federal Minister for Inter-provincial Coordination to protest the appointment of President Zardari’s personal lawyer, Farooq Naik, as Chairman of the Upper House of the Pakistan Parliament, the Senate. Unlike Rabbani, Naik was not even a member of the Senate. The ultimate reason that dissuaded the PPP from going all out to crush the brewing agitation was the fact that the Punjab police refused to use further violence and repression against the people. Rather, they were heeding the call of Nawaz Sharif not to obey what he described were unlawful orders of the government. All this showed clearly that in the key Punjab province, the PPP would not be able to prevail in a showdown with the PML-N. Moreover, this time round, the rumour mills did not churn out tales of a conspiracy being hatched in the Army Headquarters in Rawalpindi to stage another coup. Rather, the Chief of Army Staff, General Ashfaq Pervez Kayani, applied subtle pressure by advising the government not to resort to force. It was clear that the military too realised that the people considered an independent judiciary vital and that included the restoration of Chief Justice Chaudhry and his other colleagues. Under the circumstances, the government was forced to give in. It is, however, important to examine why such developments took place in the first place. More than a year ago, an agreement was reached between the PPP and PML-N that after the general elections in February 2008, Chief Justice Chaudhry and his other colleagues, deposed by General Musharraf, would be restored to their jobs. The 18 February 2008 elections returned the PPP and PML-N as the two main victors in the national parliament and in Punjab (PML-N) and Sindh (PPP). For a few weeks, the two parties formed a coalition government under the leadership of Gilani of the PPP at the centre and called it a government of national unity and reconciliation. It seemed that after long last, Pakistan was finally going to change course and the intrigues and manipulations which, in the past, had brought down civilian governments would be replaced by concord and amity. In a surprise move, Zardari put himself up as the candidate for the post of President and succeeded in being elected. The occasion had called for an eminent Pakistani with impeccable credentials as an honest and competent statesman being chosen for the job. However, with both the Prime Minister and President posts going to the PPP, it was clear that

its leaders, especially Zardari and his close aides, were aiming to enhance their control over the state. In any event, the national coalition fell through because President Zardari resorted to evasive tactics on the restoration of Justice Chaudhry while Nawaz Sharif made it the most important issue that needed to be solved. The two leaders and their close advisers met many times but it became clear that President Zardari had decided to renege on his promise and Nawaz Sharif was not going to budge an inch on that matter either. President Zardari’s aversion to giving Chief Justice Chaudhry his job back stemmed from his fear that the controversial decision by General Musharraf to drop all corruption charges against him (Zardari) so that the PPP and General Musharraf could rule together in Pakistan without the PML-N being involved, would be overturned by Chief Justice Chaudhry. Chief Justice Chaudhry had, since his removal from office on allegations of misusing his office to help his son get a job in the police, embarked upon a confrontational course vis-à-vis the Musharraf regime. He vehemently denied any wrongdoing and gave the impression that if he returned to his post, he would not tolerate any irregularity or wrongdoing. President Zardari obviously feared that he may again be put in the dock on allegations of massive corruption. In any event, Chief Justice Chaudhry resumed office as Chief Justice Dogar retired on 21 March 2009. There was considerable jubilation to mark the occasion. There were a number of people who had previously been taken away by Pakistani security forces. Their relatives are now hoping that Chief Justice Chaudhry would look into their cases and help in the release of the innocent. There are rumours that President Zardari is conspiring with the pro-Musharraf Pakistan Muslim League-Quaid to oust Prime Minister Gilani from power. On the other hand, Prime Minister Gilani has reportedly said that he would welcome the PML-N back into the coalition. President Gilani and Nawaz Sharif met on 22 March 2009 in an atmosphere exuding friendliness. The Prime Minister announced that if the Supreme Court lifted the ban on the Sharif brothers, he would welcome a PPP-PML-N coalition government again. However, the situation is far from stable. Nawaz Sharif has threatened to mobilise the masses again if the 17th Amendment is not repealed. On the other hand, the Supreme Court has published the reasons for its decision to bar the Sharifs. The two brothers are blamed for disrupting the proceedings of the Pakistani courts and for acting irresponsibly. Shahbaz Sharif has also been denounced for defaulting on his bank loans. It seems that the situation remains highly volatile at the present moment. Since the elections last year, there is absolutely no doubt that Prime Minister Gilani has behaved in a more responsible manner and his general conduct in office has been ruleoriented and transparent. On the other hand, President Zardari has continued to lord over in a typical feudal manner, and in that process, his already tarnish reputation has received further blows. It seems that heads will roll in the PPP headquarters soon but which of the two – Zardari or Gilani – will lose out remains to be seen. At the moment, efforts are afoot to bring about a normalisation of their relationship. Some critics and cynics are pointing out that the Americans and the military had to exert pressure on the Pakistan politicians not to precipitate another breakdown of law and order and plunge Pakistan into chaos and anarchy. Therefore, what transpired in Pakistan is indicative of the continuing influence and power of unelected stakeholders in the Pakistani political dispensation. This may be true but there is nothing wrong if in the correction of a political

system, some external and/or extra-political inputs have been made. For most of Pakistanâ&#x20AC;&#x2122;s existence, what has happened in the national political arena has included a heavy dose of United States meddling as well as manipulation by the military. Unfortunately, such characteristics cannot be wished away; they can only be made to recede over time by strengthening the rule of law and democracy. If the Pakistani people, at large, were reportedly going to take part in the long march because they wanted good governance and were frustrated with the politics of deceit and manipulation, then the recent events in Pakistan have to be celebrated. There is the question if the rightwing JI will now be able to wield more influence than before because Nawaz Sharif is generally considered to be right of the centre with some soft corner for Islamism. As mentioned above, during the recent turmoil, the JI was the closest ally of Nawaz Sharif. Even Imran Khan and his Tehrik-e-Insaaf are generally considered to be right of the centre. Such a turn to the right can be prevented if the original idea of a nation government comprising both the PPP and PML-N is revived sincerely and seriously. That would mean Prime Minister Gilani and the Sharifs seeking a middle path of power-sharing that is progressive and liberal in its ideological orientation. For a parliamentary democracy to be consolidated, it is important that the government of the country is carried out in an open and transparent manner. Pakistanâ&#x20AC;&#x2122;s greatest political misfortunate has been the lack of a leadership that genuinely believes in democracy and the rule of law. The latest opportunity should, therefore, be utilised to catch up with the rest of South Asia where democracy is now in a better health than it was ever before since the British transferred power to native elites in this region. Only then perhaps Pakistan can really move away from the brink of chaos and collapse.

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ISAS Insights No. 57 – Date: 2 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

Indian General Election 2009 – Geographical Influence of Regional Parties and Electoral Outlook Sasidaran Gopalan1 Preface India will hold its 15th general elections from 16 April to 13 May 2009. The elections will take place in challenging circumstances. A variety of cross-cutting political, security, economic and socio-cultural issues will influence the elections. The exercise will be impacted by multiple parties, personalities and positions from India’s vast political spectrum. As India moves into the election mode, the Institute of South Asian Studies (ISAS) is bringing out a series of papers analysing different aspects of the forthcoming elections. These will include, among others, the key national and regional parties, and their strategies, key political personalities, and the issues that are likely to have an impact on the elections. ISAS had earlier prepared six papers, providing an overview of India’s political parties; the role of the youth in India’s elections; the economic backdrop to the general elections; the major domestic issues that are likely to dominate the elections; India’s key foreign policy concerns and their likely impact on the forthcoming elections; and the role of women and importance of women leaders in Indian politics and elections. This seventh paper in the series examines the geographical distribution of India’s diverse regional parties, their states of influence and the electoral outlooks for these states. Introduction – National and Regional Parties India’s elections are becoming increasingly trickier for psephologists, given the heavily fractured mandates produced by such exercises. One of the plausible reasons for the electoral mandate having become increasingly splintered is the steady emergence of a large number of ‘non-national’ parties2 in India’s domestic politics and the electoral process. A fragmented and fractured polity with regional and state actors wielding significant bargaining power with the national parties has decisively changed the structure, nature and outcome of Indian elections since the 1990s. 1

Mr Sasidaran Gopalan 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 isassg@nus.edu.sg. Regional and state parties are also referred to as non-national parties. These terms are used interchangeably in this paper.

India’s main parties with an all-India presence, which can be referred to as national parties, include the Congress Party, Bharatiya Janata Party (BJP) and the two Left parties, the Communist Party of India (Marxist) [CPI(M)] and the Communist Party of India (CPI). These parties have their political wings in almost every region and state of the country. However, the across-the-board political presence is no longer capable of pulling in enough votes for these parties. This is due to the fact that they are facing tough opposition from a variety of regional parties in different parts of the country. The rise of regional parties has definitely eroded the political bases of the national parties with far-reaching implications on the country’s electoral outcomes. The rise of regional parties and the concomitant decline in vote shares of the national parties has resulted in the growth of coalition governments. The latter have become a regular phenomenon in India both at the central and state levels. Almost all parties have accepted that the next government in India will also be a multi-party coalition government. This has resulted in an intensive search by the parties for suitable ‘allies’ in order to form electoral alliances. The national parties are at the centre of different alliances. The Congress Party and the BJP have gathered around them multiple regional parties for weaving electoral alliances. The United Progressive Alliance (UPA) is led by the Congress Party, while the National Democratic Alliance (NDA) is led by the BJP. On the other hand, the Left parties have been instrumental in cobbling together another set of alliances, and this group is now being referred to as the Third Front. The national parties are utilising their well-spread organisational networks to negotiate with regional parties in different parts of the country to create alliances. However, their eagerness to work out these alliances is a clear indication of their bases having eroded over time. Both the Congress Party and the BJP realise that without the support of the regional parties, it is impossible to aspire to form the government. Regional Parties: A Disaggregated Profile In the last general elections held in 2004, the regional parties had a total of 196 seats out of 543 seats in the Lower House of the Indian Parliament (see Table 1). In terms of the share of the total seats, this implied a 36.4 percent of the aggregate. As seen from Table 1, this was a larger share than all of the other national parties. Table 1: Results of General Elections 2004 Party Seats (in no.) Share in Total Seats (%) 196 36.4 Regional/State National Congress Party 145 27.0 BJP 138 25.6 Left3 59 11.0 Total 543 100.0 Source: Compiled from the Election Commission of India documents 3

The Left includes the CPI(M), CPI, Revolutionary Socialist Party and the Forward Bloc. Together, they comprise the Left Front.

When we dissect the seat share of regional parties, it is possible to have a clearer idea about the seats held by different regional parties and the political leverage they enjoy as a result. Table 2 gives the disaggregated profile of seats obtained by regional parties in the 2004 elections. It also shows the share of each party in the total of 196 seats won by regional parties as a whole. Table 2: Elections 2004 â&#x20AC;&#x201C; Performance of the Non-National Parties Parties

Seats

196 Regional Telugu Desam Party 5 All India Majlis-E-Ittehadul Muslimeen 1 Telangana Rashtra Samithi 5 Asom Gana Parishad 2 Lok Jan Shakti Party 4 Janata Dal (United) 8 Rashtriya Janata Dal 24 Jammu & Kashmir Peoples Democratic Party 1 Jammu & Kashmir National Conference 2 Janata Dal (Secular) 3 Muslim League Kerala State Committee 1 Kerala Congress 1 Indian Federal Democratic Party 1 Shivsena 12 Republican Party of India (A) 1 Nationalist Congress Party 9 All India Trinamool Congress 2 Mizo National Front 1 Nagaland Peoples Front 1 Jharkhand Mukti Morcha 5 Biju Janata Dal 11 Shiromani Akali Dal 8 Sikkim Democratic Front 1 Dravida Munnetra Kazhagam 16 Pattali Makkal Katchi 6 Marumalarchi Dravida Munnetra Kazhagam 4 National Loktantrik Party 1 Samajwadi Party 36 Bahujan Samaj Party 19 Rashtriya Lok Dal 3 Samajwadi Janata Party (Rashtriya) 1 Bharatiya Navshakti Party 1 * Approximated for convenience. Source: Compiled from the Election Commission of India documents.

Share in Total Seats (%)* 2.5 0.5 2.5 1.1 2.1 4.1 12.2 0.5 1.1 1.5 0.5 0.5 0.5 6.1 0.5 4.6 1.1 0.5 0.5 2.5 5.6 4.1 0.5 8.2 3.1 2.1 0.5 18.4 9.7 1.5 0.5 0.5

In terms of the number of seats won by regional parties in the 2004 elections, the leading were the Samajwadi Party (SP), Rashtriya Janata Dal (RJD), Bahujan Samaj Party (BSP), Janata Dal (United) [JD(U)], Biju Janata Dal (BJD), Shiromani Akali Dal (SAD), Shiv Sena (SHS), Nationalist Congress Party (NCP), Dravida Munnetra Kazhagam (DMK), Paatali Makkal 3

Katchi (PMK) Tamil Nadu, Telugu Desam Party (TDP) and Telengana Rashtriya Samiti (TRS). On a further disaggregated basis, the BSP, SP, RJD, JD(U), BJD, NCP, SHS, SAD and DMK had almost 72 percent of the total regional party seats between them in 2004. During negotiations on possible electoral alliances for the forthcoming elections, these parties have emerged as key players. Indeed, except for the SAD, SHS, and JD(U), which are still formal constituents of the BJP-led NDA alliance, the rest of the parties have split into the Third Front, have had basic seat-sharing arrangements with the Congress Party or have kept their options open. Arithmetically, if the regional parties get at least as many seats as they did in the last elections, then most of these parties, given their flexible pre-poll arrangements with the national parties, will have several options opened to them. Individually, as well as collectively, they will emerge as significant determinants of the ruling coalition. It is also important to note that more parties have entered the fray since 2004. The new parties capable of influencing electoral results are Praja Rajyam in Andhra Pradesh (led by actor Chiranjeevi) and the Desiya Murpoku Dravida Kazhagam (DMDK) (led by actor Vijayakanth) in Tamil Nadu. These parties are expected to eat into the vote banks of the other parties, thereby fracturing the mandates even further. States with Significant Regional Parties Annex 1 on page 9 provides a complete state-wise illustration of the presence of the national and regional parties on the basis of seats won in the 2004 elections. It also indicates the partnership of the regional parties with the national parties and the overarching alliances on the basis of seats won in different states. Annex 1 also reveals that the states having significant regional parties are Jammu & Kashmir (National Conference), Punjab (SAD), Uttar Pradesh (BSP and SP), Bihar (RJD, JD(U) and Lok Jan Shakti Party), Orissa [BJD and Jharkand Mukti Morcha (JMM)], West Bengal [All India Trinamool Congress (AITC)], Jharkhand (RJD and JMM), Maharashtra (SHS, NCP and Republican Party of India), Andhra Pradesh (TRS, TDP and Praja Rajyam), Tamil Nadu [DMK, All-India Anna Dravida Munnetra Kazhagam (AIADMK), PMK, Marumalarchi Dravida Munnetra Kazhagam (MDMK), DMDK, Dalit Panthers of India and Puthiya Thamizhagam], Kerala (Muslim League Kerala State Committee and Kerala Congress) and Karanataka [Janata Dal (Secular) (JD(S)]. The north-east also has several regional parties (Mizo National Front, Sikkim Democratic Front, Nagaland Peopleâ&#x20AC;&#x2122;s Front and Arunachal Congress). On the other hand, Himachal Pradesh, Haryana, Rajasthan, Gujarat, Madhya Pradesh and Chhattisgarh do not have significant regional parties. These states will essentially witness contests between the national parties. It is clear that most of Indiaâ&#x20AC;&#x2122;s key states, in terms of number of seats, Uttar Pradesh, Bihar, Orissa, West Bengal, Maharashtra, Andhra Pradesh, Tamil Nadu, Kerala and Karnataka, have a significant presence of regional parties. Geographically, this implies that the results in the four key southern states (Andhra Pradesh, Tamil Nadu, Kerala and Karnataka) will be

influenced by regional parties. The same will be the case for the eastern states (Orissa and West Bengal) and the north-east. India’s northern and western states show a mixed dominance of regional parties. While Uttar Pradesh and Bihar are heavily dominated by the regional parties, Madhya Pradesh, Rajasthan, Himachal and Uttaranchal are much less dominated. In the west, barring Maharashtra, the regional parties have limited influence. Electoral Tie-ups and Outlooks in States with Significant Regional Parties The state-wise breakup of influences clearly identifies states where the national parties have no option other than to rely on regional parties. The electoral outlook, ongoing negotiations and prospective alliances are discussed below on a regional basis. South The case of Tamil Nadu looks interesting and complicated at the same time. During the last elections, three regional parties, namely the DMK, PMK and MDMK, were part of the Congress Party-led UPA. Even the Left parties were part of this mega alliance at that time. However, now, in a setback to the Congress Party, the Left parties, PMK and MDMK have left the Congress Party-DMK alliance. The PMK and MDMK hold about 10 seats. They have decided to tie up with the AIADMK, led by the charismatic J. Jayalalitha, who has severed ties with the BJP-led NDA. Jayalalitha is now a part of the Third Front, which may be bolstered by the presence of the PMK and MDMK. The Congress Party’s prospects have been further weakened since its main ally, the DMK, which is in power in the state assembly, is likely to face anti-incumbency. The AIADMK has rallied with the Left parties under the overall umbrage of the Third Front and is seeking to exploit the anti-incumbency against the DMK. There could, however, be other factors at work favouring the Congress Party’s alliance. The PMK’s following among the backward Vanniar caste is believed to have eroded because of charges of corruption and opportunist policies. Moreover, actor-turned politician, Vijayakanth, with his party DMDK, is believed to have made significant inroads in the northern belt of Tamil Nadu where the Vanniars are concentrated. The DMDK, contesting independently now, could take away a sizeable chunk of the anti-DMK votes in the region. The PMK will stand bereft of the Dalit votes as the Viduthalai Chiruthailgal Katchi, a rising phenomenon, continues to be with the DMK-led front. In its neighbouring state of Andhra Pradesh, the TDP and TRS will be the key forces. In the last elections, the TDP was with the NDA and the TRS was with the UPA. However, their joining hands will offer stiff resistance to the Congress Party. The Congress Party is also likely to encounter anti-incumbency since it is in power right now. In both Tamil Nadu and Andhra Pradesh, anti-incumbency had worked in favour of the Congress Party in 2004. Indeed, its alliances with the TRS in Andhra Pradesh and the DMK, MDMK and PMK in Tamil Nadu were vital in the UPA forming a government after the last elections. The alliances and seat-sharing adjustments were also crucial in the Congress Party winning some seats in these states.

This time, however, anti-incumbency may work otherwise. At the same time, the prospects of the BJP as well are not bright in Andhra Pradesh since the TDP has deserted it to move to the Third Front, along with the TRS. With the AIADMK also joining the Third Front, the BJP alliance is somewhat rudderless in the two key southern states. While Tamil Nadu and Andhra Pradesh have complex outlooks, Kerala has a more straightforward scenario. Despite the regional parties, the contest will essentially be between the Congress Party and Left. The state has a history of overturning governments every five years. History, therefore, is against the ruling Left in the state. The Congress Party will be hoping to make good gains. While the BJP is not looking towards making inroads into Kerala, it is more hopeful of a good outing in Karnataka. However, the entry of the JD(S), led by ex-Prime Minister Deve Gowda in the Third Front, could spoil its chances. The JD(S) enjoys caste-based support in Karnataka and could upset the calculations. While Deve Gowda has cast his lot with the Third Front, there are reports that there could be some understanding between his party and the Congress Party, which could then work against the BJP. North Over the years, the Congress Party, Indiaâ&#x20AC;&#x2122;s oldest national party, has lost considerable ground in key northern states such as Uttar Pradesh and Bihar. The BJP, though perhaps on a better footing than the Congress Party, has been somewhat marginalised in the complex caste-driven politics of north India. However, neither the Congress Party nor the BJP can afford to ignore Uttar Pradesh and Bihar. These two states account for more than 20 percent of the total seats in the Lower House of the Parliament. They are vital for all aspiring coalitions. The BSP, led by Mayawati Kumari, and the SP, led by Mulayam Singh Yadav, hold the key to the electoral outcome of Uttar Pradesh. The two parties are each otherâ&#x20AC;&#x2122;s staunchest opponents. As of now, the BSP has veered towards the Third Front. The relationship between the SP and Congress Party has improved in recent times, with the SP supporting the incumbent UPA government in the Parliament ever since the Left withdrew its support over the nuclear deal with the United States. The Congress Party and the SP have been negotiating seat-sharing arrangements in Uttar Pradesh, in the course of which the Congress Party has had to give up its demand for quite a few seats. Indeed, differences over the seat-sharing formula have resulted in both parties threatening to contest singly without any pre-election understanding. The Congress Party and the BJP have run into frictions their allies over seat-sharing arrangements in Bihar as well. Out of a total of 40 seats in Bihar, the Congress Party won only three in 2004. Its main alliance partners in Bihar are the RJD, led by incumbent Railways Minister Laloo Prasad Yadav, and the Lok Janshakti Party (LJP), led by another Cabinet Minister Rambilas Paswan. The Congress Party is facing serious difficulties in seat-sharing negotiations with both these regional parties. Indeed, the RJD and the LJP have chosen to carve out the state between them, leaving only a handful of states for the Congress Party. The alliance between the Congress Party and its regional partners is on a weak footing. Like in Uttar Pradesh, the parties may eventually contest elections without any formal seat agreements.

The BJP has also been facing problems with its negotiations with JD(U) in Bihar. Many of the BJPâ&#x20AC;&#x2122;s traditional allies from the NDA have been consciously distancing themselves from the BJP for fear of losing the minority votes. Till now, however, the JD(U)-BJP talks have not entirely collapsed despite the JD(U)â&#x20AC;&#x2122;s obvious concern for the minority votes. East The BJP received a major jolt in the last few weeks when one of its old allies, the BJD from Orissa, decided to part ties with it. The BJD has not yet indicated if it will join the Third Front despite overtures from the Left. However, it is fighting the elections on its own. In West Bengal, Mamata Banerjee, leader of the AITC, another constituent of the NDA, has moved away from the BJP and has allied with the Congress Party. This has considerably improved prospects for the Congress Party in the state, while damaging those of the ruling Left. West Maharashtra is the state to watch out for in the next elections from the western region. The two main regional outfits, the SHS and the NCP, have alliances with the BJP and the Congress Party respectively. The going has not been smooth either way. However, both BJP and Congress Party have been finally able to retain their alliances though both have had to compromise on their targeted number of seats in the state. Conclusion The run-up to the 15th Indian elections shows the regional parties in a buoyant mood. Sensing their ability to play a significant role in post-election government formation, these parties are exploiting the circumstances for maximum gains. Indeed, in states where the regional parties are dominant entities, they have been trying to marginalise the national parties by demanding more seats to field their own candidates. The situation has become increasingly difficult for the Congress Party and the BJP. Both parties are unable to assert their authority on the existing and potential alliance partners. They have to accept seat-sharing formulas that are hardly to their liking. However, given the compulsions of coalition politics and the vital significance of working out effective alliances, they cannot afford to antagonise the regional parties. The situation is markedly different for the 2009 elections compared to that of 2004, due to the emergence of the Third Front. The Left, along with a variety of regional parties, is projecting a third alternative to the Congress Party and the BJP. On its own, the Third Front is not expected to have enough seats to form a government. However, through its creation, the Third Front has ensured that the Congress Party and BJP will find it difficult to forge effective alliances. With the Third Front roping in parties that have figured in either the UPA or NDA, both the Congress Party and the BJP have been left searching for partners. The possibilities are endless but the common theme remains the increasing say of the regional outfits in the national polity. Sharad Pawar, leader of Maharashtra-based NCP, aptly commented that anyone commanding 12 seats in the 543-member House could aspire to become the Prime Minister in the next government, as the mandate will be so fractured. Ironically Mr Pawar has already sealed an alliance with the Congress Party and is the Agriculture Minister in the incumbent government.

The fact that he can make such claims in public shows that matters are in a state of flux. It also reflects the ambitions and aspirations harboured by regional parties. The 15th Indian elections will certainly be interesting.

Annex 1: State-wise Presence of National and Regional Parties in 2004 Elections State/Union Territory

National Parties

Regional Parties

Jammu and Kashmir

Indian National Congress (INC)

National Conference (NC)

Punjab

Bharatiya Janata Party (BJP)

Alliance - 2004

People's Democratic Party (PDP)

INC +

Shiromani Akali Dal (SAD)

BJP +

Indian National Congress (INC) Uttaranchal

Bharatiya Janata Party (BJP)

Samajwadi Party (SP)

Indian National Congress (INC) Himachal Pradesh

Bharatiya Janata Party (BJP) Indian National Congress (INC)

Uttar Pradesh

Bihar

Bharatiya Janata Party (BJP)

Samajwadi Party (SP)

Indian National Congress (INC)

Bahujan Samaj Party (BSP)

Bharatiya Janata Party (BJP)

Rashtriya Janata Dal (RJD)

Indian National Congress (INC)

Haryana

Janata Dal (United) (JD(U))

BJP +

Lok Jan Shakti Party (LJSP)

INC +

All India Trinamool Congress (AITC)

BJP +

Bharatiya Janata Party (BJP)

Biju Janata Dal (BJD)

BJP +

Indian National Congress (INC)

Jharkand Mukti Morcha (JMM)

Bharatiya Janata Party (BJP)

Rashtriya Janata Dal (RJD)

Indian National Congress (INC)

Jharkand Mukti Morcha (JMM)

Bharatiya Janata Party (BJP) Indian National Congress (INC)

Rajasthan

Bharatiya Janata Party (BJP) Indian National Congress (INC)

Gujarat

Bharatiya Janata Party (BJP) Indian National Congress (INC)

Madhya Pradesh

Bharatiya Janata Party (BJP) Indian National Congress (INC)

West Bengal

Bharatiya Janata Party (BJP) Indian National Congress (INC) The Left

Orissa

Jharkhand

INC +

The Left Chhattisgarh

Bharatiya Janata Party (BJP) Indian National Congress (INC)

North-East (seven sister)

Bharatiya Janata Party (BJP)

Mizo National Front (MNF)

BJP +

Indian National Congress (INC)

Nagaland People's Front (NPF)

BJP +

The Left Maharashtra

Sikkim Democratic Front (SDF) Arunachal Congress

INC+

Bharatiya Janata Party (BJP)

Shiv Sena (SHS)

BJP +

Indian National Congress (INC)

Nationalist Congress Party (NCP)

INC +

State/Union Territory

Union Territories and Goa

National Parties

Regional Parties

Alliance - 2004

Republican Party of India

INC+

Bharatiya Janata Party (BJP) Indian National Congress (INC)

Andhra Pradesh

Karnataka

Indian National Congress (INC)

Telengana Rashthriya Samiti (TRS)

INC +

Bharatiya Janata Party (BJP)

Telugu Desam Party (TDP)

BJP +

The Left

Praja Rajyam

Bharatiya Janata Party (BJP)

Janata Dal (Secular) (JD(S))

Indian National Congress (INC) Tamil Nadu

Bharatiya Janata Party (BJP)

Dravida Munnetra Kazhagam (DMK)

INC +

Indian National Congress (INC)

All-India Anna Dravida Munnetra Kazhagam (AIADMK) Paatali Makkal Katchi (PMK)

BJP +

Marumalarchi Dravida Munnetra Kazhagam (MDMK) Desiya Murpokku Dravida Kazhagam (DMDK) Dalit Panthers of India (DPI)

INC +

The Left

INC +

Puthiya Thamizhagam (PT) Kerala

Indian National Congress (INC)

Muslim League Kerala State Committee (MUL) Kerala Congress (KEC)

The Left

Source: Compiled from the Election Commission of India documents.

INC+ INC+

ISAS Insights No. 58 – Date: 6 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: A Year after the Democratic Elections Rajshree Jetly 1 Introduction Pakistan emerged out of a decade of military rule under President Pervez Musharraf on 18 February 2008 when the general elections were held. During the last period of President Musharraf’s reign, Pakistan was reeling under economic malaise and a serious political crisis. The civil society inspired a broad-based people’s movement, led by the lawyers that eventually resulted in the end of military dictatorship and the dawn of a new era of democratic governance. Now, it has been one year since Pakistan re-entered the democratic world and the question is whether Pakistan is in a better state now than it was prior to 18 February 2008. This paper reviews the state of Pakistan a year after the installation of the democratically-elected government. The country’s democratic credentials remain weak largely due to the failure of its leadership. The leaders of the key political parties, the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N), which came together to form a coalition government on an anti-Musharraf and pro-democracy platform, have not succeeded in turning Pakistan around. Democracy, which was seen as the solution to Pakistan’s problems, has not delivered. The frail democratic institutions, perennial civil-military stand-off, fragile political consensus and increasing sectarian tensions have caused Pakistan to be trapped in a political quagmire, thus making the attainment of democracy a difficult task. This is not surprising given that Pakistan has been under the influence of direct military rule for more than half the years of its existence. The political leadership has not been able to focus on governing Pakistan and has been struggling for the most part against military dictatorships and internecine fighting. Add to that is the fact that many of Pakistan’s prominent leaders have been tainted by allegations of corruption and misconduct. It is, thus, hardly surprising that the political leaders have been unable to put country before self. A Crisis of Leadership Despite being voted into power in the February 2008 elections with a big mandate, the coalition government, led by the PPP and the PML-N, has not been able to hold itself together. There is serious infighting both within the parties and between the parties which is 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.

leading to greater political instability. This, in turn, is weakening the government’s ability to deal with the major challenges in the form of separatist movements, rise of Islamic militancy and terrorism. Internal factionalism in Pakistan is also straining its relations with external powers such as the United States and India. The political parties have also lost the trust of the electorate as they have largely failed to deliver on their election promises. The February 2008 elections were dominated by three basic issues, namely, the restoration of the democratic process; the reinstatement of the judges who were overthrown during the Emergency declared by General Musharraf in November 2007; and the repeal of Article 58 2(b) which gives the President powers to dismiss an elected National Assembly, elect governors of various provinces, and appoint the Chief of Army Staff and other service chiefs. In any meaningful assessment of the performance of the government, the extent to which these three goals have been met must first be examined. A closer look reveals that the return to democracy has not been as successful as hoped for. This is largely due to the weak and self-serving leadership, particularly the leader of the PPP, Asif Ali Zardari, who is also the President, and Nawaz Sharif, the leader of the PML-N which is presently in the opposition. Zardari came into power by default, being the widower of the former Prime Minister Benazir Bhutto who was assassinated before the February elections. Whatever hopes there may have been that President Zardari was going to be a leader committed to the revival of Pakistan have been dashed as he quickly manoeuvred himself into a position of absolute power. He managed to first get himself appointed as the co-chairperson of the PPP and a few months later, in August 2008, albeit under pressure from various quarters, secured the resignation of President Musharraf and removed him from the political scene. He also initially successfully marginalised his political rival, Nawaz Sharif, and got himself elected as President of Pakistan, a post which ideally should have been party neutral. President Zardari’s credibility weakened as he failed to follow up on two critical promises made by his party – the restoration of the judiciary and the repeal of Article 58 2(b) of the Constitution. The restoration of the judiciary has been a key issue since November 2007 when Musharraf dismissed about 60 judges and placed many noted judges and lawyers under house arrest. The move triggered huge protests across the country and led to the Lawyer’s Movement which became part of the cause célèbre of the public and the election platform of the PPP and the PML-N. Unfortunately, President Zardari dragged his feet on the restoration of the judiciary. The judges were reinstated in a piecemeal manner and the expectation that the entire judiciary would be fully restored, including Chief Justice Iftikhar Chaudhry, was not met. It took a year and a few months, more precisely, 22 March 2009, for President Zardari to finally acquiesce on this demand amid huge protests in the country. It was believed that President Zardari was deliberately keeping Chief Justice Chaudhry out of office to avoid any risk of the latter reopening corruption cases against him or revoking the National Reconciliation Ordinance (NRO) which provided him legal immunity. 2 An independent judiciary is one of the key pillars in a democratic system of government and any party committed to the restoration of democracy must be equally committed to the restoration of democratic institutions of which the judiciary is a major one. However, President Zardari was 2

Some believe that the army may have initially also been reluctant to reinstate Chief Justice Chaudhry as he had locked horns with the military establishment in the past over innumerable cases of ‘missing people’ who had disappeared or were being illegally detained by the security agencies as part of Pakistan’s war on terror.

clearly putting his self interest before the party or the nation and he has lost the trust of the people. Another critical issue relates to the repeal of Article 58 2(b). Having promised to repeal this provision, President Zardari has yet to deliver on this. In his 28 March 2009 address to both Houses of Parliament, he repeated that the Parliament should form a committee that would work towards resolving this issue through a constitutional amendment. A similar promise was made in his maiden speech to both Houses of Parliament in September 2008, just after he was sworn in as President. Yet, little was done by way of implementation then. In this respect, President Zardari stands accused of doing what Musharraf did during his regime where all powers were concentrated in the office of the President who had the right to dismiss a legitimately elected parliament. Article 58 2(b) is anathema to the concept of democracy because it hangs like the sword of Damocles over democracy. Yet, there is a real personal incentive for President Zardari to retain Article 58 2(b) because from his perspective, Punjab is a province where the PPP is weak relative to the PML-N and Article 58 2(b) would be a seductive weapon to have in case the balance of power shifts. It should be remembered that the PML-N remains very strong in Punjab, which is the single most important province in terms of electoral calculation as well as political and economic power. The other fallout of President Zardari retaining Article 58 2(b) while holding the office of President is that it has made the office very powerful. This is beginning to create rifts within the PPP, as the centre of power which should be with the Prime Minister in a parliamentary democracy appears to be with the President. There have been reports of growing differences between President Zardari and Prime Minister Yousuf Raza Gilani. The former’s dipping popularity could well enhance the political stakes for Prime Minister Gilani. Moreover, should the reinstated Chief Justice Chaudhry revoke the immunity provided to President Zardari under the NRO, it could place Prime Minister Gilani in the driver’s seat as the leader of the PPP. Institutional Crises Compounding President Zardari’s plunging popularity is the sorry state of party politics in the country. The two major political parties, the PPP and the PML-N, have a long and bitter history of rivalry, which is not helping Pakistan in this fragile political climate where so many different forces are threatening to tear the country apart. Both parties, after being in the political wilderness for nearly 10 years, returned to power through a coalition. Unfortunately, the marriage was short-lived and both parties are back to being adversaries. Nawaz Sharif walked out of the coalition in August 2008, citing irreconcilable differences especially over the issue of the restoration of the judiciary. After parting with the PPP and sitting in the opposition, he declared that for the sake of preserving the democratic process, he would not actively work to destabilise the government. However, following the Supreme Court’s ruling that the Sharif brothers could not hold office due to their previous convictions, Nawaz Sharif proved that he was prepared to take off the gloves. Nawaz Sharif’s brother, Shahbaz Sharif, was removed from his post in February 2009 as Chief Minister of Punjab and Governor’s rule was imposed for about a month. The Sharif brothers claimed that this move was politically motivated and engineered by President Zardari to sideline Nawaz Sharif and get the PPP back in Punjab. Nawaz proved that he had

the ability to galvanise the masses by agitating for street marches and protests. He adroitly linked the protest to the popular call for the reinstatement of Chief Justice Chaudhry and was able to bring so much pressure on the government that it was forced to back down from its earlier position. The army, which was fearful of the Jihadis taking advantage of the situation, was also keen to see a quick end to the crisis. Chief Justice Chaudhry was reinstated and Shahbaz Sharif returned as Chief Minister of Punjab following a new ruling by the Supreme Court one month after its earlier ruling. Recent surveys place Nawaz Sharif well ahead of President Zardari as the best person to lead Pakistan, at 31 percent against eight percent. Whether this will tempt Nawaz Sharif to further undermine President Zardari and the PPP in the hope of taking power remains to be seen. However, as long as Article 58 2(b) remains with President Zardari, the struggle will continue. The real problem is that with Pakistan in a near dysfunctional state, it cannot afford these kinds of political fights which may be otherwise viewed as healthy in a functioning democracy. A poll conducted by the United States-based International Republican Institute (IRI) in late 2008 showed that 88 percent of the Pakistani people felt that the country was headed in the wrong direction. If this continues, the state will simply weaken and this will open the doors for the army to reassert itself in the governance of Pakistan. The army has so far acted responsibly with respect to the unfolding events in Pakistan. Its reputation was tarnished with Musharraf’s growing unpopularity and it is committed to staying in the background for now. Nevertheless, the army continues to be very involved in high level decision-making and is calling the shots on crucial security issues. The army remains a major impediment to civilian democratic rule. For one, there is always the threat of a coup and Pakistan’s history suggests that this is not an unlikely threat. Even if there is no coup, the army is so integrated into every aspect of Pakistan that it is unrealistic to expect it not to play a key role. Thus, Pakistan is stuck with a situation where it will be very difficult for it to really achieve unfettered civilian, democratic rule. And now, more so than ever before, given the security threats to Pakistan, the civilian administration needs the army’s support and goodwill. The ideal situation would be for the civilian leadership to establish supremacy over the army but the reality is that this is unlikely to happen in the near future. This is despite the fact that General Ashfaq Parvez Kayani, after taking over from Musharraf, has made some reassuring gestures, including the withdrawal of military officers from the government civil departments to distance itself from civil administration. The army also displayed remarkable sagacity in not using the crisis surrounding the dismissal of the Punjab Assembly to its own advantage. It has instead used its position to work towards resolving the problem by applying pressure on the political parties to keep on course and not slip into greater trouble and chaos. Internal and External Security The general weakness in political governance has also been a major stumbling block in Pakistan’s ability to deal with ethnic movements, creeping Talibanisation of the country, and terrorist activity. The Baluchistan crisis, which was reignited in 2004, has recently taken another dimension with reports that the Taliban are now asserting themselves in Baluchistan with the newly formed Tehrik-i-Taliban Balochistan. With the Al-Qaeda/Taliban base shifting to Baluchistan, there is a danger of the Baluch cooperating with Al-Qaeda/Taliban forces for strategic reasons which would further compound the problem of fundamentalist terrorism in Pakistan. Recent overtures to bring dissident nationalist forces to the negotiating

table, including a Rs46.6 billion package for the province, may not be effective as the problem is too deep-rooted to be resolved by pork-barrel politics. Pakistan is also under considerable pressure to deal with Islamic fundamentalism which has clearly taken on a militant role. Religious extremism in Pakistan has now become so potent that it is a threat to the very state itself. The recent capitulation by Pakistan to implement Sharia law in the Malakand division of Swat and the relative proximity of Swat to the capital city raises fears of the entire country coming under the grip of rampant Islamisation. In fact, the government’s failure to contain Islamic militancy was already evident in July 2007 with the siege of the Lal Masjid by religious extremists in the heart of Islamabad. That incident and the recent Swat events are grim reminders of how far the tentacles of Islamic radicalism have spread in Pakistan and how ineffective the government has become. Pakistan is slowly losing the fight against militancy. This is largely due to a weak government which is unable to stand firm and is capitulating to extremist demands and making compromises. The army is also not able to gain an upper-hand on these militant activities reflecting the magnitude of the problem where the full might of the state and the military is being put to test Islamic fundamentalism is also integrally connected to rising incidents of terrorism. This is another major challenge for Pakistan. While the world at large blames Pakistan for global terrorism by allowing Al-Qaeda-linked training camps and supporting cross border insurgencies, Pakistan itself is now becoming a victim of fundamentalist terrorism. For example, according to figures compiled by the Pakistan Institute for Peace Studies, in 2008 alone, there were a total of 2,148 terrorist, insurgent and sectarian attacks reported across the country, killing 2,267 people and injuring 4,558. The United States National Counterterrorism Center’s report revealed that the loss of lives related to Islamic militancy was greater in 2007 than in the previous six years combined. Linked to this issue of rising fundamentalism is the challenge Pakistan faces at the international level where the key issue is global terrorism whose roots are in the Pakistan/Afghanistan area. This is creating tremendous problems for Pakistan’s international relations with two key countries which have been victims of Islamic terrorism, namely, the United States and India. Both these countries have been increasing the pressure on Pakistan to put an end to cross-border and global terrorism. This naturally creates tremendous difficulties for Pakistan in balancing its foreign policy equations with domestic politics. India-Pakistan relations have always been rocky but there was a period from 2004 onwards when there were many positive developments and relations were on the uptrend. When President Zardari took office, he continued with the efforts to reach out to India and surprised many by going against conventional policy and practice in Pakistan by publicly making statements that were not necessarily in line with the orthodox views of the Pakistani establishment, particularly the military. For example, President Zardari went as far as to term the militants operating in Kashmir as ‘terrorists’. He also announced a “no-first-strike” policy with respect to nuclear weapons and said that India had never been a threat to Pakistan. However, after the Mumbai attacks in November 2008, relations are back on shaky ground. It is difficult for Pakistan to cede too much to India without risking a backlash at home. At the same time, India cannot push the envelope too far as that could weaken the present Pakistan government, leaving the field open for interests that are inimical to cooperation with India. Pakistan’s Interior Adviser, Rehman Malik, has conceded that the Mumbai attacks were partially planned in Pakistan and has announced the arrest of a number of accused. He has

also stated that Pakistan intended to prosecute these individuals. Nevertheless, India is unlikely to ease pressure on Pakistan too quickly, partly because of the scale of the attacks on its financial capital and partly due to the upcoming general elections where the Indian government cannot afford to be seen as giving in to Pakistan. As far as United States-Pakistan relations are concerned, a stable Pakistan is vital to the United States’ interests for a range of issues, the most pressing of which is the war on terror. United States President Barack Obama has recently approved the deployment of 17,000 additional troops to Afghanistan, reinforcing the fact that the new United States administration is focusing on Afghanistan and Pakistan rather than Iraq. He has also proposed a five-year US$2.8 billion military aid to Pakistan to fight extremism under the Pakistani Counterinsurgency Capability Fund. This is in addition to the US$7.5 billion of civilian assistance that Washington will give to Pakistan over the next five years. However, while Pakistan is still clearly seen as an ally, there seems to be a subtle shift in tone from the George Bush era when the United States’ foreign policy was overly generous to Pakistan. Suspicions continue to linger in some United States quarters on the Inter-Services Intelligence’s alleged complicity with the Taliban and Pakistan’s inability and/or unwillingness to fight Al-Qaeda. In his new strategy towards Afghanistan and Pakistan, President Obama has made clear the fact that the increase in aid and training is on the condition that Pakistan demonstrates its commitment in rooting out Al-Qaeda. President Obama has stated unequivocally that “there is no doubt that in the FATA (Federally Administered Tribal Areas) region of Pakistan...there are safe havens where terrorists are operating” and that “after years of mixed results, we will not provide a blank cheque”. The United States’ unilateral military action on Pakistani territory using drone attacks has complicated the situation. Notwithstanding public proclamations on both sides, with President Zardari asserting that the drone attacks threaten the sovereignty of Pakistan and President Obama reassuring that the United States would consult Pakistan before launching the drone attacks, there is strong suspicion that there exists a tacit understanding between the United States and the Pakistani government to allow the use of Pakistani territory to launch the attacks. This was as much as admitted to, much to the embarrassment of Islamabad, by the Chairman of the United States Senate Intelligence Committee, who said that the Unmanned Aerial Vehicles are operating from an airbase inside the country. President Zardari is already viewed as pro-American and he has to work all that harder to placate domestic constituencies that he is on their side and not the Americans. The general public opinion in Pakistan is not in favour of United States military action against Al-Qaeda and the Taliban. According to the poll conducted by the IRI in October 2008, 63 percent of the people opposed cooperation with the United States and 73 percent remained opposed to United States military incursions in the tribal areas. Unlike Musharraf, President Zardari is head of a democratic civilian government which means he is answerable to the people. This makes it harder to make unpopular choices which may sometimes be the right ones. What is particularly distressing to Pakistani foreign policy officials is the developing entente in recent years by India and the United States for two major reasons – one, both the United States and India have been victims of terrorist attacks whose roots can be traced to Pakistan and, two, both the United States and India have recently developed a close working relationship. The United States has openly recognised India as a responsible rising

democratic power that deserves its support. In previous years, Pakistan was always able to play off India and the United States but that is less likely now. Conclusion The people of Pakistan and the political parties had campaigned long and hard against military rule with a vision of democracy that would revive the flagging fortunes of the state. That vision is yet to be realised and, in some ways, Pakistan is in a worse state than it was earlier, particularly in terms of political stability and security. Pakistan’s democratic experiment has not yielded the promised fruits in its first year. Perhaps one year is too short a gestation period and Pakistan’s fledgling new democracy needs more time to find its feet. Based on the first year of the democratic government, it appears that Nawaz Sharif has gained the upper hand over President Zardari despite the latter starting off on a high. Nawaz Sharif has clearly proved himself to be the more seasoned politician who knows how to bide his time and when to strike. Most significantly, he has proved that he is able to galvanise grass roots support which is critical to democratic legitimacy. President Zardari, on the other hand, came to power on the strength of the late Benazir Bhutto’s popularity but he himself does not carry the public. While the first year was dominated by President Zardari, all indicators point to Nawaz Sharif gaining in political strength and moral ground in the year ahead. But either way it’ll be a roller coaster of a political ride. In the final analysis, an enlightened Pakistani leadership remains the key to Pakistan’s future. It must move beyond internal squabbles and destabilising politics and focus on getting Pakistan back on track. Pakistan’s civil society has made great strides recently and the citizens of Pakistan have showed an abundance of patience in their hope for genuine democracy and peace in their country. The army has also stepped back to allow the civilian leadership to establish itself. It is now up to the political leaders of Pakistan to salvage the democratic future of the country.

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ISAS Insights No. 59 – Date: 9 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 New Bangladesh Government: The Road Ahead Iftekhar Ahmed Chowdhury 1 Introduction 29 December 2008 was a watershed in Bangladesh’s democratic evolution. In the elections that have been called historic, the Awami League-led Grand Alliance or Mohajote swept the national polls. Following an overwhelming victory, its leader, Sheikh Hasina, was sworn in on 6 January 2009 as Prime Minister of this nation of 147 million people. There could be few better examples to underscore this point than the Shakespearean quote that “uneasy lies the head that wears a crown.” She was immediately confronted with challenges that were legion, including a bloody mutiny among border guards. The future of democracy of the vast populace, impoverished yet filled with promise, will depend on her ability to tackle these issues successfully. Bangladesh Society To comprehend the backdrop to these challenges, it may be worthwhile delving a bit into the nation’s history. Its nearly 38 years of existence in the form of an independent country was preceded by centuries of presence as a cultural entity. In the past, Greater Bengal, comprising current Bangladesh and West Bengal, which is now a part of the Indian Union, gave birth to progressive ideas and ideals that often led Indian thought processes. Early in the 20th Century, Indian politician, G. K. Gokhale, famously remarked, “What Bengal thinks today, India thinks tomorrow”. The Bengali literary renaissance that occurred in the 19th Century moulded the ‘protestant’ or ‘argumentative’ intellectual heritage of contemporary Bangladesh. The Bengali intelligentsia, often called the bhadralok (literally meaning gentle-folk), not a class in a Marxian sense because they were unrelated to the processes of production but rather more of a Weberian status-group, challenged the existing mores by refusing to accept as incontrovertible truth whatever they heard at the feet of the guru (they also have been accused by some of cosying up to the British Raj as collaborators). They were intensely critical and Socratic in their mental make-up and would be in total agreement with Aristotle’s retort vis-à-vis his mentor, Amicus Plato. Aristotle said, “sed magis amica veritas” meaning “Dear is Plato, but dearer

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.

still is the truth.” They were the forerunners of the extremely vibrant middle-class and civil society of today’s Bangladesh that every government in that country has had to contend with. Bangladesh, earlier called East Bengal between the Partition of India in 1947 and the proclamation of the Islamic Republic of Pakistan in 1956, and, thereafter, East Pakistan, became independent following the Liberation War in 1971. Since then, it has been a kaleidoscope of social and political transformation. It had tried several experiments in terms of political systems, ultimately settling for Bengal’s old love, the Westminster Model (albeit a single-chamber Bangladeshi variant). Behind these periodic shifts in political experimentation was the insatiable resolve of the Bangladeshis for a just and equitable social order. It is said that the Bangladeshis never fear to change, nor do they change out of fear. It is their will to change, fed by their penchant for perfection, that render them, as some would describe with a modicum of truth, as such a volatile society. Over the past decades, the urges of the intelligentsia have been reflected in the nation’s famous civil society – in non-governmental organisations that have earned such global renown. Institutions such as Mohammed Yunus’ Grameen Bank and Fazle Hasan Abed’s BRAC, along with many others of their ilk, have become agents of social transformation. They have been instrumental in the fight against poverty and social injustice. They have become a source of inspiration throughout the developing world where they are being copied. Indeed, many parts of the world are now marching to tunes first piped in Bangladesh. These efforts have rendered Bangladesh a success story in poverty-alleviation. In fact, Bangladesh is on track towards halving extreme poverty by 2015 in consonance with the United Nations’ Millennium Development Goals. These also have had a unique role in women’s empowerment. Women, through micro-credit and non-formal education, have become mainstreamed in the socio-cultural ethos. This has helped to keep at bay fundamentalism and extremism, including terrorism. These twin dark forces of the present times, fundamentalism and terrorism, have been marginalised and have been held in check, not by police action or by diktat of the state from above, or pressure from outside but by indigenously-spawned social changes from within and below. The World Bank has called it Bangladesh’s ‘Silent Revolution’. Bangladesh Politics Alas, these positive elements have not found reflection in the politics of the country. For starters, there exists a profound mistrust between the political parties, particularly between the two major ones, the Awami League and the Bangladesh Nationalist party (BNP), and their two leaders, Hasina and Begum Khaleda Zia respectively. It was due to this reason that, in 1996, the Constitution was amended to incorporate the concept of the ‘neutral, non-party, caretaker government’. It is to hold office in the interim period between two governments and make for the transition of power through the holding of elections, as no party believe another of its kind would or could hold polls that are free, fair and credible. Although the system twice worked acceptably (1996 and 2001), and with diminishing effectivity the third time round in 2006-2007, it has clearly not been very successful. Over time, incumbent governments have allegedly sought to manipulate the system by placing ‘sympathisers’ in key positions before the transfer of power to the caretakers. It was such a perception that led the Awami League to announce the boycott of elections scheduled for 22 January 2007. Violence threatened to erupt all over the country. After some hiccups, the result was what is now popularly known as ‘1/11’. A caretaker government, led by Dr

Fakhruddin Ahmed and backed by the military, assumed power in January 2007. It extended its own term to two years, the time-frame required by the Election Commission to prepare fresh electoral rolls and undertake other necessary measures. It was this government that ultimately organised the elections of 29 December 2008 that brought Prime Minister Hasina and the Mohajote to office. The Road Ahead The new government is generally seen as secularistic and modernising. In fact, one of its election slogans was ‘Digital Bangladesh’. The road ahead for Prime Minister Hasina’s government is fraught with multiple challenges. Some key ones are discussed here. These are not placed in any taxonomic pecking order or priority. This implies the need to address them simultaneously. Some of these are linked and understandably cannot be tightly compartmentalised. Institution-Building Bangladesh is largely an egalitarian society. Feudalism was eliminated by land reforms and legislations over half a century ago. However, the political institutions failed to evolve into a mature enough state sufficiently capable of containing the pluralist spirit of the populace. Several military interventions did not help. The best way to fund politics was seen to be mobilising resources through the capture of power. Money was required to secure wins in elections and, thereafter, the politician who had spent the amounts to purchase votes needed to make up for his losses. In this predatory ‘winner-takes-all’ situation, the loser was excluded from all aspects of governance. One of the most urgent future tasks for the government, therefore, is to restore the credibility of the Parliament by getting the opposition a share in governance, for example, by providing it some Committee Chairs. Ultimately, the goal should be to reduce the cost of electoral defeat. Institutions in society which can assist governance should be strengthened. The Election Commission is a case in point. It must remain effective and independent, for it will be the backbone that will keep democracy firm and standing. The public services that have a long tradition in the subcontinent must be depoliticised, their principal criterion for promotion should be merit and their quality of service delivery should be enhanced. The Public Service Commission should be more autonomous and sufficiently prestigious. Police reforms have been hanging fire for a long time, and the sooner they are initiated the better. In November 2007, the caretaker government, by an amendment to the Criminal Procedural Code, had separated the judiciary from the Executive magistracy. The Executive has strongly resisted this on professional grounds. A golden mean will have to be found. Corruption In Bangladesh, there exists a tremendous propensity to want to win elections, for there is so much a victory can deliver. This is what rendered corruption, combined with political muscle-power, pervasive. As Cicero had said 2,000 years ago, “inter arma enim silent regis”, meaning “In the face of arms law fell mute”. Obviously, systemic corruption will require addressing. The caretaker government had made considerable headway by setting up a powerful Anti-Corruption Commission (ACC). The resignation of the Chairman of the ACC has somewhat queered the pitch for the government.

This problem will require skillful handling. Raising public awareness and a change of mindset are necessary. Ultimately, honest behaviour must flow from the dictates of conscience rather than from the fear of the police. Economy Though poverty alleviation is increasingly being seen as a success story in Bangladesh, according to the World Bank, 56 million of its people still remain poor. Bangladesh is fortunate in that it has remained fairly unscathed, thus far, by the current global recession. In fact, the situation may have slightly benefited its principal export, ready-made garments, which earn 76 percent of the trade income because it specialises in the lower-end of the market. It continues to earn nearly US$11 billion a year. The government will need to continue to strive for greater market access, mainly in the United States, where Bangladesh faces discriminatory trade barriers. The other great source of national income is remittances from expatriate Bangladeshis, mainly workers, of whom Bangladesh has exported over 1.7 million over the last two years. In 2008, they remitted US$7.9 billion, 10 percent of the countryâ&#x20AC;&#x2122;s gross domestic product. This accounted for among the highest share in the world. However, Bangladeshâ&#x20AC;&#x2122;s markets are drying up due to the recession, as evidenced in the announcement in March 2009 by the Malaysian Labour Minister of the cancellation of 55,000 Bangladeshi work visas. New markets have to be identified, skills upgraded, and to keep public opinion satisfied at home, efforts must be made to ensure that workers are better treated in the host countries. In order to study the possible adverse impact of the recession, a Task Force has been set up under the chairmanship of the Finance Minister. It must make appropriate recommendations. Obviously, the Task Force has its work cut out for it. An aspect of the economy that will require particular attention is energy. Power shortages are routine and efforts at new generation have yielded no substantial returns. A decision will be required, perhaps following a national debate, if the country should go nuclear. Internationally, it should pose little problem as Bangladesh has impeccable non-proliferation credentials. It has already been reported that the Russians have been approached for two 1,000MW nuclear power plants. The gas reserves are now being calculated far more conservatively at 13.54 trillion cubic-feet, so new finds are essential. Indeed, the energy sector will require a huge investment calculated at US$8 billion by 2025. It will also be necessary to resolve the maritime boundaries with India and Myanmar as offshore drilling will be called for. A National Coal Policy will need to be put in place. In the short term, the Finance Minister has already identified the power sector as problematic. As such, immediately, palliatives such as supply-side management may be necessary. Food supply will need constant monitoring. Bangladesh needs to produce over 30 million tons of grains annually and keep a reserve of 0.5 to 1 million tons in stock for rainy days. For this to happen, there must be regular provision of inputs such as power, irrigation, seeds and fertiliser (the latter often through external procurement). Law and Order Unfortunately, very early into its term, the government confronted an outrageous mutiny in late February 2009 among its border guards known as the Bangladesh Rifles (BDR). It was staffed at senior levels by army officers, 55 of whom were brutally killed and a number are

missing. Three separate investigations are in progress and much of the government’s future action will depend on their outcome. A minister is coordinating the enquiries. The stated reason for the uprising were said to be demands for higher pay, the BDR’s own officer-cadre and its participation in United Nations peacekeeping missions, none of which appear to have been advanced by the BDR’s actions. The government must act to calm passions, particularly among those affected. The Prime Minister appears to have succeeded in doing that. The BDR man the borders. The guarding of the border may now be adversely affected and, as such, that lacuna must be filled. Terrorism is seen as a threat. In this age of globalisation, cross-border or international linkages are easy to establish and the government must remain ever vigilant. The day-to-day law and order situation often becomes problematic. Fortunately, Bangladesh’s notorious hartals or general strikes have not recurred recently and there is need for the law enforcement authorities to be more active. Rewarding the efficient and reprimanding the deficient is a principle more honoured in breach than in observance. This must be corrected. Foreign Policy It should not be too difficult for the new government to carry forward the image of Bangladesh as a positive and constructive international actor. For Bangladesh, what is needed is sufficient manoeuvrability to protect its sovereignty and external support for its development. There is also the felt need to live ‘in concord with’ but ‘distinct from’ the powerful neighbour, with Bangladesh being almost entirely ‘India-locked’. The Awami League has generally had comfortable relations with India and the first important foreign dignitary to visit Dhaka after the elections was India’s External Affairs Minister, Pranab Mukherjee. However, Bangladesh’s foreign policy aspirations will require it to seek a high level of international interactions with Southeast Asia and the Far East, Europe, the United States and the Muslim countries. Relations with the United Nations will be key. Not only does the United Nations provide norms, values and standards to conform to, but it is also a conduit to participate in peacekeeping, popular with its armed forces for both image and benefits, and to which Bangladesh has consistently been one of the largest contributors. Interactions with groupings like the South Asian Association for Regional Cooperation, the Organisation of the Islamic Conference and the Commonwealth are important as they provide Bangladesh with platforms to air its views. As the elected Chairman of the 50 Least Developed Countries, Bangladesh will have to continue to strive for better preferential trading terms for them, mainly in the World Trade Organization. Governance Good governance is not something that can be boxed separately as it runs like a thread through all other issues. It is necessary for every element in the government to contribute towards it. The newly-formed National Human Rights Commission, established on 1 December 2008, must ensure that the actions of all state agents are in consonance with acceptable norms and standards so that no one is above the law. Local government, particularly the elected Chairmen of Councils, must be more empowered and, to the extent, possible national law-makers kept away from dealing with development funds.

The practice of holding Cabinet meetings away from the capital, Dhaka, must be continued and, indeed, enhanced. This will help take the government to the doorsteps of the people. The media, as of now, functions unrestrained. There is much truth to Amartya Sen’s dictum that a free press and famine are incompatible. Above all, the Bangladesh government, as in the case of all governments, must learn that the essence of democracy is its ability to grasp that it is far more preferable to live with an inconvenient idea than to try and suppress it. Conclusion Prime Minister Hasina completes her first hundred days on 16 April 2009. Much of her time in government during this period has been spent consolidating her powers and assessing a daunting ‘to-do’ list. There is often talk of the ‘Bangladesh Paradox’ – the ability of the country to forge ahead at a growth rate of six percent despite its many and varied constraints. This is particularly true in the socio-economic sectors. Bangladesh’s experience in such areas as in micro-credit and non-formal education goes to show that the simplest ideas can often effect the profoundest changes. The great challenge of the new government is to convert this ‘paradox’ into a ‘paradigm’, and identify and collate Bangladesh’s ‘best practices’ into a model that could be usefully emulated in many societies of comparable milieu.

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ISA S Insights No. 60 – 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

Indian Elections 2009: Where are Economic Reforms Headed? Bibek Debroy  Preface India is holding its 15th general elections from 16 April to 13 May 2009. The elections are taking place in challenging circumstances. A variety of cross-cutting political, security, economic and socio-cultural issues are influencing the elections. The exercise is impacted by multiple parties, personalities and positions from India’s vast political spectrum. The Institute of South Asian Studies (ISAS) is bringing out a series of papers analysing different aspects of the elections. These include, among others, analysis of key national and regional parties and their strategies, key political personalities, and issues dominating perceptions of the electorate. ISAS had earlier prepared seven papers, providing an overview of India’s political parties; the role of the youth in India’s elections; the economic backdrop to the general elections; the major domestic issues likely to dominate the elections; India’s key foreign policy concerns and their impact on the elections; the role of women and importance of women leaders in Indian politics and elections; and the geographical distribution of India’s regional parties, their areas of influence and regional electoral outlooks. The eighth paper in the series critically examines the outlook for economic reforms and the major economic policies that are likely to prevail in India following the elections. Combinations and Configurations The Indian political scenario and the shape of the new central government are completely uncertain until May 2009. Conceptually, there can be the following configurations: 1) a Congress government; 2) a BJP government; 3) a Congress-led government; 4) a Bharatiya Janata Party (BJP)-led government; 5) the Third Front, supported by the Congress from the outside; 6) the Third Front, supported by the BJP from the outside; and 7) the Third Front government. One does not need psephology to figure out that the Congress and the BJP will add up to 280 seats or thereabouts. And, clearly, neither the Congress nor the BJP is going to 

wither away. Therefore, Options 1, 2 and 7 are extremely improbable though they are logically possible. We are left with Options 3, 4, 5 and 6. Opinion polls, masquerading as precognition, will not get us any closer to which of the four is most likely, since quite a bit hinges on which is the largest party or the largest alliance, and the subsequent exchange of one kind of portfolio for another. It is useful to remember the composition of the Indian parliament in 2004, at least for the major political parties – the Congress (145 seats); the BJP (138); the Samajwadi Party [SP] (39); the Nationalist Congress Party [NCP] (9); the Trinamool Congress [TMC] (2); the Rashtriya Janata Dal [RJD] (21); the Lok Janashakti Party [LJP] (3); the Shiv Sena (12); the Asom Gana Parishad [AGP] (2); the Akali Dal (8); the Dravida Munnetra Kazhagam [DMK] (16); the Bahujan Samaj Party [BSP] (17); the All India Anna Dravida Munnetra Kazhagam [AIADMK] (0); and the Left (59). For the 2009 elections, across psephologists, we have such modal numbers as the Congress (135-150 seats); the BJP (135-145); the SP (23-30); the NCP (13-14); the TMC (13-17); the RJD-LJP (15); the Shiv Sena (12); the AGP (4-5); the Akali Dal (4-5); the DMK and its allies (13-15); the BSP (26-34); the AIADMK and its allies (30); and the Left (35-40). That leaves the field wide open, since some incremental parties will not sleep with the enemy. The SP and the BSP, the TMC and the Left, and the DMK and the AIADMK are instances of such rifts. Consequently, the definitions of the United Progressive Alliance (UPA) and the National Democratic Alliance (NDA) are fungible. All one knows is Options 3 and 5 are a bit more likely than Options 4 and 6. One also notices stability in the numbers across 2004 and 2009, though there are state-level shifts not discernible in all-India aggregates. That apart, one should mention the relative decline of the SP and the Left, and the relative increase in importance of the BSP, the TMC and the AIADMK. Other than the Congress, these three parties in the ascendance are led by ladies. The Economic Domain However, there is greater certainty in the economic domain. The Reserve Bank of India’s (RBI) annual review of the monetary policy has just been announced and it has said that the economy will grow by six percent in 2009-10. In an interview, the Chief Economic Adviser at the Ministry of Finance has suggested a band of 5.5 percent to 7.5 percent, which is so wide that it is hardly illuminating. However, to be fair to the Chief Economic Adviser, the upper part of the range is conditional on the United States’ economy bottoming out by September 2009, which is an unlikely event. Without this, the Chief Economic Adviser’s band is 5.5 percent to 6.5 percent. Neither the RBI nor the Chief Economic Adviser will vehemently disagree if one breaks up the 2009-10 growth into 5.5 percent for the first half of the year and 6.5 percent for the second half. From October 2009, India will thus settle into a trajectory of 6.5 percent (down from 8.5 percent) and remain there until the world economy and exports perk up. What does one expect the incoming government to do so that the trajectory becomes 7.5 percent rather than 6.5 percent or the recovery occurs before October 2009?

Manifestos and Recovery Prescriptions Reportedly, the Congress has been working on a 100-day reform blueprint. It is true that the big-bang reforms should occur in the first 100 days. Otherwise, steady-state resistance takes over. On economic reforms, the UPA flaunts the National Rural Employment Guarantee Scheme (NREGS) and the Right to Information (RTI) Act. The RTI Act was pushed through by the UPA government during that window and though the NREGS was formally launched in August 2005, the decision had already been taken during the first 100 days, when the National Advisory Council still possessed some bite. During 1991-1996 too, significant reforms occurred during the first 100 days. However, this 100-day hypothesis is not quite true of either the United Front or the NDA. Does that validate a hypothesis that steady state resistance to reforms is greater under the Congress? With Option 3, 5 or 6, the incremental allies will stonewall enough to jettison all reforms. The first 100 days will not shake India, except that, with Option 3, we might have a Right to Food Bill. This is simply not a matter of the National Common Minimum Programme (NCMP) or the National Agenda for Governance (NAG), as commentators often suggest. Four political parties have brought out their manifestos so far – the Congress, the BJP, the Communist Party of India (Marxist) [CPM] and the SP. In addition, the BJP has an informationtechnology vision document. Despite subsequent band-aid attempts, the SP’s manifesto is worse than even that of the CPM. It prohibits English, computers, capital markets, agricultural mechanisation and shopping malls. All three markets – labour, land and capital – will be messed up if the SP becomes part of a ruling coalition. One can ignore the SP and turn to the other three. Not only can these three manifestos be contrasted, one can also contrast the 2009 manifestos with the 2004 vintages. In the 2004 versus 2009 manifesto face-off, the CPM is consistent. However, both the Congress and the BJP have moved to the left in five years. Indeed, there is a blurring of differences across the three 2009 manifestos in economic content. In substance, all three manifestos have similar positions, demonstration of India’s version of Gresham’s Law – bad policies drive good policies out of circulation. Take the question of subsidising the poor, this is a good policy. The Congress (2009) manifesto states that, “This will require that all subsidies reach only the truly needy and poor sections of our society. The Indian National Congress will continue its efforts to create and implement a national consensus on this issue.” This is excellent and there will be medical insurance for the unorganised sector below the poverty line (BPL), old age pensions for BPL elder citizens, subsidised food grains for BPL families and health insurance for BPL. And what kind of national consensus has the UPA worked out on identifying BPL in the last five years? If we have not been able to do it in five years, what is the guarantee that we will be able to do it in another five years? The consensus implicit in the manifesto is the NREGS (self-identification), single-woman headed households, disabled and elderly, urban homeless, released bonded workers or collective (the Scheduled Castes, the Scheduled Tribes Other Backward Castes and the minorities). There is no quarrel with self-identification, singlewoman headed households, disabled and elderly. However, for the rest, we have no consensus at all. Both the BJP (2004 and 2009) manifestos mention BPL but less than that of the Congress. In 2009, we have subsidised food-grains for BPL (with the good idea of food coupons and private outlets thrown in), subsidised pensions and interest rates for the aged, bank accounts

for BPL women, subsidised bicycles for BPL girls, and subsidised school education for girls from “disadvantaged families”. As with the Congress, we have not licked the problem of identifying BPL. The BJP (2009) manifesto also has a curious figure. However, before that, the BJP (2004) said, “In the past six years, the number of Indians living below the poverty line has diminished significantly.” This is absolutely right and this is based on the National Sample Survey data for 1999-2000 to 2004-05, two points when there were large samples. The next large sample data will not be available till 2011. As such, we do not quite know what has happened to poverty since 2004-05. The BJP (2009) manifesto states, “It is a telling comment on the UPA’s performance that a whopping 55 million people have been pushed below the poverty line over the past five years. This is according to a study by the Indian Statistical Institute (ISI).” Beyond this statement in the BJP’s manifesto (2009), no one seems to have heard of the ISI-Kolkata study. Moving on to the CPM, the Left party does not believe in BPL. In 2009, as in the case in 2004, it wants a universal public distribution system, no targeting. The view was stated more strongly in the manifesto in 2004, “BPL cards should be available for all those who are not income-tax payers.” It is, thus, a bad idea to pay income taxes, rich farmers included. Since the policies are always based on the lowest common multiple of bad ideas, we can arrive at only one conclusion. India is a poor country and everyone in India must be poor. Everyone must be entitled to subsidies. Before mentioning the issue of resources, let us flag another odd development. No economist will quite know the answer as to what India’s ideal interest rate should be. The CPM (2009) manifesto wants credit at four percent for agriculture and self-help groups. The manifesto does not specify whether this is a real or nominal rate of interest. However, it must be nominal. Since the manifesto also questions the government’s figures about an inflation rate of four percent, the CPM clearly wants a negative real rate of interest. The Congress (2009) manifesto does not mention a specific figure. However, small and marginal farmers must have credit at “lower rates” and all farmers will be waived interest if they repay bank loans. Since interest and principal payment will be waived for those who do not (or cannot) repay, we have zero percent interest for farmers. The BJP also wants four percent for agriculture and educational loans, spliced with higher interest rates on deposits by elder citizens. Let us not forget the CPM’s insistence on the Employees’ Provident Fund rate of more than 8.5 percent, something the other two parties do not mention but would not contest. With small savings and government borrowing thrown in, the banks will borrow at eight percent or more, and lend at four percent or less. Now we know why the public-sector banks cannot be privatised and why loss-making private banks must be nationalised. The Reform Outlook Manifestos are not just promises. When in government, the political parties do try to implement them. The period from 2004 to 2009 is evidence enough and the manifestos feed into the NCMP or the NAG. It is true that the ‘common minimum’ is the highest common factor and not the lowest common multiple, and it is, thus, a common maximum programme that becomes a binding constraint. However, not all reforms require legislative changes. Even within the NCMP constraints, more reforms were possible. Was it because of the NCMP that the roadways programme collapsed under the UPA? Was it because of the NAG that it took off under the NDA?

Administrative decisions are often determined by ministers and it is here that the collateral damage by incremental parties is the greatest. With Option 3, a fairly likely scenario in terms of distribution of portfolios is Defence with the SP; Home with the RJD; Mines, Petroleum and Fertilisers with the LJP and the JMM; Commerce and Telecommunications with the DMK; and Agriculture with the NCP. And who knows – perhaps a historic blunder of the Prime Minister with the Left and even Finance with an incremental ally. That is the reason why the 6.5 percent growth trajectory is independent of any central government action, within and without 100 days. It is a function of monetary policy loosening and fiscal measures already introduced and steam of entrepreneurship. Yes, rural sector reforms are important and can provide endogenous sources of growth. However, these reforms are state subjects. And if one means substantive rural reforms and not just hikes in procurement prices or a Right to Hunger Bill, the experience of the last five years does not suggest that they are likely under Option 3. The likelihood is greater under Option 4. Nor should one forget the fiscal mess. The RBI’s annual review of monetary policy has just stated that the overall (centre + state) fiscal deficit is 10.8 percent of the gross domestic product, excluding off-budget items. As Indian Finance Minister P. Chidambaram said, he was pressing the “pause” button on the Fiscal Responsibility and Budget Management (FRBM) Act. What is happening is much more than a “pause”. Given additional public expenditure demands under Options 3, 5 and 6 and existing government borrowing programmes for 2009-2010, the FRBM has been broken in spirit. It will now be broken in law and India will get back to automatic monetisation of deficits. The cycle of high interest rates cannot be broken. No one will touch rates on small savings and deposit rates will have a floor of eight percent. Priority sector lending will be at four percent. How can one expect prime lending rates to drop below 11 percent, even if the RBI rates are cut more? With Options 3, 5 and 6, we are unlikely to get the privatisation of public sector undertakings too, not just on efficiency grounds, but also to bridge deficits. Privatisation is more likely with Option 4. This is realism rather than pessimism. Policy responses to a downturn can be fiscal, monetary or structural. On the structural side, there is, thus, a glorious certainty about nothing significant occurring. Public expenditure is not the point, even in infrastructure. The problem is not resources but administrative capacities of the government systems to deliver. One would like to think those reforms are more likely under Option 3 or 4, except that the last five years of a Congress-led government (Option 3) do not inspire confidence.

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ISA S Insights No. 61 – 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

The Sri Lankan Situation and the Principle of the ‘Responsibility to Protect’ Iftekhar Ahmed Chowdhury 1 As the Sri Lankan army presses on with its final assault on the Liberation Tigers of Tamil Eelam (LTTE) stronghold, with over 50,000 civilians feared entrapped in the fighting, Indian External Affairs Minister, Pranab Mukherjee, made a public statement on the evolving situation. He said, “These killings must stop. The Sri Lankan government has a responsibility to protect its own citizens and the LTTE must stop its barbaric attempt to hold civilians hostage.” A key element in his remarks was the use of the phrase ‘responsibility to protect’. Was he referring to the recently-adopted United Nations (UN) principle which also goes by the acronym of ‘R2P’ and hinting at its relevance to the Sri Lankan context? It is most likely not the case, at least, in a military sense. India’s relations with the Sri Lankan government are excellent and, despite some diplomatic manoeuvrings to satisfy Tamil voters at home in the midst of the elections, New Delhi, no friend of the LTTE, who had assassinated Prime Minister Rajiv Gandhi, is unlikely to stand in the way of the Sri Lankan army’s final victory. However, the safety of the civilian population, including the Tamils, will continue to concern India. It is a factor in the politics of the southern Indian state of Tamil Nadu, whose Chief Minister, M. Karunanidhi, an ally of the ruling Congress, went on a ‘fast unto death’ to secure the safety of Tamil civilians, which critics said was prompted by his foreknowledge that, on 27 April 2009, Sri Lanka’s President, Mahinda Rajapaksa, would order a cessation of aerial bombing and heavy artillery shelling, partly as a result of Indian and Western pressure. The fast happily began and ended on the same day and no death was involved as a consequence. The ‘R2P’ Principle Of course, the Indians need to tread a delicate path as their government is well aware of the tremendous Sri Lankan sensitivities to any mention of the ‘R2P’ in this context. About two years ago, a foreign academic, Dr Rama Mani, who was the Executive Director of the International Centre for Ethnic Studies in Colombo, was sacked and her visa cancelled for espousing this idea. Also trenchantly criticised by the pro-government media in Colombo was Gareth Evans, former Australian Foreign Minister, who is the President of the International Crisis Group and a champion of the principle, for suggesting at a lecture hosted by Dr Mani 1

that, while the current situation did not yet warrant invoking ‘R2P’, it may ‘deteriorate’ to such a level as to justify it. What is the ‘R2P’ principle, how did it originate and what is the debate around it? The idea was first propounded as a principle of international relations in a report of the International Commission on Intervention and State Sovereignty (ICISS) established by the Canadian government in December 2002. Very briefly, the principle held that if a country was failing or was unwilling to prevent severe abuses of its own civilian population, the responsibility to do so would devolve on the international community who would use peaceful methods to try and resolve the problems, and those failing, could resort to the use of military force. Though it was pushed by personalities such as Mr Evans, this stood little chance, at the beginning, of universal acceptance, particularly given the backdrop of the United States’ and the North Atlantic Treaty Organization’s interventions in Iraq and Afghanistan, of which much of the developing world, particularly some key members of the Non-Aligned Movement (NAM) were wary. However, the UN is about setting standards and norms, and some elements of the concept appealed to many. Nonetheless, it would require considerable sharpening and honing to make it universally acceptable. An opportunity came when the process of the UN reforms received a fillip in 2005 under the leadership of the President of the UN General Assembly (UNGA), Foreign Minister Jean Ping of Gabon. He appointed a small group of 10 ‘facilitators’ to help him with drafting the ‘Outcome Document’ of the September 2005 World Summit that would contain proposed reforms of the UN system. The task of negotiating the paragraphs on the ‘R2P’ was given to two of the ‘facilitators’, namely, the Slovenian Permanent Representative, Ambassador Roman Kirn, and me (then representing Bangladesh at the UN) – a European and an Asian coming from two distinctly-diverse perspectives. Thereafter, the Slovenian Ambassador and I, as the two responsible ‘facilitators’ working on behalf of the UNGA President, conducted a series of intense negotiations spread over months through 2005. A number of the NAM countries, including Cuba, Iran, Pakistan and Egypt, had strong reservations, arguing that the concept would enable ‘neo-imperialist’-type interventions by the powerful countries in pursuance of their own interests. Russia and China opposed it in sympathy with these views. The United States was indifferent to the proposal. The United States apprehended that the proposal would thrust greater responsibilities on it and it was, in any case, reluctant to have its soldiers serve under any non-United States command. The European Union and Canada were supportive but realised it was impossible to build a consensus around it without including sufficient ‘safety clauses’ to satisfy the NAM detractors. Eventually, the agreed language, adopted by the World Summit in September 2005, was contained in Paragraphs 138 and 139 of the Outcome Document. The first accepted that ‘each individual state has the responsibility to protect its populations from genocide, war crimes, ethnic cleansing, and crimes against humanity’. The second entailed that the ‘international community, through the UN, also has the responsibility to use appropriate diplomatic, humanitarian, and other peaceful means, in accordance with Chapters VI and VIII, to protect populations from genocide, war crimes, ethnic cleansing and crimes against humanity. The rest of the paragraph goes on to say that, ‘In this context, we are prepared to take collective action in a timely and decisive manner, through the Security Council, in accordance with the Charter, including Chapter VII, on a case-by-case basis and in

cooperation with relevant regional organisations as appropriate, should peaceful means be inadequate, and national authorities manifestly fail to protect their populations from genocide war crimes, ethnic cleansing and crimes against humanity.’ The paragraph also deals with the responsibility in this regard of the General Assembly to assist countries under stress in ‘capacity-building’ to avoid such situations from occurring. The ‘safety clauses’ are in bold print. The principle could only be invoked under four circumstances (repeated several times for emphasis), that is, ‘genocide, war crimes, ethnic cleansing and crimes against humanity’. Thereafter, action could be taken only ‘through the UN’ and that too acting in a ‘collective’ manner, thus ruling out unilateral action. Initially, the intervention would have to use ‘appropriate diplomatic, humanitarian and other peaceful means’. Any use of force would also have to be through ‘the Security Council’ (with Iraq in view?) which would imply the endorsement of the two early detractors, Russia and China, who have ‘veto’ powers to reject any decision. Regional bodies such as the African Union would need to be roped in (this was introduced due to the African insistence). To give it a development perspective, the NAM saw to it that the element of ‘capacity-building’ was also included, much to the chagrin of some western ‘donors’. Reactions to the “R2P’ The original enthusiasts of the idea lamented the rather ‘toothless’ (in their view) outcome but they had little choice but to go along. However, they were able to obtain a Security Council Resolution, Number 1674, which buttressed the World Summit Outcome Document contents on the ‘R2P’. Adopted on 28 April 2006, it “reaffirmed the provisions of Paragraphs 138 and 139 of the 2005 World Summit Outcome Document regarding the responsibility to protect populations from genocide, war crimes, ethnic cleansing and crimes against humanity”. It also committed the Security Council to action to protect civilians in armed conflicts. It is this element that gives this powerful body some leeway. Several major debates have been held in the Security Council on ‘the protection of civilians in armed conflicts’, in the course of which many delegations have linked the subject to the ‘R2P’. In December 2006, UN Secretary General, Kofi Annan, who was at the helm when the world leaders adopted the ‘Outcome Document’, left office and was succeeded by Ban Ki-moon. The new Secretary General demonstrated his support to the concept by appointing a Special Adviser for the ‘R2P’, Professor Edward Luck, in February 2008. As the debates at the UN demonstrated, the views of the governments and, in this piece we will examine those of the Asia-Pacific region, were diverse. Australia was strongly in favour and its representative, Ambassador Robert Hill, said on 2 October 2007, “We recognised ‘the responsibility to protect’ as a central tenet of our shared humanity. (It) underpins the notion that states must protect their own populations. But should they fail to do so, the international community must act; not to stand idly by in the face of atrocity, genocide or ethnic cleansing… (T)his means we must commit to prevent and respond to those most serious crimes wherever they occur”. Canada’s Ambassador John Mc Nee said in the Security Council on 22 June 2007, “This Council, indeed the international community as a whole, will be judged on our ability to protect the most vulnerable. It is a challenge that we simply must meet.” The developing countries of the region were far more cautious. At the General Assembly World Summit in September 2005, President Susilo Yudhuyono of Indonesia argued that, “We need a consensus on the responsibility to protect… (T)o this end, force should be used

only when all other means have failed”. Malaysia’s Foreign Minister, Syed Hamid Albar, was quoted in Bermuda Times on 13 June 2006 as saying, “Actions must be in accordance with the respect for sovereignty and territorial integrity of states as well as observing the principle of non-interference”. The Chinese position, as articulated by Ambassador Liu Zhenmin at the Security Council on 4 December 2006 was that, “(In implementing the R2P, the international community) should not infringe upon the sovereignty and territorial integrity of the countries concerned, nor should they enforce intervention by circumventing the governments of such countries”. Japan’s and Singapore’s positions were somewhere in between those presented above. At the Security Council on 9 December 2005, Japan’s Ambassador Kenzo Oshima said, “World leaders formally acknowledged (the R2P) at the 2005 Summit, and it was reaffirmed by the Security Council in its resolution 1674. Yet these words have not adequately been transformed into action. We need to discuss in this body what other concrete measures we can take”. The Singaporean representative, Ambassador Vanu Gopal Menon, stated at a UN meeting on 7 April 2005, “It is high time that massive killings and crimes against humanity be things of the past. Yet, these things continue to happen and they continue to be protected by the walls of an antiquated notion of absolute sovereignty”. Indeed, on 19 April 2005, he challenged the General Assembly, and that failing, the Security Council, to frame criteria to prevent such abuses. Later that year, the ‘R2P’ was adopted. Pressure Groups Powerful pressure groups in the non-governmental and academic circles are now in place to monitor the application of this principle. One such institution is the Global Centre for R2P at the Ralph Bunche Institute for International Studies at the City University of New York set up in February 2008. During the last UNGA Session on 25 September 2008, the Centre organised a roundtable session in New York where the keynote speakers were Foreign Minister Maxine Verhagen of the Netherlands, Foreign Minister Bruno Stagno of Costa Rica and me, then Foreign Advisor (Foreign Minister) of Bangladesh. Professor Luck was also present at the session. The possibilities of the application of the ‘R2P’ in the case of Myanmar were hotly debated for the first time perhaps at a high-enough level to shape the UN’ policies, and arguments made on both sides at a purely inter-governmental level politics and diplomacy would have combined to preclude such a debate. It is noteworthy that, earlier, such an intervention had been favoured by the French Foreign Minister Bernard Kouchner but it was shot down by China and Russia. Interestingly, the immediate reason for the intervention in Myanmar would have been not so much the repressive measures of the regime as its reluctance to accept humanitarian assistance following the devastating Cyclone Nargis. The initiative has been replicated in Southeast Asia by the setting up of the Asia-Pacific Centre for the Responsibility to Protect also in February 2008. At inter-governmental regional levels, and the principle acknowledges the role of such bodies in this regard, this part of the world has not seen too much action to fulfil even the non-military aspects of the ‘R2P’. While a commendable achievement of the landmark Association of Southeast Asian Charter of November 2007 was the creation of a Human Rights Body, the closest it got to the ‘R2P’, the principle of ‘non-interference’ remains a liability. Indeed, President Gloria Macapagal Arroyo of the Philippines has warned that her country would not ratify the Charter unless the Myanmar authorities commit themselves to democratic reforms and release Aung San Suu Kyi. In the other major Asian regional body, the South Asian Association for Regional Cooperation, comprising the South Asian countries, Article X which debars discussions on

any contentious issues, would most certainly stand in the way of establishing a regional mechanism to pursue the concept. The Sri Lankan Situation In the Sri Lankan situation, with which this paper began, we have seen how exercised the government had become to any reference to the ‘R2P’. On it, James Traub wrote in The Washington Post on 22 April 2009 that “the fighting threatens to produce exactly the kind of cataclysm that states vowed to prevent when they adopted ‘the responsibility to protect’ at the 2005 UN World Summit.” The renowned and retired UN diplomat, Lakhdar Brahimi, writing in The International Herald Tribune on 20 March 2009, described the Sri Lankan situation as a “slaughter waiting to happen”. The Sri Lankan government would argue, as it does, that it is seeking to eliminate a group considered as ‘terrorists’ in many countries. A further complication is the fact that, while both parties to the conflict may be culpable, the writ of the UN would extend to only the government, and not to the non-state actor, that is, the LTTE. It may be argued though whether the time has come to expand the concept of the ‘R2P’ to bring non-state actors within its purview (though the assent of the concerned state would still be necessary). However, to go beyond the ‘agreed language’ of the world leaders will entail much legal and practical difficulties. However, this does not mean that once the war is over, the grievances of the Tamil minorities can be swept under the carpet. Indeed, if this is done, Sri Lanka’s travails will continue to fester as Professor Neil de Votta, a United States-based Sri Lankan analyst, has very powerfully argued in his essay ‘Sri Lanka at Sixty: A Legacy of Ethnocentrism and Degeneration’. However, it must also be pointed out that while Sri Lanka has resisted any formal application of the ‘R2P’, it has not been averse to external interest as evidenced in its acceptance of connected visits by senior Indian officials as well as by Foreign Minister Bernard Kouchner of France and the United Kingdom’s Foreign Secretary, David Miliband, though the efforts of the latter two to secure a ceasefire did not succeed. At the same time, the determination of the Sri Lankan government to use the sovereign card was also seen in the refusal to grant visa to a powerful European politician, Foreign Minister Carl Bildt of Sweden. Conclusion Be that as it may, the ‘R2P’ principle has its critics. Walden Bello of Chulalongkorn University, Thailand, has criticised it as a form of ‘imperialism’. Precisely for that reason, the NAM and G77 have sought to build in the effective ‘safeguards’ into its operation that this article deals with earlier. Indeed, in his report on implementing the ‘R2P’ dated 12 January 2009, the UN Secretary General underscored the necessity to thwart states from misusing the doctrine. To this end, he proposed a strategy that focuses on prevention and assistance through education and training, and saving lives through “timely and decisive action”, instead of an “arbitrary, sequential or graduated policy”. In fact, the original proponents, the ICISS, raised the threshold of a military intervention very high – it would be permissible only as a just cause when the intention is right, as only a last resort, by a legitimate authority, using proportional means, and with reasonable prospects of success.

The ‘R2P’ is a global norm, a value, and a standard. It is not a single action but a continuum, requiring a series of measures by the international community, starting early and well in time. The wise old adage ‘prevention is better than cure’ is most apt in this case. The element of ‘capacity-building’ as a component of the concept deserves much greater stress. Professor Luck believes that the ‘R2P’ “has come to stay” but he argues that the realisation of the vision “will depend on many others as well – (UN) member states, the Secretariat, regional and subregional organisations, and civil society, among others”. It is the responsibility of the international community to protect human kind from falling into the morass of poverty, underdevelopment, disease and despair. Development, good governance, empowerment of the vulnerable and the rule of law are key to preventing such unpalatable situations from occurring in the first place. This will happen if and when the UN itself implements the many resolutions it has adopted on these subjects in the past. These include honouring aid commitments, supporting indigenous initiatives to allow for development to be home-driven, and according preferential treatment and market-access to particularly the poorest among the least developed countries. It is only then that ‘genocide, war crimes, ethnic cleansing, and crimes against humanity’, the four infamous horsemen of apocalypse, can be prevented from arriving. oooOOOooo

ISA S Insights No. 62 – Date: 8 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

The Malaise in Myanmar: What is to be done? Iftekhar Ahmed Chowdhury 1 Introduction A question that the international community is currently grappling with is how to handle the situation and the powers that be in Myanmar. The regime, headed by the 75-year-old General Than Shwe, continues to control the destiny of the nation and rules it with an iron fist, unresponsive to calls for change, both from within and outside the country. Indeed, the country has been run by the military junta for more than four decades, dating back to when General Ne Win staged a coup in 1962 (Myanmar, then known as Burma, had obtained independence from the British in 1948), suspended the Constitution, banned the opposition and introduced “the Burmese way to socialism”. Power was exercised by the State Law and Order Council (SLORC) which put down massive public demonstrations in 1987 and 1988. And in the following year in 1989, the SLORC changed the name of the country to Myanmar, declaring that it was more in consonance with Burmese history and culture. The United States and many Western countries refused to recognise this change of nomenclature and continued to call it Burma, though at the United Nations took it on the new name. The elections held in May 1990 were won by the National League for Democracy (NLD) of Aung San Suu Kyi, daughter of the revered leader of Burmese independence, Aung San. However, the SLORC rejected the results and continued with the incarceration of Aung San Suu Kyi who was already then under house arrest. International attention was focused on Myanmar with the award of the Nobel Peace Prize to her in 1991 but the regime remained unmoved. From then, off and on, to date, she remains in confinement. In September 2007, a convention which had been meeting intermittently since 1993 without the participation of the opposition parties, issued a draft Constitution, largely retaining the control of the military. The authorities described it as an advance on the ‘Road Map’ to democracy which is to be completely achieved by 2010. Large segments of the populace remained unconvinced, as evidenced by the uprising of the monks in 2007 which was severely crushed. Meanwhile, in another rather controversial move, the government changed the capital in 2005 from the historical Yangon to a totally new site, Naypyidaw – it was more central, and importantly to the authorities, more secure. 1

Cyclone Nargis On 3 May 2008, Myanmar was hit by the devastating Cyclone Nargis. It ravaged the Irrawaddy Delta and Yangon, killed over 22,500 people and rendered over a million homeless. The government did not obviously possess the wherewithal to tackle a disaster of this magnitude. At the same time, it was chary of readily accepting international assistance, apprehending that it would provide the global community with a ‘toe-hold’ in the country, eventually facilitating its interference in the country’s ‘internal affairs’. In fact, in the face of the destructions, it went ahead with holding a referendum on the Constitution on 10 May 2008. While the government argued that the referendum underscored its commitment to democratic transition, many, especially in the West, saw this as utter callousness in the face of a tragedy. Initially, the government dragged its feet on giving visas to foreign relief workers, even to senior United Nations (UN) officials. However, it relented under external pressure, particularly from the UN as well as, it is reported, from friends in the Association of Southeast Asian Nations (ASEAN) and China. A tripartite mechanism was set up involving the government, the UN and ASEAN to settle questions of visas and importation of relief materials. However, two international appeals, one for US$477 million last year, and another for US$691 million for reconstruction over next three years have elicited limited global response despite the huge initial interest, partly because such aid is no longer seen as a tool that can effect desired changes and partly because of fears that the amounts may end up bolstering the military. The Responsibility to Protect This poor response evident today contrasts the early strident reactions that followed the dithering of Myanmar to welcome outside relief. In less than a week following the cyclone, on 10 May 2009, the French Foreign Minister, Bernard Kouchner, declared, “We are seeing at the UN whether we can implement the ‘Responsibility to Protect’ (R2P), given that food, boats and relief teams are there, and obtain a UN resolution which authorises the delivery of aid and imposes this on the Burmese government.” In saying what he did, Kouchner was invoking a principle adopted at the World Summit of Leaders in its ‘Outcome Document’ in 2005, reflected under its Paragraphs 138 and 139. Simply put, the ‘R2P’ states that governments have a ‘responsibility to protect’ civilians from genocide, war crimes, crimes against humanity and ethnic cleansing. When a government is unable or unwilling to protect its civilians from these crimes, the ‘responsibility to protect’ falls upon the international community to encourage and help the state to exercise the responsibility. If the state manifestly fails to protect civilians, the international community can act, first with peaceful measures, using economic, political and legal tools, and that failing, with collective use of force through the UN Security Council under Chapter VII of the Charter, only as a last resort. Indeed, the responsibility of the international community also involves capacity-building in potentially vulnerable states so that the situations do not occur in the first place. By nailing the colours of aid-giving to the mast of ‘R2P’, Kouchner appeared to have touched a hornet’s nest. Already many Non-Aligned Movement countries viewed the principle as a ploy to effect changes of undesirable regimes. The French posture alarmed them further and they required calming. Secondly, if Myanmar was already recalcitrant, threats were likely to drive it deeper into its shell and render it even more non-cooperative. Thirdly, it was not certain that the regime had committed any of the four listed ‘crimes’, its perceived

indifference to the humanitarian crisis notwithstanding. Finally, who was to bell the cat and who was to make the ‘intervention’ and that too in the backyard of India and China? Understandably, reactions to Kouchner were strong and negative. Debate on the Principle In the UN Security Council itself, the proposal countenanced an immediate rebuttal from veto-wielding China whose Ambassador rejected the idea of any involvement of the UN Security Council at all. He said, “The current issue in Myanmar is a natural disaster. It’s not an issue for the Security Council. It might be a good issue for other forums of the UN.” Prior to the Council meeting, the Indonesian Representative, whose country is an ASEAN member of the UN Security Council echoed the Chinese sentiments. He remarked, “The last thing we would want is to give a political spin to the technical realities and the situation on the ground.” In fact, France’s European ally, the United Kingdom, took a similar position when its envoy clarified on 8 May 2008 that the ‘R2P’ “relates to acts of genocide, war crimes, crimes against humanity and so forth, rather than government responses to natural disasters.” The UN Secretariat held similar positions. Under Secretary General for Humanitarian Affairs, John Holmes, explained, “I am not sure invading them would be a very sensible option at this particular moment. I am not sure it will be helpful to the people we want to help.” The nail on the coffin of the proposal was driven by none other than the UN Secretary General Ban Kimoon’s Special Adviser for the ‘R2P’, Edward Luck, who told the British Broadcasting Corporation, “Linking the ‘R2P’ to the situation in Burma is a misapplication of the doctrine.” However, even if Kuchner’s ideas were put to paid by intergovernmental reflections based on legal and pragmatic grounds, he did succeed in signalling the urgent requirement to bring synergies together and send a strong message to the Myanmar authorities that their actions, and also on situations the lack of them, were seriously noted. Observers have discerned thereafter certain changes in the behaviour pattern of Myanmar authorities. The head of the UN body orchestrating the aid effort, Richard Horsey, said, “I think the cyclone has broken down some of the suspicion. The government has understood the difference between humanitarian aid and politics.” The Director of “Save the Children Fund’ in Myanmar, Andrew Kirkwood, remarked, “We have not faced any significant restriction in the Delta over the past 11 months.” In fact, he said, “When the Cyclone Bijli threatened to strike Myanmar in April 2009, the government took the initiative to establish contacts with aid agencies as an advance precaution, something that would have never happened a year ago.” Thus, it appears that pressures applied gently often works in the case of Myanmar. However, the million dollar question remains – how much and when? The Rohingyas For instance, the use of ‘gentle pressure’ does not seem apply to Myanmar in its treatment of its minorities such as the Rohingyas, a Muslim group which claims that it has been persecuted for generations and this persecution has intensified in present times. The Myanmar authorities reportedly do not recognise the Rohingyas as citizens. In 1991, some 250,000 of such refugees fled from Myanmar’s northern Rakhine state by foot and boat to Bangladesh and had to be settled in camps for years, as the hosts and international organisations negotiated their ‘willful return’ to their country of origin. Bangladesh was in no position itself to accord shelter to such numbers of refugees and eventually persuaded Myanmar to take all but 20,500 of them back. As the Foreign Advisor (Foreign Minister) of

Bangladesh, I took up the matter of the return of the balance with my Myanmar counterpart, U Nyan Win, on several occasions in 2007 and 2008. However, the problem is that the refugees are unwilling to return till the situation at home improves socially, economically and politically. Some in small numbers have been accepted by countries such as Canada and many have gone to the Middle East. The Rohingyas have also been fleeing to other countries such as Thailand, sometimes in horrifically crowded and unsafe boats, and there were some recent controversies on the treatment meted out to them by the Thai police. Indonesia, a predominantly Muslim nation, is reportedly considering settling some of them. Thailand’s Foreign Minister, Kasit Pirobya, had said that the Rohingya issue would feature in the ASEAN Summit, which Myanmar was to have attended. However, the meeting was postponed due to political disturbances in Thailand. Imposition of Sanctions A greater focus of the world is obviously the millions who remain in Myanmar. The Western view has been that nothing short of the strictest sanctions will persuade the authorities in Myanmar to change. In this, the United States has led the way. No American investment in Myanmar is permitted. Since 27 August 2003, the United States Treasury has banned the import of almost all goods from Myanmar, including gifts and souvenirs. Then, in September 2007, the United States Administration announced sanctions against 14 senior officials of Myanmar, including the head of government, Senior General Than Shwe, and his deputy, General Maung Aye, freezing their assets and prohibiting any American citizen from conducting business with them. The European Union has had sanctions in place since 2006 and these include travel ban, freezing the assets of Myanmar leaders and their relatives, and an embargo on arms exports to the country. Earlier, it had hinted easing the sanctions if there was democratic progress. However, recently, the European Union extended them by another year. Any UN sanction, of course, is resolutely opposed by China, which has stated, “Any move by the UN Security Council should be prudent and responsible, and conducive to the mediation efforts of the Secretary General”. In the Chinese assessment, sanctions would not be a prudent and responsible move. What is to be done? Much hope now hinges on mediation efforts, which are being conducted by the UN Secretary General’s Special Envoy to Myanmar, Ibrahim Gambari, a former Nigerian diplomat and Foreign Minister. Gambari has visited Myanmar seven times now, mostly without much breakthrough. However, he has indicated his determination to continue. His latest trip was in January-February this year in the course of which he met, apart from Myanmar officials, Aung San Suu Kyi. She did not meet him on an earlier occasion on the grounds that it would yield no fruitful results. Gambari has offered a plan to Myanmar approved by Ki-moon. It involves a two-year programme (January 2009 to January 2011) aimed at reviving the economy and involving an amount of US$400 million to US$500 million per year (a total of US$1 billion through the plan period), provided, and this is a big proviso, the Myanmar government is willing to accord guarantees on democracy and human rights in the country. The next move on the part of the UN may need to be a visit by the Secretary General himself. Sufficient prior ground work will need to be done for this, for a failure would have disastrous implications both for the people of Myanmar and the international community. Already Aung San Suu Kyi has requested, as a ‘pre-condition’ to such visit, ‘the release of all political prisoners’, something that cannot be easily obtained from the Myanmar authorities.

ASEAN, of which Myanmar is a member, and which has recently adopted a Human Rights Charter, can help by bringing to bear some positive influence, and monitoring the ‘steps to democracy’, including holding elections. Already leaders such as President Gloria Macapagal Arroyo of Philippines have displayed an ardent desire to do so. Singapore maintains good relations with Myanmar leaders and it can be useful in this regard. Last year, pressure applied on Myanmar at the Shangri-La Dialogue in Singapore, chaired by Singapore’s Defence Minister Teo Chee Hean, is said to have helped soften Myanmar’s posture with regard to the aftermath of Cyclone Nargis. Non-ASEAN regional actors such as India and Bangladesh, who sit in the ASEAN Regional Forum, can and should help as their interests are inextricably tied up with positive developments in Myanmar as well. Another platform to engage Myanmar could be the newly-formed Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, or BIMSTEC, of which it is also a member, along with Bhutan, Nepal, Sri Lanka and Thailand. Myanmar is an applicant for membership of the South Asian Association for Regional Cooperation. It is already an Observer as of last year. Progress along the democratic path would facilitate its membership. Myanmar, therefore, straddles all major regional groupings in this part of the globe. These groupings would have a common interest in achieving the desired changes in Myanmar. Bilaterally, India should wield considerable influence on Myanmar which has remained unused at least for the purpose of democratisation, perhaps for fear of creating another unhappy neighbour. China, of course, will be a key player in the Myanmar equation. It cannot forever bear the Myanmar Cross. In the UN Security Council, China has not condemned Myanmar. However, in September 2007, China agreed, for the first time, to a UN Security Council resolution expressing concern at the violent crackdown against the monks and urged the country’s rulers to accept the UN envoy. Later, Chinese Foreign Minister, Yang Jiechi, publicly supported the Secretary General’s efforts. Conclusion The answer to curing the malaise in Myanmar, thus, lies perhaps not so much in force as in peer pressure and persuasion. Professor Ralph Pettman of the Melbourne University had underscored nearly three decades ago that Burma exemplified, even at that time, a society which survived by ‘opting out of the international system.’ He said ‘it adapts and adjusts but does not kowtow to its big neighbour(s)’. Thant Myint-U, the grandson of the former Burmese Secretary General of the UN, U Thant, and an analyst and a historian, has, in his study of that country entitled “The River of Lost Footsteps”, powerfully argued that change will not come in Myanmar through sanctions and attempts at isolating it but it may come through trade, tourism and engagement. He warns though that, “Much more than any part of Burmese society, the Army will weather another forty years of isolation just fine.” He may just be right.

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ISA S Insights No. 63 – Date: 12 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: What the Forecasts Say Tridivesh Singh Maini 1 Preface India is holding its 15th general elections from 16 April to 13 May 2009. The elections are taking place in challenging circumstances. A variety of cross-cutting political, security, economic and socio-cultural issues are influencing the elections. The exercise is impacted by multiple parties, personalities and positions from India’s vast political spectrum. The Institute of South Asian Studies (ISAS) is bringing out a series of papers analysing different aspects of the elections. These include, among others, an analysis of key national and regional parties and their strategies, key political personalities, and issues dominating perceptions of the electorate. ISAS had earlier prepared eight papers, providing an overview of India’s political parties; the role of the youth in India’s elections; the economic backdrop to the general elections; the major domestic issues likely to dominate the elections; India’s key foreign policy concerns and their impact on the elections; the role of women and importance of women leaders in Indian politics and elections; geographical distribution of India’s regional parties, their areas of influence and regional electoral outlooks; and the prospects for economic reforms following the elections. The ninth paper in the series takes a close look at the different surveys and opinion polls carried out on the elections and tries to identify the key messages emanating from these surveys. Introduction The elections of 2009 are unique for a number of reasons. These include the lack of discernible popular waves favouring any political formation led by the two main national parties; the enhanced significance of regional parties; selective influences of diverse political leaders; and the intensity with which the elections are being fought over five weeks.

An important feature of these elections has been the ban imposed by the Election Commission of India on the conduct of exit polls 2 until the last phase of voting is over. During the last general elections in 2004, the Supreme Court had refused to ban exit polls. This time, however, such polls have been banned till 13 May 2009, the last day of the polling. 3 As a result of the ban on exit polls, newspapers, television channels and other media agencies have been projecting the likely outcomes of the polls through surveys conducted among specific samples of the electorate. With four phases of the polling completed, votes have been cast for 457 of the 543 seats. This paper looks at the different surveys that have come out so far, including the ones that were conducted before the elections began on 16 April 2009. Pre-poll Surveys The first survey was conducted by the CNN-IBN in the third week of February 2009. It projected that the Congress-led United Progressive Alliance (UPA) will win between 215 and 235 seats; the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) will win between 165 and185 seats; and the Third Front will win between 120 and 150 seats. In another pre-poll survey conducted by India’s leading daily, The Times of India, in the first week of March 2009, the UPA was shown marginally ahead of the NDA, with both formations falling well short of the required 272 seats to obtain a simple majority. While the survey projected the UPA to win 201 seats, it put the NDA at 195 seats. 4 The projections for both the UPA and the NDA were done before the occurrence of several key developments with respect to constituents of both combines such as Mr Laloo Prasad Yadav of the Rashtriya Janata Dal (RJD), Mr Mulayam Singh Yadav of the Samajwadi Party (SP) and Mr Ram Vilas Paswan of the Lok Janshakti Party (LJP) joining hands. The trio has entered into an electoral understanding on the 120 seats in Bihar and Uttar Pradesh. 5 An updated assessment of the survey was presented a month later. The new projections gave 198 seats to the UPA, 176 to the NDA and 109 to the Third Front. 6 Thus, between the two time periods, the survey found the UPA gaining more ground at the expense of both the NDA and the Third Front. However, it also noted that there were parties outside these three combines who could significantly influence the outcome of the elections. The first Star News-Nielsen India pre-poll survey gave the UPA 210 seats. These seats did not include those of the RJD, the SP and the LJP. If one were to include their seats, the total tally of the UPA was expected to go up to 257. The Congress was projected to win 144 seats, according to this survey. On the other hand, the NDA was expected to win 184, with the BJP winning 137 seats, and the Third Front 96 seats. Interestingly, while this survey projected more seats for the UPA just as the other surveys, it also expected the SP to win more seats (30) than Ms Mayawati Kumari’s Bahujan Samaj Party (21). 7

3 4 5 6

Exit Polls are based on responses received from voters after the latter have cast their votes and are leaving the booths. The Business Standard, “EC bans opinion, exit polls by media”, 14 April 2009. The Times of India “TOI estimate: UPA ahead but just only”, 6 March 2009. The Indian Express, “Lalu, Mulayam, Paswan form ‘secular alliance’”, 26 March 2009. The Times of India, “Congress best placed to lead next government: BJP Left lose ground in TOI estimates”, 10 April 2009. The Hindu, “UPA to get 203 seats, NDA 191: Opinion Poll”, 12 April 2009.

The second Star News-Nielsen survey, conducted all over India from 26 March to 3 April 2009, showed a marginal decline in the UPA’s prospects, though it was still ahead of the other combines. The UPA was projected to win 203 seats, down by seven seats from the first survey. The NDA was now placed at a higher level of 191 seats, seven up from the first survey. 8 Interestingly, the survey showed both the Congress and BJP improving individually with their seat tallies increasing to 155 seats and 147 seats respectively. These gains were arguably at the expense of the other constituents within their respective combines. This survey also gave the Third Front 104 seats, eight more than in the first round. The leading television channel, NDTV, carried out a pre-poll survey just on the eve of elections on 14 April 2009. This survey gave a clear edge to the UPA by projecting between 205 and 215 seats for the combine, while forecasting between 160 and 170 seats for the NDA. It also predicted a bigger tally of between 120 and 130 seats for the Third Front. The survey also took the Mulayam-Laloo-Paswan combine as the ‘Fourth Front’ and projected it to win between 30 and 40 seats. While all the above surveys put the Congress-led UPA in the lead, only two assessments gave an edge to the NDA over the UPA. The first of these was a survey by India TV. It projected 187 seats for the NDA, with the BJP alone winning 144 seats. On the other hand, the UPA was put at 178 seats, with Congress winning 133 seats. The survey, however, stated that if the UPA could woo back erstwhile allies such as the SP and the LJP, it would be able to muster 235 seats. 9 It projected the Third Front to win a sizeable 121 seats. The second assessment which gave an edge to the NDA was an internal assessment of the BJP. This survey predicted 217 seats for the NDA, with the BJP getting 160 seats and 180 seats for the UPA, with the Congress winning 135 of these seats. 10 The survey that projected the maximum number of seats for the Third Front was that by India Today. It gave the UPA between 196 and 205 seats, and the NDA between 172 and 181 seats. On the other hand, it gave the Third Front as much as 169 to 178 seats, projecting it to became as sizeable a combine as the NDA. 11 Post-poll Surveys The latest NDTV survey was conducted after the end of the third phase of polls on 20 April 2009. With elections at the half-way stage, the survey projected the UPA to win 219 seats, followed by the NDA with 170 seats, the Third Front with 113 seats, and the Fourth front with 35 seats. The forecasts were, by and large, similar to what NDTV had predicted before the polls. According to the latest internal assessments of the Congress, the party is expected to emerge as the single largest party, winning between 140 and 160 seats. 12 The BJP has not released any mid-poll analysis till now.

8 9 10 11 12

Ibid. The Indian Express, “NDA may have a minor edge over UPA”, 5 April 2009. The Times of India, “BJP survey gives it slight edge in race against Congress”, 27 March 2009. The India Today, “The battle cry of the satraps”, Ashok K. Damodaran, 3 April 2009. NDTV website “Elections 2009: The war room assessments”, 24 April 2009. Weblink: http://www.ndtv.com /news/india/elections_2009_the_war_room_assessments.php.

In a survey conducted after three phases of polling and released on 6 May 2009, The Times of India has projected the Congress to emerge as the single largest party with 152 seats while the UPA is expected to end up with around 195 seats. Interestingly, the NDA is right behind with 187 seats, with the BJP projected to win 145 seats. The survey opined that the All India Anna Dravida Munnetra Kazhagam, led by Ms J. Jayalalitha, may sweep Tamil Nadu while the Telegu Desam Party may do better in Andhra Pradesh than expected earlier, along with the Janata Dal (United) in Bihar. In the key state of Uttar Pradesh, both the BJP and the Congress are expected to gain and win up to 30 of the 80 seats between themselves. In Maharashtra, the BJP and the Shiv Sena are expected to take a slender lead over the Congress. 13 Conclusion All the surveys – pre-poll and post-poll – are unanimous in predicting a fractured verdict for the elections. No party or political combine is expected to win 272 seats required for a simple majority in the Lower House of the Indian Parliament. Most of the surveys expect the Congress-led UPA to emerge as the largest political combine. However, the BJP-led NDA is not far behind, at least as far as the latest Times of India survey is concerned. All surveys are unanimous in underlining the pivotal role of the Third Front in forming the next Indian government. As India gears up for the last round of polls on 13 May 2009 and the announcement of election results scheduled for 16 and 17 May 2009, the forecasts point to uncertainty looming large on India’s political front. The configuration of the next Indian government is now anybody’s guess, unless the forecasts are completely off the mark.

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The Times of India, “Polls head for photo-finish as BJP plays catch-up”, 6 May 2009.

ISA S Insights No. 64 – Date: 13 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: The Prime-ministerial Candidates Amitendu Palit 1 Preface India is holding its 15th general elections from 16 April to 13 May 2009. The elections are taking place in challenging circumstances. A variety of cross-cutting political, security, economic and socio-cultural issues are influencing the elections. The exercise is impacted by multiple parties, personalities and positions from India’s vast political spectrum. The Institute of South Asian Studies (ISAS) is bringing out a series of papers analysing different aspects of the elections. These include, among others, an analysis of key national and regional parties and their strategies, key political personalities, and issues dominating perceptions of the electorate. ISAS had earlier prepared nine papers, providing an overview of India’s political parties; the role of the youth in India’s elections; the economic backdrop to the general elections; the major domestic issues that are likely to dominate the elections; India’s key foreign policy concerns and their impact on the elections; the role of women and the importance of women leaders in Indian politics and elections; geographical distribution of India’s regional parties, their areas of influence and regional electoral outlooks; the prospects for economic reforms following the elections; and the trends emerging from different opinion polls and election surveys. The tenth paper in the series profiles some of the key candidates for the post of India’s next Prime Minister. Introduction The casting of votes for India’s 15th general elections draws to a close on 13 May 2009. The final phase of voting on 13 May 2009 will see curtains coming down on the elections in the world’s largest democracy – an exercise that lasted for almost four weeks spread over 543 constituencies across 28 states and seven Union Territories.

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.

Indian elections have always captured widespread attention due to their scale and diversity. This time, however, the interest has been more intense, due to a large variety of possible outcomes of the elections. Unless analysts and poll surveys are completely off the mark, the elections are going to produce a heavily split mandate. A party or a political combine requires a minimum of 272 seats to obtain a simple majority in the Lower House (Lok Sabha) of the Indian Parliament. As of now, none of the main combines – the Congress-led United Progressive Alliance (UPA), the Baharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) or the Third Front – are expected to win as many seats on their own. A fractured mandate will unleash several possible permutations and combinations of political parties for striking coalitions capable of mustering the arithmetical majority of 272 seats. The announcement of the results is expected to be followed by hectic parleys between the parties to stitch such coalitions. Indeed, the post-election negotiations are expected to be almost across the board, except between parties separated by irreconcilable ideological positions such as the Left and the BJP. The possibility of having several potential post-electoral combinations has interesting implications for the post of India’s next Prime Minister. The list of probable candidates for the leader of India’s next cabinet has grown much larger in the course of these elections. Apart from officially nominated candidates from India’s national parties – the Congress and the BJP – there are several leaders from different parties fancying their chances. The latter are mostly from regional parties belonging either to the Third Front or loose poll-specific alliances such as the ambiguous ‘Fourth Front’. Fortuitous circumstances, in terms of pure arithmetical requirement of seats, may find some of these leaders in an enviable position. The trade-off for numbers may result in bargain for something as precious as the post of the Prime Minister. The Candidates In the following paragraphs, we profile some of the key prime-ministerial candidates. Sonia Gandhi The President of the Congress, Mrs Sonia Gandhi, was unanimously chosen as leader of the Congress Parliamentary Party in the Lok Sabha as well as the leader of the Congress-led UPA after the 2004 elections. She, however, refused to become the Prime Minister primarily on the account of the controversy regarding the country’s top political chair being occupied by a person of foreign origin. Following Mrs Gandhi’s refusal, Dr Manmohan Singh became the Prime Minister. The demands for Mrs Gandhi to become the Prime Minister may surface again if the Congress leads the process to form the next government. Mrs Gandhi’s experience as the Chairperson of the UPA makes her acceptable to most constituents of the coalition. The Left, a probable ally of the Congress post-elections, is also agreeable to her leadership. However, the reasons that prevented her from assuming office the last time may constrain her from doing so this time as well.

In the event of Mrs Gandhi becoming Prime Minister, she is expected to emphasise on an agenda addressing the concerns of the common people, particularly the rural electorate. The strategic directions and contents of India’s foreign policy are expected to remain broadly unchanged in her regime, subject to the accommodation of pressures from potential allies such as the Left. Manmohan Singh Known as the architect of India’s market-oriented economic reforms, Dr Singh’s assumption of prime ministership was greeted enthusiastically by the international community, particularly international investors as well as India’s middle class and the intelligentsia. Dr Singh’s image as an honest and dedicated Prime Minister remains untarnished after five years in office. He is the Congress’s officially nominated prime ministerial candidate for the current elections. He is expected to become Prime Minister again if the Congress does well in the elections and plays the central role in forming the government. However, the brush with the Left over India’s civilian nuclear deal with the United States may provoke the Left to object and resist his leadership, should it become a potential ally of the UPA in the formation of the next government. Despite being the pioneer of India’s economic reforms, several key reforms such as those in banking and pensions were left unfinished during Dr Singh’s current tenure. Given the inflexible positions of the Left on these issues as well as those of some of the Congress and UPA’s likely allies, pursuing these reforms will not be easy. Dr Singh is expected to maintain the UPA’s focus on social-sector development, particularly in health and education. If the Congress election manifesto is implemented in principle and spirit, then job reservations for poorer classes can be expected under both Mrs Gandhi and Dr Singh. His foreign policy in the neighbourhood would be interesting to watch in the light of the continuous developments in the region. However, no significant shift in the thrust of India’s foreign policy is expected under Dr Singh’s prime ministership. Lal Krishna Advani The Deputy Prime Minister in Mr Atal Bihari Vajpayee’s cabinet and the Leader of the Opposition in the 14th Lok Sabha, Mr Lal Krishna Advani is the prime ministerial candidate of the BJP. He is expected to lead the NDA government if it assumes power. The senior-most leader in the BJP after Mr Vajpayee’s withdrawal from active politics, Mr Advani has had a tough time rallying the NDA since its defeat in the 2004 elections. The BJP’s performance in different assembly elections during the last couple of years has been a mixed bag. However, his political stature in the party has never really been questioned, with the BJP president Mr Rajnath Singh and other senior party functionaries endorsing his candidature. A government led by Mr Advani is expected to emphasise on strengthening the India-United States partnership (despite the BJP’s opposition to the Indo-US nuclear deal). Though Mr Vajpayee had kick-started the dialogue process with Pakistan, it is not clear whether Mr Advani will be willing to do so under the current circumstances. He is expected to push for a more liberal personal income tax structure and discourage foreign participation in retail trade.

Rahul Gandhi Most would foresee Mr Rahul Gandhi, son of the deceased ex-Prime Minister Mr Rajiv Gandhi and the Congress’ President, Mrs Gandhi, as a prime ministerial candidate for the future. With the Congress officially nominating Dr Singh as its candidate, the possibility of the junior Gandhi being chosen as Prime Minister is not obvious. However, if the postelection circumstances compel the Congress to search for an alternative to Dr Singh, then Mr Rahul Gandhi could be a possible choice. Since he is not constrained by the ‘foreign origin’ factor as in the case of his mother, Mr Rahul Gandhi may be a consensus choice for not only the Congress but its allies as well. Currently, a General Secretary of the All India Congress Committee and head of the Youth Congress, Mr Rahul Gandhi, as the Prime Minister, is expected to follow the Congress’ broad thrust on most issues. However, given his relatively young age, he may introduce new ideas and perceptions on key policy matters, apart from inducting relatively younger faces in the cabinet. Sharad Pawar The Minister for Agriculture and Food in Dr Singh’s cabinet, Mr Sharad Pawar also dons the hat of the President of the Board of Control for Cricket in India. A seasoned politician from India’s western state of Maharashtra, Mr Pawar, an ex-Congressman, now heads the Nationalist Congress Party, a regional ally of the UPA. Mr Pawar’s chances of becoming Prime Minister arise from his acceptability across a broad spectrum of political parties. In the run-up to the current elections, he has kept both his current and future allies guessing about his future course of action. Though officially still a part of the UPA, he may well shift allegiance to different post-election combinations. His experience, stature and political acumen make him acceptable to the regional parties as well as the national parties. The Left and the Congress would be willing to support a combination of secular parties headed by Mr Pawar. Several regional parties such as the Samajwadi Party, the All India Anna Dravida Munnetra Kazhagam (AIADMK) and the Biju Janata Dal have already indicated their support for Mr Pawar. Mayawati Kumari Ms Mayawati Kumari’s figuring in the list of possible prime ministerial candidates shows the extent by which leaders of India’s regional parties have become important in the current elections. Chief Minister of India’s largest state, Uttar Pradesh, and leader of the Bahujan Samaj Party (BSP), Ms Mayawati has played a key role in forming the Third Front along with the Left. With the Third Front bound to play a significant role in post-election government formation, Ms Mayawati’s chances of heading a potential non-Congress, nonBJP coalition cannot be ruled out. Though the BSP’s political base fundamentally comprises lower-caste Dalits, Ms Mayawati has shown considerable political skill in attracting upper caste votes in her favour as well. Thus, in the event of a wider political realignment of parties, she is likely to gain acceptance as a leader, given her flexibility in accommodating caste configurations and ideologies.

Other Candidates India’s fluid political situation is capable of springing several surprises. The announcement of election results may see several more contenders emerging for the post of Prime Minister. These include Mr Arun Jaitley, General Secretary of the BJP and ex-Commerce Minister of India. Mr Jaitley is one of the BJP’s key strategists and public faces. His articulate pronouncements have earned him critical acclaim. Known as a capable administrator, Mr Jaitley may emerge as a serious contender. So can Mr Narendra Modi, the high-profile Chief Minister of Gujarat from the BJP. Despite being branded anti-secular, Mr Modi’s credible performance as an economic administrator has earned him kudos and can help him to achieve higher political offices. Among other regional party stalwarts, one can hardly overlook Ms J. Jayalalitha, leader of the AIADMK, and Mr Chandrababu Naidu, leader of the Telugu Desam Party. Both Ms Jayalalitha and Mr Naidu have been Chief Ministers of two of India’s key southern states – Tamil Nadu and Andhra Pradesh respectively. Election outcomes of these states have typically been seen to influence government formations at the centre in the past. This time too, the results may make either or both of them significant actors in the post-election exercise. Conclusion As India and the rest of the world wait for the announcement of the results of the general elections, discussions and deliberations on government formation have already begun. These parleys involve all the political personalities outlined above as well as many more. Only time will tell who will become India’s next Prime Minister. The general elections of 2009 are likely to be remembered for not only their fractured verdict, but also for the large number of prime ministerial candidates and aspirants they are likely to produce. Indeed, rarely has any Indian election produced as many as ‘dark horses’ as the current one.

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ISA S Insights No. 65 – Date: 14 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

The Politics of International Aid and New Asian Donors: Prospects for Peace and Reconstruction in Sri Lanka Darini Rajasingham Senanayake 1 The United States’ government that wields considerable influence at the International Monetary Fund (IMF) has sought to delay the US$1.9 billion loan appeal by Sri Lanka in the context of an unfolding humanitarian crisis in the island. The Sri Lankan government, which has promised that it is at the end of its endgame with the Liberation Tigers of Tamil Eelam (LTTE), is seeking funds for the reconstruction of the northeast conflict-affected region, among other things. Colombo argues that it is fighting a ‘war on terror’. Clearly, Colombo needs the IMF loan to service its external debt as a result of soaring defence expenditure and external borrowings which are also related to controversial oil-hedging deals. The United Nations (UN) Security Council had earlier determined that it would not block the IMF loan to Sri Lanka when the subject came up at an informal UN Security Council discussion. However, it may revisit this determination following what the UN has termed a “bloodbath” on the day after Vesak in the northeast. Here, civilians are trapped in the standoff between the military and the LTTE which is using them as a human shield. Earlier, the UN Security Council’s president, Mexican Ambassador Claude Heller, had said that “all 15 members agreed that such a move or other steps to punish Sri Lanka were unnecessary.” The island’s two main donors, China and Japan, along with Russia and Vietnam on the UN Security Council, regard the violent conflict between the Sri Lankan government and LTTE as an internal matter. China recently overtook Japan as Sri Lanka’s largest donor. The island is strategically located on one of the world’s busiest shipping lanes. The currently pending IMF loan has re-opened an old debate on international aid, and its relevance and effectiveness, both within and beyond Sri Lanka. The IMF had almost run out of relevance and, more significantly, clients in the developing world before the current global financial crisis. This was partly due to the unpopularity of the Structural Adjustment Programs and other aid-related policy conditionalities imposed by the Washington Consensus in the heydays of neo-liberal development thinking. The institution had also lost considerable credibility during its response to the East Asian financial crisis in the 1990s and its handling of the Argentina crisis in Latin America, particularly in the wake of World Bank Chief Economist, Joseph Stiglitz’s critique that the IMF policies actually exacerbated these crises.

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.

Stiglitz, subsequently, lost his job at the World Bank but he won the Nobel Prize for Economics and now teaches at Columbia University. The IMF’s diminished relevance prior to the current financial crisis was also due to the emergence of new Asian donors with billions of dollars, such as China and India, moving into Africa and Asia on the account of the need for natural resources to sustain growth at home. Following the global financial crisis, this particularly Bretton Woods twin received a new lease of life to assist poor countries affected by the global economic downturn at the G20 Summit in London when it garnered pledges in the billions to help economic recovery. However, at the same London Summit, British Premier, Gordon Brown, had also declared that the “Washington Consensus is dead”. Perhaps he followed in the English tradition of announcing, “The king is dead! Long live the king!” In any event, it appears that the IMF may now step in where the World Bank once trod; the latter being the Bretton Woods twin tasked with post-conflict reconstruction. It is generally agreed that Sri Lanka’s current economic woes are more related to soaring defence expenditure, dysfunctional governance and corruption that have fuelled and have been fuelled by the extended armed conflict with the LTTE rather than the global economic crisis. Three years ago, Sri Lanka turned down an IMF offer of the status of a Heavily Indebted Poor Country (HIPC Initiative) and the Mahinda Rajapaksa regime celebrated the departure of the IMF with fanfare, and the promise never to go back to western aid conditionalities which often included the privatisation of public corporations and assets, underperforming or otherwise. Since then, Sri Lanka’s Central Bank had followed a path of borrowing from private capital markets, having concluded that concessionary loans offered by international financial institutions were too costly, given aid conditionalities, including over-priced technical assistance from donor counties that amount to “phantom aid”. Not so long ago, the Governor of the Central Bank of Sri Lanka went on record to tell the IMF to put Washington’s finances in order following the global financial crisis rather than advising Sri Lanka on monetary policy. Sri Lanka currently suffers from a homegrown balance of payments crisis related to defence expenditure, a bloated public sector and inflation that peaked last year at 30 percent, when the official reserves were whittled away defending an exchange rate which was pegged at 108 Rupees to the United States Dollar. According to Razeen Sally, Director of the European Center for International Political Economy, an apparent balance of payments crisis is also related to “corruption and institutional rot that set in long ago but has plumbed new depths”. Currently, controversial oil-hedging deals are under investigation by the Bribery Commission on the complaint to the Central Bank, following a Supreme Court stop-order on oil-hedging payments by Ceylon Petroleum Corporation, including to Citibank and Standard Chartered Bank. Recently, the United National Party, the main opposition, raised questions about conditionalities attached to the IMF loan in parliament in Colombo. The Sri Lankan government has stated that it will not tolerate conditionalities from the IMF which would very likely welcome a client from South Asia given its declining clientele in the region. Historically, Sri Lanka has been a little bit of a ‘donor darling’. The country tends to underutilise normal development assistance (at around 17-35 percent depending on the project) and has experienced ‘hot aid flows’ as was the case following the Asian Tsunami disaster of 2004 when over 500 donors and international non-government organisations (INGOs) arrived in the island to provide relief and stayed on for several years. The aid experience after the Asian Tsunami disaster gave rise to a local discourse that the island had

been struck by an ‘aid tsunami’ that had caused new problems of coordination, equity and a lack of local ownership of recovery priorities and programme. Several studies indicated that a significant part of the funds were consumed by international experts from various UN Agencies, the International Federation of Red Cross and related Red Cross partners, and INGOs based in Colombo rather than reaching affected communities. The island’s lush tropical beauty, cultural openness, and tourist-freindly people and infrastructure, despite and arguably because of cycles of conflict, peace building, reconstruction and destruction in the last quarter century, means that it has been a favourite place for aid workers and the international development and humanitarian industry. It has been known for a while that international assistance in post-conflict situations may either ameliorate or contribute to conflict. Aid dependence in conflict situations may lead to institutional de-development and a form of aid-induced Dutch disease. It is in this context too that the Sri Lankan government has recently been quite dismissive of western aid donors. The Tamil Diaspora, Information War and Aid Fungibility “Politics in an information age is not only about whose military wins, but whose story wins” as Joseph S. Nye has noted. The Sri Lankan government is facing increased international pressure as it nears the end of the long war with the LTTE. Last month, Tamil diaspora groups held protests outside the IMF in Washington D. C. over the impeding loan. On 5 May 2009, the Secretary General of the Paris-based Reporters Without Borders wrote an open letter to the IMF’s Managing Director, Dominique Strauss-Kahn, drawing attention to “the lamentable state of press freedom in the country and seeking ‘rule of law’ and human rights aid conditionality if the loan is passed. The missive from Jean-Francois Julliard, Secretary General of Reporters without Borders, noted, “As you know, Sri Lanka is spending as much as US$1.6 billion on defence in its 2009 budget, a 6.5 percent increase on the 2007 allocation, while neglecting social needs. Some army units are implicated in war crimes. Others are suspected of responsibility for many cases of violence against journalists and human rights activists.” Many western donors and members of the Organization for Economic Cooperation and Development-Development Assistance Committee (OECD-DAC), with significant Tamil disaporas in their capitals, are troubled by the humanitarian situation in a small strip of land in the northeast controlled by the LTTE where civilians trapped by the LTTE are being killed on a daily basis in the crossfire. The French and British Foreign Ministers visited the island recently after Sri Lanka denied a visa to the Swedish Foreign Minister. Their visit was to persuade the government to have a humanitarian pause for help for trapped civilians in the conflict zone but they returned empty handed. The government had insisted that the LTTE would use such a humanitarian pause to strengthen itself as it has done in the past. But the immediate humanitarian crisis and the fact that there are significant Tamil diaspora groups in many OECD-DAC counties and that they have been holding protests may be only part of the problem with releasing an IMF loan. There is also the question of the fungibility of aid and the usage of an IMF loan by the Sri Lankan government. If the IMF loan sought is US$1.9 billion and the Sri Lankan government’s defence expenditure is US$1.6 billion, the question of the fungibility of aid or the ability to transfer donor resources to non-targeted expenditure – a problem as old as foreign aid itself – inevitably arises at this time. The question remains – will an IMF loan subsidise the military machine of the government given fungibility? It is then arguable that conditionalities on an IMF loan should relate, not only to immediate humanitarian conditions to assist suffering

civilians in the conflict, but also extend to a sustainable solution and good governance for conflict de-escalation. In the past, western donors have worked in tandem with each other and offered carrots and wielded sticks at successive Sri Lanka government to encourage peace and reconciliation. Thus, for instance, the peace process that ran between 2001 and 2007 between the Sri Lankan government and the LTTE was sweetened by the ‘international community’ with the promise of US$4.5 billion that was pledged at the Tokyo Donor Conference in 2003. The peace at reconstruction was to be bought and overseen by four Co-Chairs of the Peace Process – Norway, the official peace facilitator at the time; Japan, Sri Lanka’s largest bilateral donor; the United States; and the European Union. New Asian Donors: China and India in Sri Lanka The current international aid configuration in Sri Lanka reflects shifting structural dynamics in the international development architecture, given the emergence of new Asian donors, particularly China and India, which tend to have a more state-centric approach to aid as well as the critique of aid in the global south. They may also be increasingly rendering the established aid structure irrelevant. The traditional OECD-DAC donors have been facing a declining influence with the emergence of the new Asian donors that have complicated the aid-trade debate. The new Asian donors tend to be less concerned with human rights conditionalities and have supported the Sri Lanka government in its confrontation with the LTTE. For instance, the Indian government has pledged reconstruction assistance after the conflict and has sent emergency humanitarian assistance to the conflict zones in northern Sri Lanka, including teams of navy doctors. Of course, the Indians have also supplied intelligence assistance to the Sri Lankan government in its confrontation with the LTTE and provided defence equipment of a non-offensive nature, principally radar equipment to detect LTTE planes. Sri Lanka has suffered from the syndrome of being a ‘donor darling’. ‘Donor darlings’ tend to suffer from too many aid actors with small sums of money who place a high transaction cost on local institutions and deflect from addressing the pressing problems on the ground. In Sri Lanka, critical civil society groups have, for a while, and certainly since the aid that followed the Asian Tsunami disaster in 2004, called for less aid and better targeting and monitoring of international development assistance. Given its increased strategic location on major shipping and trade lines linking the Far East to the Middle East, Africa and Europe, the island today counts on China and Pakistan for military and financial assistance to combat the LTTE. In the southern tip of Sri Lanka, 10 miles from one of the worlds’s busiest shipping lines lies a vast construction site. A port funded by the Chinese is being built on this site which is in the electorate of President Rajapaksa. Hambantota is one of the poorest districts in the island and China is building a US$1 billion port there. In Colombo, it is building an arts and culture stadium. China says that the Hambantota port is a purely commercial venture but the United States and Indian military analysts regard it as part of a ‘string of pearls’ strategy whereby China is also building and/or upgrading ports in Gwadar in Pakistan, Chittagong in Bangladesh and Sittwe in Myanmar as it patrols the India Ocean against pirates and protects its Saudi oil supply route.

China has also helped Sri Lanka in other ways, including encouraging Pakistan to sell weapons to Sri Lanka and supporting it diplomatically by blocking attempts to put Sri Lanka on the UN Security Council agenda. China apparently provided free-of-charge six F7 jet fighters last year and, according the Stockholm International Peace Research Institute, these planes shot down the LTTE mosquito planes. Chinese aid to Sri Lanka jumped from a few million dollars in 2005 to US$1 billion last year, replacing Japan as Sri Lanka’s largest aid donor. It also became its biggest arms supplier in the 1990s. As both India and China fish in Sri Lanka’s strategically located troubled waters, the Sri Lankan government seems to be strategically using the rising Asian donors, in particular to defeat the LTTE and counter the western aid lobby that may increasingly face irrelevance in Asia. Reconstruction Aid and Fungibility: Lessons from the Eastern Province Elsewhere, I have suggested that the government would win the war but loose the peace. Many have predicted that the LTTE would melt into the people and into South India and continue its guerrilla war until the root causes of the conflict are addressed. A military victory by the government in no way addresses the ‘root causes’ of the conflict in Sri Lanka which can only be addressed by the devolution of power to the northern and eastern regions. Indeed, Tamil moderates could argue that now that the LTTE threat is passed, there should be meaningful power sharing rather than the masquerade of democracy that is evident in the east since the government apparently ‘liberated’ the eastern province. What exists in the east at this time is a distortion of democracy even though there were elections held. The situation in the eastern province which was re-captured by the Sri Lanka military from the LTTE in mid 2007 and which is showcased as a post-conflict development model is instructive. The International Crisis Group (ICG) report on “Development Assistance and Conflict in Sri Lanka: Lessons from the North East” issued on 16 April 2009 notes, “Even now, the eastern province is still not the ‘post-conflict’ situation that development agencies had hoped. Despite the presence of tens of thousands of soldiers and police in the east, the LTTE have proven able to launch attacks on government forces and their rivals, the Tamil Makkal Viduthalai Puligal (TVMP). There have also been violent conflicts between different factions of the pro-government TVMP and impunity for killing and dissapearances, many of them apparently committed by government forces and their allies. The government has still not devolved power to the eastern province as required by the Thirteenth Amendment to the Constitution which established the provincial council system in 1987 in response to Tamil demands for regional autonomy. The Governor of the province, appointed by the President, is blocking the council’s initial piece of authorising legislation, and development planning and implementation continue to be run from Colombo and central government ministries. The government has yet to articulate any plans for a fair and lasting distribution of resources and political power that would satisfy all communities.” The ICG Report further notes that, “In this environment, development of the east remains affected by the conflicts and threatens to exacerbate them. Despite the need for development, there is a danger of funds being wasted or misused.” The critique of development assistance within the country has, of course, also remarked that international aid itself has contributed in the past to the conflict scenario both because of poor governance locally as well as in the international aid system and bureaucracy due to phantom aid, lack of transparency about the amouts and conditions of aid as well as poor monitoring, evaluation and exit-strategies. In the context, it is to be hoped that, in a post-conflict situation in Sri Lanka, the IMF loan and other international aid would be conditional on a scenario where:

1. Moderate Tamil voice that had been stifled by the LTTE and para-militaries allied to the government would be heard again, and be incorporated into the post-conflict reconstruction planning and implementation process. 2. The military defeat of the LTTE does not mean that its ideology has been defeated. It is when the Sri Lanka state recognises and remembers once again that Sri Lanka is a multicultural, multi-religious and plural country, ensures that all communities have equal rights and the Tamil people feel like they are treated with respect and decency by the state will the ideology of the LTTE be defeated. The state will need to reach out to the minority community, ensure that displaced people are not held in internment camps but rather are properly resettled, and offer it an acceptable political solution. There also needs to be a process of reconciliation and peace building among the various ethnic and religious communities. 3. Affirmative action of hiring of minority community members into government institutions, bureaucracy and the armed forces. Unfortunately, like the LTTE, southern politicians have played the ‘ethnic card’ and used the conflict and war to win votes and stay in power. At the same time, they have destroyed a history of co-existence between various ethnic and religious communities in Sri Lanka. This political culture must end for bridges to be built and ethnic relations to improve in Sri Lanka. 4. The monitoring of the IMF loan and other reconstruction assistance at the macroeconomic and project level by development experts and the civil society would be necessary, given the fact that, in the past, Sri Lanka has been subject to the phenomenon of what a report by Action Aid International titled ‘Real Aid’ has termed ‘phantom aid’. 5. Finally, ‘Trade not Aid’ is the path forward for sustainable economic recovery and to avoid aid dependency and the related poverty and conflict trap that northeast Sri Lanka has been caught in for the last two decades.

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ISA S Insights No. 66 – 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

The Sorrows of Swat and the Mayhem in the Malakand: What Now? Iftekhar Ahmed Chowdhury 1 Introduction As early as the 6th century B.C., the Chinese traveller, Huang-Tsang, praised the “forests, flowers and the fruits” of the rugged mountains and the beautiful valley of Swat. So did the Greek conqueror, Alexander the Great, who arrived there a couple of hundred years later. Thus, visitors from the east and the west were in agreement on the land’s idyllic ambience in the ancient ages. In the modern days, Swat has been called the ‘Switzerland’ of Pakistan for the same scenic splendour. Alas, the comparison with Switzerland ends there for, unlike the ‘playground of Europe’, Swat today is a stage where a Grecian tragedy of Olympian proportions is being enacted. Here too, even with regard to this drama, the comparison must conclude. To the Greeks, the tragedy resulted in a catharsis or an emotional healing and cleansing of the audience as well as of the actors through their experience of the sufferings of the characters in the drama. The sorrows of Swat and the recent mayhem in the larger Malakand Division, of which the former princely state is now a part, do not seem to be having any healing effect on the perpetrators of the pains, both the Taliban and the Pakistani troops. And as the size of the hapless refugee population burgeons, both the nearby national capital, Islamabad, and the more distant international community, appear to have been rendered unmoved spectators. However, this cannot last long for out of this tumult may emerge a deluge that could sweep away a state structure that has failed to deliver. Brief History In the intervening period between the ancient and modern times, Swat was the cradle of a classical Buddhist culture. The Muslim period began with the invasion of Mahmud of Ghazni in the 11th century A.D. The Islamic state of Swat was established in 1849, with Sharia law in force, a fact that has ramifications later. Though Winston Churchill romanticised his fighting days in the Malakand in the late 19th century through his first-ever published literary work, Swat was never absorbed into British India and was recognised by the British as an Indian princely state in 1926. In 1947, it acceded to Pakistan though the Wali of Swat and the ruler 1

enjoyed considerable autonomy and popularity thereafter. The martial law government of General Yahya Khan in Pakistan abolished the state in 1969 (along with those of neighbouring Dir and Chitral, also formerly ‘princely states’). The author, who was incidentally in the Swati capital, Saidu Sharif, on that very day, recalls the apprehensions of resistance but eventually there were none. However, if there was no overt resistance, there was simmering resentment among the tribes of the mountains and the valley. Another fact worth mentioning in relations to this and one that is relevant to contemporary events is that, sporadically, 19th century Swat was also ruled by religious leaders who took the title of Akhund. Indeed the Victorian poet, Edward Lear, introduced it to the Anglo-Saxon world through his somewhat comical ditty ‘The Akond of Swat’. Lear seems to indicate a faraway near-mythical place and person (much like Samuel Coleridge’s ‘Kubla Khan of Xanadu’) as he writes, “Who or why or what is the Akond of Swat? Is he tall or short or dark or fair; does he sit on a stool, or sofa, or chair, or squat? The Akond of Swat?” In many ways, the Akond may be seen as the forerunner of the present day Sufi Mohammed or his son-inlaw, the Taliban-connected Mowlana Fazalullah. The Agreement Prior to its incorporation into Pakistan, the set of laws that actually prevailed in Swat was loosely connected to Islamic jurisprudence as a result of the historic evolution narrated earlier. Indeed, some claim a system based on Sharia and nizam-e-adl (Islamic Law) existed at that time. Justice based on local mores and culture was swift and the sentences were mostly mild. Thus, the Pakistani legal code brought about some radical changes that the tribes were unused to and the situation was exacerbated by the corrupt and inefficient administrative machinery brought in to apply it. The festering opposition was fuelled by the growing Taliban movement, which gained momentum with the United States’ conduct of the ‘war on terror’ in the neighbourhood and the support given to it by the government in Islamabad which was increasingly viewed as a ‘puppet’ of the western and ‘irreligious’ foreigners. Two years of fighting with Fazalullah’s men left the Pakistani army exhausted, with the outcome being the agreement on 16 February 2009, one that was much criticised by Washington which saw it as an abject surrender to the extremists. The agreement between the Pakistan government and the Taliban resistance, led by Fazalullah, was brokered by the latter’s father-in-law, Sufi Mohammed. It established a ceasefire in the Swat valley of the North West Frontier Province and imposed Sharia law in the Malakand Division of which Swat is now a part. The common men and women of the valley heaved a sigh of relief now that the guns had finally fallen silent. Unfortunately, the version of the Sharia law of the Swati Mullahs is of a fundamentalist variety that is obviously intolerant and against women’s rights. Wanting to ensure its application throughout the region, Taliban vigilantes wreaked mayhem in the wider Malakand Division and even descended on Buner, a district only 65 miles from Islamabad, and all but occupied it. The Shattered Peace Suddenly, fears engulfed the western world. Images reminiscent of Taliban jeeps with Kalashnikov-wielding Jihadists rolling into Islamabad, as in the case of Kabul some years

ago, frightened the West. This was also not without reason. The Taliban had sensed and tasted victory. The Taliban had sympathisers throughout the country. Bombings were taking place everywhere, including in Lahore, the capital of Punjab, the heartland of Pakistan. Doomsday scenarios of nuclear weapons falling into the Taliban hands were being routinely painted in the media, particularly in (though not confined to) the West. It is true that the Taliban were feeling encouraged by their success and, rather unwisely, began to boast of capturing the state. United States Secretary of State, Hillary Clinton, began to speak of “existential” threats and United States President Barack Obama called the government of President Asif Ali Zardari “fragile”. The latter fact rather than the Taliban triumphs served as a rude “wake-up” call for the government in Islamabad. The withdrawal of western support could spell disaster for the Zardari government. An American Senator rather colourfully described the government’s “pants being on fire”, the crudity notwithstanding, the metaphor describing the situation rather aptly. The Pakistan army wanted the more than US$7 billion on offer. The result was the cancellation of the agreement and heavy military action began in the valley, with aerial bombardment and other measures. 2 However, the Taliban, whose forefathers had given battle to Alexander and whose fighting skills had more recently been sharpened and honed by the jihad against the Russians and later the Americans, were not giving up easily. The consequent fierce fighting led to hundreds of deaths and the imminence of a horrific internally-displaced refugee situation that may see half a million homeless soon. Thus, is there another catastrophe in the making, akin to northern Sri Lanka? Sadly everything points to that taking place. As the Latin poet Vergil said and which the London School of Economics has adopted as its motto, “Felix qui potuit rerum cognoscere causas” (Happy is the man who knows the causes of things). Let us, therefore, examine what has led to the current crisis in Swat. First, there is its history which is, of course, unique to Swat, a heritage where politics was always coloured by a religious strain, albeit mild, but now exacerbated by the Islamist militancy. The second factor is the incorporation of Swat into Pakistan which has not been able to deliver good governance in a way for the people to perceive a positive change from the era of princely statehood. The third reason is the military action by the Pakistan government and the collateral damage to the civilian population. This was the bane of Pakistan in 1971 and was a major reason for the Bangladeshis fighting for their independence, and later in Baluchistan, where it is a continuing problem. Finally, the presence next door in Afghanistan of western foreigners fighting those for whom battle has become a cultural trait and one which the locals derive pride from. In other words, the situation in Afghanistan has exacerbated the issue. Added to it is the fact that many Pakistanis view ‘Islamism’ as a stick with which to beat the Americans. For instance, the famous cricketer, Imran Khan, the head of the political party, Tehrik-e-Insaaf, who was once known as ‘the playboy of the western world’ has now described the ‘war on terror’ as the “war of terror”. This is not to say any of the elements is wrong or unethical but only to argue that they exist and feed as different streams into the resultant deluge. 2

In a speech in Boston on 13 May 2009, former Ambassador Robert Blackwill criticised the use of F-16s and helicopter gunships rather than the infantry by Pakistan to fight the terrorists. However, the problem is that, in the course of hand-to-hand combat, there is a grave risk that some troops may simply switch sides.

The Responsibility to Protect In the circumstances of a huge impending humanitarian situation, it is reasonable nowadays to test if the recently adopted principle of the ‘Responsibility to Protect’ (R2P) is applicable. The Summit of World Leaders at the United Nations (UN) in 2005 unanimously adopted it in paragraphs 138 and 139 of its “Outcome Document”. The first paragraph accepted that ‘each individual state has the responsibility to protect its populations from genocide, war crimes, ethnic cleansing and crimes against humanity’. The second paragraph entailed that ‘the international community, through the UN, also has the responsibility to use appropriate diplomatic, humanitarian, and other peaceful means, in accordance with Chapters VI and VIII, to protect populations from those four crimes. Those efforts failing, the international community can take ‘collective action in a timely and decisive manner, through the UN Security Council, in accordance with Chapter VII, on a case-by-case basis’. The element of ‘capacity building’ is also included as preventive measures. UN Secretary-General, Ban Ki-moon, further refined the concept in his Report of 12 January 2009 in a way that the Chilean Ambassador to the UN, Heraldo Munoz, has summarised as the ‘three pillars and four crimes’. We have seen what the four crimes are. The three pillars referred to are the primacy of state responsibility; international assistance; and included by the Security Council, timely and decisive response. Ban’s Adviser for the ‘R2P’, Professor Edward Luck, has cautioned against any ‘expansion’ of the concept or criteria to render the principle acceptable and implementable. It goes without saying that any ‘external intervention’ of any kind whatsoever in Pakistan will have to take place with the approval of the state authorities. For all its travails, Pakistan remains a key international actor with a population of 170 million, one of the largest in the world; a democracy, albeit somewhat shaky, but nevertheless with a representative government elected by its people; and a nuclear weapon state, with a very strong conventional military capability with over 620,000 troops in arms. It also perhaps justly boasts of some of the world’s finest professional diplomats. In any case, China, with its veto power in the UN Security Council, would never allow any measure to be taken by the UN without Islamabad’s sanction. What Now? As such, whatever is to be done out of necessity has to be with Pakistan’s consent. For the possibility of the application of the ‘R2P’, while Pakistan may be extremely sensitive to any suggestion that the situation in Swat, even most remotely, calls for the consideration of this principle, it will perhaps accept the two pillars of ‘state responsibility’ and ‘international assistance’. Indeed, as with the case of the Afghanistan refugees during the Soviet occupation, Pakistan will need support to handle the Swati internally displaced persons (IDPs). In fact, the appropriate handling of the IDPs will be a part-solution of the problem. Also, there is a great danger that if the government or the international community is unable to provide succour to the IDPs, pro-Taliban relief agencies may step in, including the reincarnated forms of the banned extremist groups. A second possible solution could be to set up a Commission, comprising eminent persons to examine how best to bring ‘good governance’ to Swat. The people of Swat and, perhaps, of the rest of the Malakand Division (or the former Malakand Agency), must not be allowed to

feel deprived due to the change of the status from ‘princely states’, as in the case of Swat, Dir and Chitral, to being a part of Pakistan proper. A third solution would have to be the elimination of civilian collateral damage in military actions. Already elsewhere in Pakistan, the United States’ ‘drone’ attacks are fuelling extreme resentment. Some recent media reports stated that the Pakistani government is also involved in planning these attacks, perhaps partly generated to display the retention of a modicum of sovereign authority, may only contribute to public discontent. It may only be a matter of time before a part of the huge Pakistani armed forces begins to feel the same way. A retired Pakistani Lieutenant-General and respected analyst, Talat Masood, said, “More American focus on Pakistan, with concomitant pressures to take actions, are only likely to increase terrorist activities.” Conclusion As a result of the writ of the central authorities not extending throughout its territories (it does now in theory though not in absolute practice), and because the law and order situation is nearly uncontrollable, some analysts have begun to ask if Pakistan is a country or merely a space. Some have stated that the best answer to the question of what is Pakistan is that it is “not India”. 3 Surely Pakistan is too important to deserve this kind of analysis. However, the responsibility to demonstrate that lies with all Pakistanis and not just with the Pakistan Peoples Party government of President Zardari or the Pakistan Muslim League-Nawaz and Nawaz Sharif – it also lies with the army; the lawyers; the journalists; the intelligentsia; and the man (and woman) on the street. All of them must act in concert, responsibly addressing the threats of Talibanisation, of underdevelopment and of national disunity. It does not warrant jingoistic patriotism but simply national pride. The history of any nation-state will comprise successes and failures, and Pakistan is no exception. Perhaps the expectations of Pakistanis remain less fulfilled than some other nations and in satisfying these, undeniably, the government in Islamabad must take charge. As for its people, they genuinely believe, as in the words of their popular refrain, “Sohni Dharti Allah Rakhye!” meaning “May God protect the golden soil!” However, the truth is that man must also help.

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B. Stephens, ‘The Wall Street Journal’, 12 May 2009, ‘Pakistan’s existential challenge: The trouble for a country defined mostly by what it is not’.

ISA S Insights No. 67 – Date: 20 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

Nepal in Crisis S. D. Muni 1 Introduction Nepal’s peace process has been transiting from one crisis to another. The latest one has been precipitated by the resignation of Maoist Prime Minister Pushpa Kamal Dahal (Prachanda) and the search for a new coalition government. Prachanda’s resignation was in protest against President Ram Baran Yadav’s decision to reject the cabinet’s decision to sack the army chief, General Rookmangud Katawal. The Maoist-led government sacked General Katawal on the charges of his “defiance” of civilian authority. The government wanted to establish the principle of “civilian supremacy” by curbing the army’s tendency to ignore the government’s directives. The other coalition partners in the Maoist-led government, the Communist Party of Nepal-United Marxist Leninist (UML) and the Madhesh Janadhikar Forum (MJF) had reservations about the sacking of the army chief. The UML walked out of the cabinet meeting and the MJF submitted a note of dissent when the cabinet took the decision on 3 May 2009. The Nepal Army’s Defiance The Defence Ministry, which is headed by a Maoist Minister, identified three issues of the army’s defiance under General Katawal’s leadership, namely, i) fresh recruitments in the army; ii) extension of the services of eight Brigadier-Generals, and iii) the withdrawal of the army from the national games in reaction to the participation by the Maoist armed cadres, that is, the Peoples’ Liberation Army (PLA). On all these issues, the Nepal Army’s position is not tenable. New recruitments are a violation of Comprehensive Peace Agreement (CPA) of November 2006 (Article 5.1.2). The United Nations Mission in Nepal (UNMIN), which is managing both the PLA and the Nepal Army under the peace process, had categorically said so. It is true that the Nepal Army had recruited soldiers during the interim government headed by G. P. Koirala of Nepali Congress (NC) in 2007. The Maoists, then as a junior partner in the government, had let go of the recruitment as ‘one-time’ decision to replace the vacancies created. However, they could not approve of the similar move on the part of the Nepal Army after a popularly-elected government had assumed office under their leadership. There was 1

also no urgency or any security requirement for the Nepal Army to proceed with the recruitment of about 3,010 soldiers during October-December 2008, in defiance of the Defence Ministry’s instructions. On the extension of the officers’ services, the Nepal Army was insisting on the past norms and practices that are no longer in vogue. There is a new Army Act of 2007 which clearly empowers the Council of Ministers to “control, mobilise and manage the Nepali Army”. Accordingly, matters of promotion and extension of services are a prerogative of the Council of Ministers. The Defence Ministry refused to approve the army headquarters’ recommendation for the extension of the services of the eight officers. This was seen as a move by the Maoists to create vacancies in the Nepal Army where the PLA commanders could be placed later in the course of the PLA’s integration into the Nepal Army. These officers went to the court and obtained a temporary stay on the directions of the Defence Ministry. The army chief allowed these officers to resume their duties without even consulting or coordinating with the Defence Ministry. The boycott of the national games on the entry of the PLA teams by the Nepal Army was a direct and avoidable affront to the Prime Minister who had recommended the PLA’s participation. The Nepal Army could easily have avoided that. However, it seems that the Nepal Army’s purpose behind the defiance was to send a political message that it will not subordinate itself to the Maoists. This political message is also reflected in General Katawal’s explanation submitted to the Defence Ministry in which he justified the Nepal Army’s position on all the three counts of defiance charges. Ignoring the provisions of the Army Act of 2007 (of the Council of Ministers’ supremacy in matters related to the army), General Katawal referred to the provisions in the interim Constitution to assert that he could only be removed by the President and not the cabinet. He also cited the provisions of the bygone 1990 Constitution to assert his claims for the “continuity of the job”. An interesting aspect of the Nepal Army-Maoist controversy was the media exposure of a “soft coup” by the army to deter the government from sacking the army chief. Under the alleged coup plan, the Maoist leaders, the ministers and other selected individuals would be arrested. The former King would be put in Nagarjun Palace in ‘line arrest’. Prachanda, the NC President, Koirala, and a number of other leaders would be cut off from the public. Singhadurbar, Baluwater, the Young Communist League and the Maoist offices, and the Ministers’ Quarters at Pulchowk would be put under ‘siege’. At the UN-monitored cantonments, the arms containers would be guarded but the PLA combatants would not be harmed and would be allowed to leave the cantonments for home or for foreign employment. The UNMIN monitors would be put in helicopters and flown to Kathmandu – “they would be treated with dignity.” Under this plan, the Nepal Army was contemplating, on the advice of General Katawal, to take the President into confidence and impose his rule rather than that of the Nepal Army. When this coup plan was exposed by the media, the Nepal Army officially denied that there was any such plan. The army sources, leaking the coup plan, also disclosed that General Katawal was in touch with Dr Yadav on the question of his threatened sacking by the Maoists.

The Nepal Army’s Resistance to Democratisation and Reform The conflict on the Nepal Army’s defiance issue is a reflection of the unresolved conflict between the discarded feudal order and the promised new democratic Nepal. General Katawal, a protégé of the late King Mahendra, who remained loyal to King Gyanendra during the Jan Andolan-II (people’s movement-II), is, in some ways, an icon of the old order. Both the Maoists (particularly their PLA) and the Nepal Army carry the baggage of mutual hostility nursed by the 10-year long insurgency. The Nepal Army suffers from a serious sense of inferiority vis-à-vis the Maoists for having failed to defeat the PLA and the insurgency. The Maoists also could not bring their ‘people’s war’ to victory by capturing the state militarily but an insurgency wins as long as it is not defeated. However, both the PLA and the Nepal Army have been treated generally equally under the provisions of the CPA on the “management of arms and armies”, duly incorporated in the interim Constitution and the UNMIN guidelines. This has emboldened the PLA but left the Nepal Army resentful, more so because under the peace process, the Nepal Army has also to be “restructured” and “democratised”. General Katawal subtly admitted to this when he said in his clarifications to the government that, “In the process of obliterating remnants of past conflict…the feeling of some uneasiness is natural.” The Nepal Army tried to adjust with the unfolding parameters of the new Nepal so long as the Maoists were not the dominant partners in the interim government of Prime Minister Koirala. That government, during the two years of its rule, did not make any move towards integrating the PLA and the Nepal Army. During this interim government, the Nepal Army went along with the removal of the monarchy and of the King from its traditional residence, the Narayanhiti (Royal Palace), howsoever reluctantly. However, the Nepal Army’s conflict with the new Nepal has sharpened with the Maoists assuming leadership of the government in August 2008, after the April 2008 Constitutional Assembly (CA) elections. The core conflict between the Nepal Army and the Maoists is on the integration of the PLA into a “restructured and democratised” Nepal Army. The Maoists have consistently pleaded for the integration of the PLA into the regular army as an essential part of peace process. The NC and the UML have endorsed this, as evident in all the agreements and understandings between the Maoists and the Seven Party Alliance since November 2005. Even the international community and the UNMIN accepted the need and rationale both of the PLA’s integration into the Nepal Army and the restructuring and democratisation of the Nepal Army under the umbrella of ‘security-sector reforms’. These reforms even include the proposals to downsize the army after the successful completion of the peace process. The Maoists have also tried to take legislative measures to hold the Nepal Army accountable for a number of disappearances during and prior to the Jan Andolan-II. The integration of the PLA and the restructuring of the Nepal Army are, therefore, integral aspects of Nepal’s peace process. The Nepal Army has been resisting on both these counts. Its insistence on the recruitment of the new soldiers and the extension of the services of the Brigadier-Generals reflect this resistance. The Nepal Army’s resistance to the integration of the PLA has been argued on the technical grounds of educational qualifications and professional competence of the prospective PLA recruits. This argument may sound valid in normal circumstances as the PLA cadres are uneducated and not professionally trained in the art of modern warfare though they had given a tough time to the Nepal Army on the ground during the insurgency. However, the pre-condition of educational and professional qualifications for the recruitment of the PLA cadres is untenable in substance in the evolving political context of the new Nepal. These issues have emerged as a result of Nepal’s radical

shift from a feudal order to a vibrant democracy. They are essential components of conflict resolution and have to be dealt with special care and sensitivity. It is always possible to create new mechanisms to upgrade the education and professional levels of the integrated PLA cadres. There are a host of security-sector reforms that the Nepal Army itself has to undergo with patience and perseverance. The PLA’s integration is also resisted on the basis of the Maoist cadres’ ideological orientation. However, then, what about the Nepal Army’s own ideological orientation for having been an institution loyal only to the Royal Palace? It has used its professional training and firepower in either the UN peace-keeping operations or against its own people, in suppressing various democratic uprisings against the Nepalese monarchy. The Nepal Army has rarely fought any war to defend Nepal’s territorial integrity and sovereignty in its recent history (since 1951). That is why the peace process decided to “democratise” the Nepal Army. The fears of the integrated PLA cadres becoming a fifth column of the Maoists’ political machination are consciously exaggerated by the Nepal Army to secure political support from non-Maoist parties against the integration. The Maoists seem prepared to settle for the integration of 5,000 to 7,000 cadres out of a total of nearly 20,000 living in cantonments. The rest will be accommodated either through a special economic package or in the recruitment in newly-raised paramilitary formations. How can retrained and re-educated 5,000 to 7,000 soldiers dispersed in a 100,000 strong army become a political fifth column of the Maoists? Who knows if the sections of the Nepal Army at the lower levels are already sympathetic to the Maoists for the change they promise in the lives of poorer Nepalese. The real concern may not be about the numbers but the ranks as the elite and management layers of the Nepal Army do not want to see a single PLA commander occupying critical decisionmaking positions equal to them. Politics of Civil-Military Conflict The resistance to the PLA’s integration has its own politics. By denying or delaying the integration, the Nepal Army is breeding discontent among the PLA cadres, provoking them against the Maoist leadership and weakening their organisation. In this political objective, the Nepal Army has naturally received ready and spontaneous support from the NC, the UML and the old royalist parties. That the powerful sections of the NC and the UML have linkages with the army establishment is widely known in Nepal’s knowledgeable circles. The old royalist network of politically-vested interests operating beyond and across the party loyalties has also been activated to isolate the Maoists on the army chief’s issue. They are being accused of “power-grab” and institutional domination. The Maoists have become vulnerable to these charges in view of their periodic strong arm tactics. The exposure of Prachanda’s tapes on 4 May 2009, the day after his resignation, and the President’s intervention have made the Maoist leadership more vulnerable to these charges. In the tapes, Prachanda is seen claiming that he inflated the number of PLA cadres from 8,000 to 35,000 and his plea for the elections was explained as a part of his overall strategy to capture the Nepali state. There are, however, Nepali analysts who adopt a more balanced view of Prachanda’s tapes and credit him for preparing the hardened PLA cadres for the elections and democratic politics. After all, any party in power would like to consolidate its political hold by controlling as many institutions as possible. The real yardstick should be to see that the ruling parties do not expand their influence in administrative and constitutional institutions through undemocratic means and for the eventual subversion of democracy.

Notwithstanding the provocations and political polarisation, the Maoists must not have precipitated the civil-military crisis. There are other priorities of constitution writing and consolidation of democratic gains that need careful and wholesome attention. The Maoists must realise that they have secured unexpected popular support and what they need to concentrate on is to consolidate and expand this support through good governance and the deliverance of development. However, the Maoists are immature in operating the levers of democratic power. The required political resilience to carry the contentious forces along in the challenging exercise of democratic state-building comes hard to them. The Maoist rank and file is still not completely free from the legacy of the gun culture and the language of force. This makes them vulnerable to the charges of irrationality and dominance. The leadership is under constant pressures from this rank and file to take precipitate decisions to demonstrate the radical and revolutionary character of their organisation. That the leadership succumbs to these pressures is an indication of its weakness and political immaturity in relation to democratic dynamics. President Yadav’s decision to reject the cabinet’s position on the sacking of the army chief has generated a strong debate on his constitutional powers. The Maoists have challenged the President’s position and sections of the other parties, including in the UML and the MJF, have also questioned the propriety of the President’s decision. It is important to note that the civil society leaders have endorsed the Maoists’ decision to sack the army chief, and have since been protesting against the President’s move to nullify this decision. Even prior to the decision, the civil society leaders had pleaded with the President to remain in his constitutional limits. In the defence of his decision, the President underlined his status as the “Head of the State” and the “Supreme Commander of the Nepal Army”. However, in both these capacities, he has to act on the advice of the cabinet, not on his own. He also referred to the lack of a consensus behind the cabinet’s decision on the army chief since the other coalition partners did not endorse it. He also mentioned the visit of the 18 opposition parties’ delegation to him to ask him to nullify the cabinet decision. These are not very valid reasons. The lack of a consensus in the cabinet meeting and the representations by the opposition parties are political issues and not constitutional matters. The dissenting parties can go to the CA to vote the government out. The President, of course, had the right to return the cabinet’s decision on the army chief for review and reconsideration but it was not within his powers to undo the decision and go further even to administratively ask the army chief to remain in office. The concept of a consensus has been underlined in the interim Constitution but the spirit of that concept broke down much earlier when the NC refused to hand over power to the Maoists soon after the election results were out, and join the post-election Maoist-led government. In fact, even on the question of the army chief, there is no real consensus among the political parties, including the main opposition, the NC. The UML leader and the Deputy Prime Minister had publicly declared that the army chief deserved to be sacked. Prime Minister Prachanda, in fact, had obtained the in-principle consent of the leaders of his coalition partners, Jhal Nath Khanal of the UML and Upendra Yadav of the MJF, on the sacking of the army chief. However, since these leaders were travelling abroad when the decision was actually taken, others in their respective parties went against the Maoists in the absence of an internal consensus in these parties. The international community hardly cherished the rise of the Maoists in Nepal. They are only gradually coming to terms with this hard reality. The leading members of this community such as India and the United States have, therefore, found it easy to side with the Nepal Army

on the civil-military tangle. India has long standing traditional and special links with the Nepal Army which cannot be allowed to be vitiated. The Indian Ambassador has been in constant touch with Prime Minister Prachanda, dissuading him from taking the precipitate action against the army chief. Prime Minister Prachanda has subsequently confessed that he sought India’s support in this decision but he could not secure the same. In popular perceptions and media assessments in Nepal, India has come to be seen as siding with the army chief and against a representative government, and has been criticised for pressuring the Nepali government on an issue which is entirely of internal concern. India’s unhappiness with the Maoists is believed to be arising out of the growing proximity between China and the Maoists, and the rather assertive stance of the Maoist rule. India’s action has also come under criticism in the Indian media. However, both India and the international community also need to keep in mind the overall context of civil-military relations in South Asia. The political dominance of the military over the civil authorities in Pakistan and Bangladesh has left unfortunate scars on the democratic institutions in these countries. The potential of the Sri Lankan army dictating political terms on the ethnic issue and even seeking a share in the power structure following its “impressive” victory over the Liberation Tigers of Tamil Eelam has been enhanced. Nepal should be saved from drifting on this risky path, particularly in view of the fact that the controversial army chief is widely known for his political outreach and uncharitable human rights record. The international community must devote its efforts to rebuilding the shattered political consensus in Nepal that drove the 2006 ‘people’s movement’ for democracy. The present crisis must be approached in the interest of Nepal’s faltering peace process and the strengthening of the democratic and representative foundations as well as completing the unfinished task of mainstreaming the Maoists. What Next? Efforts are under way in Kathmandu to cobble together a new, preferably a non-Maoist government. President Yadav first called for the formation of a national government within a deadline of five days. That deadline passed without producing a government. He has now asked the CA to form a new government based on a majority. This is also not proving to be an easy task in view of the numbers that the Maoists hold in the CA and the sharp internal conflicts around personalities and issues involved within all the major non-Maoist parties. It may, however, still be possible to form a non-Maoist government with the united efforts of the domestic and external stakeholders in Nepal. Madhav Kumar ‘Nepal’, the former Secretary-General of the UML, is being tipped as the next Prime Minister and there are claims that enough numbers of the CA members are willing to support his leadership. A nonMaoist government is naturally aimed to isolate the Maoists, who on their own, will also not join any other combination as junior partners, in view of their parliamentary strength. A nonMaoist government will also be contrary to the spirit of the CA election results where the popular support was in favour of the Maoists to lead the country. The Maoists’ popular support was reiterated during the by-elections held for six seats in April 2009, where the Maoists secured three, leaving one each for the NC, the UML and the MJF. It would indeed be an irony of the democratic process in the new Nepal if Madhav Kumar, who lost decisively in the CA elections of April 2008, is finally endorsed to lead the new government by the majority of the elected CA members. The longevity of the non-Maoist government would depend upon the balancing skills of the new Prime Minister and the capability of the new government in dealing with the opposition put up by the Maoists. What governance the

new government will be able to deliver in the face of the Maoist protests and disruptions in the CA, and on the streets all over Nepal, remains to be seen. Besides governance, the present political crisis in Nepal has pushed the peace process into serious difficulties. A non-Maoist government is not expected to endorse the decision of the Maoists on the sacking of the army chief. This will indirectly embolden the Nepal Army and put the question of PLAâ&#x20AC;&#x2122;s integration and security-sector reforms in cold storage. One also wonders if the constitution-making process will advance in any meaningful way as many of constitutional provisions may require a two-third support in the CA which cannot be ensured without the Maoistsâ&#x20AC;&#x2122; participation. The continuing spectre of instability and political uncertainty has considerable potential of dragging Nepal back into the chaos and disorder that characterised the pre-Jan Andolan-II (April 2006) situation.

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ISA S Insights No. 68 – Date: 22 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

Post-Election India: How the Neighbours View the Elephant Iftekhar Ahmed Chowdhury 1 Introduction The Indians have spoken electorally. In what has been the largest election ever, at any time anywhere, in the world’s biggest democracy, they have returned to power one of the oldest political parties in the world, the Indian National Congress, to lead their government. They have displayed their willingness to continue to be led by a wise man, Prime Minister Manmohan Singh, and an experienced woman, the Congress Party’s President, Sonia Gandhi, till such time change and youth come, as they will inexorably, in the form of Rahul Gandhi in leadership role. In the same breath, therefore, this vast electorate has opted for continuity and change, thus displaying the maturity of the common voter and demonstrating the efficacy of democracy as the most effective form of social organisation. India, of course, both geographically and figuratively, holds a central position in the South Asian subcontinent. It is the only country to have direct land borders with all the continental regional states – Pakistan, Bangladesh, Bhutan and Nepal. Only a strip of the sea separates it from the two other South Asian nations, Sri Lanka and Maldives. Though foreign policy was not a key issue in the elections, except to the extent that it is related to India’s domestic security, the Congress Party’s election manifesto devoted a disproportionately large segment of the somewhat brief section on the subject to the countries of the region, despite the acknowledged facts of India’s burgeoning international clout and growing global aspirations. Perhaps appropriately so, for the fruition of one of India’s primary foreign policy goals – a permanent seat in the Security Council of the United Nations – may be ironically linked to how it is viewed by its smaller and weaker neighbours. And over the next five years, it is reasonable to expect the government in New Delhi to make the best endeavours in the pursuit of this objective. ‘Power’ Defined India, of course, beyond any shadow of doubt, is the regional ‘pre-eminent’ power, politically, economically and militarily (Indians eschew the term ‘pre-dominant’ because it tends to imply a form of ‘hegemonism’ which they shun). Now, ‘power’, as defined by 1

Raymond Aron, in international relations, is ‘the capacity of a political unit to impose its will on other units.’ 2 India finds herself in such a situation in South Asia where it is able to exercise this method of asserting influence, without seemingly appearing to do so. A prescription for such a behaviour pattern is implied in the theories of ‘soft’ or ‘smart’ power propounded by Joseph Nye. 3 For India, it would entail consultations, understanding, patience, yet firmness, and a modicum of sacrifice. The overwhelming influence that India is capable of exercising, runs the risk of being perceived by the neighbouring states as threatening to erode their sovereignty. What the great political theorist, Hedley Bull, had stated some decades ago is still valid. He had written, ‘The deepest fears of the smaller units in the global system are their larger neighbours’. 4 The Congress Manifesto Perhaps mindful of these dilemmas, the language of the foreign policy component of the election manifesto of the Congress Party was crafted with circumspection. Declaring that “we will continue to pursue an independent, pro-India foreign policy”, it goes on to say that the party “has always believed that it is India’s historic destiny to be engaged and connected with the rest of the world and, in particular, with the countries of Asia.” 5 A special or particular focus is applied on Asia, in whose current emergence, India is expected to play a major role. The civil nuclear cooperation agreements with the United States, Russia, France and Kazakhstan is assigned the next importance in the pecking order, and then almost immediately, the emphasis shifts to the neighbours, indicating what a Congress Party-led India would offer them as well as what India would expect in return. It claims that it was the success of ‘forceful diplomacy’ on the part of India that obliged Pakistan to admit the responsibility of its citizens for the Mumbai attacks and urged the Pakistani authorities to take ‘credible action’ against them. Then comes the assurance, “If it does so and dismantles the terrorist networks that operate from its soil, a Congress-led government will not be found wanting in response”, a reasonable one under the circumstances. 6 Though drafted before the military victory of the Sri Lankan government over the Liberation Tigers of Tamil Eelam, the document is futuristic in calling upon Colombo to find “an honourable solution to the strife in that country and ensure that all communities, especially the Tamil-speaking people, are guaranteed and enjoy equal rights within a united Sri Lanka.” 7 While, on the one hand, it negated the concept of ‘a separate homeland for the Tamils’, on the other, with an eye on the Tamil population in India, it sought an end to the inter-communal conflict on the island, stressing upon Colombo to address the root causes. On Bangladesh and Nepal, the document welcomed the “return of multi-party democracy” and promised to “work with both countries to deepen bilateral ties across a wide spectrum of 2

4 5 6 7

R. Aron, ‘Peace and War: A Theory of International Relations’ (Trans.), Richard Howard and Annette Baker Fox, London: Wiedenfield and Nicolson, 1966, p.711. Joseph S. Nye Jr has pioneered the concept of ‘soft power’, and his notion of ‘smart power’ is very popular with the new Barrack Obama Administration in Washington. Of his many writings on the subject, a recent relevant one is ‘The US can reclaim ‘smart power’, Los Angeles Times, 21 January 2009. H. Bull, ‘The Anarchical Society: A Study of Order in World Politics’, London: Macmillan, 1977. http://ibnlive.in.com/news/in-full-congress-manifesto-for-general-elections-2009, 18 May 2009. Ibid. Ibid.

areas for demonstrable mutual benefit”, with the caveat, though, that these countries “must take note of India’s security concerns in a meaningful manner.” 8 The Neighbour’s Perceptions How would the neighbours see a Congress Party-led India? For all of them, perhaps a Congress Party-led coalition in India was the preferred option. This is for several reasons. First, the Congress Party and its leadership are ‘known quantities’ with whom these countries have worked over a period of time, and this despite the fact that, in all the neighbours named Pakistan, Sri Lanka, Bangladesh and Nepal, the governments had changed during the tenure of the coalition. Secondly, the alternative, a coalition led by the Bharatiya Janata Party, would have produced, in the eyes of the neighbours, a more ‘inward-looking’ nationalist government in New Delhi that could have had negative ramifications for a region struggling against ‘extremism’ in all its forms. Thirdly and finally, the current preoccupations of all these governments are to steer themselves out of the global economic recession, in which the intellectual leadership of Prime Minister Singh and the paradigms offered by his government are seen as key. ‘Pilot-Fish’ Behaviour For the smaller neighbours, there are at least three discernible ways of behaving vis-à-vis the larger and the more powerful one. One is what Erling Bjol, a Scandinavian analyst, described as ‘pilot-fish’ behaviour, 9 that is, keeping close to the shark to avoid being eaten. Early Finnish relations with then Soviet Union were an example, based on the Finnish perception that her national interests ‘did not permit ties nor the pursuit of alignment with an antiRussian (Soviet) policy’. 10 A comparable relationship in South Asia would be one between Bhutan and India. Just as Finland’s relationship with the Soviet Union was given a structural basis by the ‘Treaty of Friendship, Cooperation and Mutual Assistance’ between the two countries in 1948, Bhutan’s relationship with India in the past was also mostly defined by the Treaty of Friendship signed on 8 August 1949, by which Bhutan’s foreign policy was to be “guided” by India. Though the relations has remained good, Bhutan has always wanted to renegotiate parts of the treaty and displayed some independent action in foreign policy by joining the United Nations (UN) as a sovereign member in 1971 and the South Asian Association for Regional Cooperation (SAARC) in 1986. In 2003 and 2004, the Bhutanese army conducted operations against anti-Indian insurgents of the United Liberation Front of Assam that were operating from bases in Bhutan for attacks on India. 11 That is exactly the model behaviour India would like to see in a friendly neighbour. In what appeared like an immediate reward to Bhutan, India signed a new treaty in 2007 whereby Bhutan no longer needed to take India’s guidance on foreign policy nor obtain India’s permission to import arms. Another regional country that would fit the ‘pilot-fish’ behaviour pattern is probably Maldives. Like Bhutan, Maldives is a member of the UN and the SAARC, and in both fora, its positions are similar to India’s on most issues. In 1988, India, through ‘Operation Cactus’, put down a coup attempt against 8 9

Ibid. Erling Bjol, ‘The Small States in International Politics’, in August Schou and Arne Olav (eds.), ‘Small States In International Relations, Stockholm: Almqvist and Wiksell, 1971, p. 33. Then Finnish President, Urno Kekkonen’s speech in Thomas Vilkuna (ed), Neutrality: The Finnish Position (Trans.), P. Ojansu and L. E. Keyworth, London: Heineman, 1970), p. 30. Institute of Peace and Conflict Studies (http/www.ipcs.org/print South Asia Article).

then President Maumoon Abdul Gayoom, for which the latter remained most grateful to New Delhi. The new President, Mohammed Nasheed’s government, elected last October, is not likely to behave much differently. Minimum Cedible Deterrence Pakistan is a category by itself. It is the only other ‘nuclearweapon’ country in South Asia, eschews a ‘no-first-use’ principle vis-à-vis India, is rapidly adding to its nuclear arsenal and says it follows a policy of ‘minimum deterrent capability’ towards India. 12 In other words, Pakistan, at least since the Indo-Pak War of 1971, has sought to make it as difficult as possible for any potential rival to overcome it. All Pakistani governments have been locked into a bitter dispute with all Indian governments over Kashmir since 1947 and, though it appears to ease from time to time, no government on either side has been or will be in a position in the foreseeable future to fundamentally alter its stance on the issue. However, state-to-state relations between India and Pakistan is only half the issue, or as it seems at times, less than half. It is the non-state actors from Pakistan who perhaps constitute a more serious source of worry for New Delhi. These are the Pakistan-based Taliban, the Islamist extremists, and the Jihadists participating in insurgencies in Kashmir and carrying out attacks on Indian soil, as evidenced in Mumbai and on the assault some years ago on the Indian Parliament in New Delhi. They are also targetting the state in Pakistan, conducting suicide bombings throughout the length and breadth of the country and occupying swathes of its territory as in Waziristan, Baluchistan, and Swat in the Malakand. Undeniably, these groups have rendered the state fragile but Pakistan still remains a key international player, with a strong army, a gifted intelligentsia and a fine corps of diplomats, albeit with weak and corrupt governance which is part of the problem. It appears at this time that the Pakistani authorities have decided to take on these non-state actors in full force. Besides the situation in Afghanistan, the presence of foreign troops in that country, a lessthan-friendly government in Kabul, United States’ ‘drone’ attacks on its own soil and a culture of behaviour of the border tribes inherited from the British Raj have produced unbearable pressure on the Asif Ali Zardari government. Despite all this, Stephen Philip Cohen, an expert on the country, believes that “Pakistan does well in many areas and arguably can still emerge as a successful state and cohesive nation.”13 However, of course, “Pakistan needs to act now otherwise irreparable damage to its security and existence will take place.” 14 All these elements will need to be factored into their relationship by both India and Pakistan. Living ‘In Concord With But Distinct From’ The third pattern of behaviour by India’s neighbours is the aspiration ‘to live in concord with but distinct from’ it. This is largely pursued by Bangladesh, Sri Lanka and Nepal. In Bangladesh, the current Awami League-led government of Sheikh Hasina enjoys the friendship and support of the Congress Party-led coalition, as did the preceding ‘care-taker’ 12

13 14

For India-Pakistan nuclear balance, see Iftekhar Ahmed Chowdhury, ‘The South Asian Nuclear Genie: Out of the Bottle; It can be Useful’, ISAS Brief No. 102, 13 April 2009. S. P. Cohen, ‘The Idea of Pakistan’, New Delhi: Oxford University Press, 2006, p. 3. Ishtiaq Ahmed, ‘Pakistan’s India Fixation can bring the Taliban into Power’, ISAS Brief No. 104, 28 April 2009.

government of Dr Fakhruddin Ahmed which had worked out an excellent working relationship with New Delhi. The government as well as the very vibrant civil society in Bangladesh tend to be secularistic which sits in very nicely with the Congress Party. Both India and Bangladesh share common economic values and pursue similar policies that have given both societies a modicum of macro-economic stability. Though poorer in absolute terms, Bangladesh has outperformed India in certain social sectors. Homegrown development concepts in Bangladesh such as micro-credit and non-formal education for girls have empowered women and helped marginalise extremist thoughts and actions in this overwhelmingly Muslim country. All this should augur well for a close and structured relationship between Bangladesh and India. Yet, there seems to persist in Bangladesh a deep suspicion of India, justifiably or otherwise, as a result of several issues. These involve the sharing of the water of common rivers; the questions of transit and connectivity, in which each side suspects the other of wishing to secure undue advantages; the complaints of non-trade barriers in India by Bangladeshis impeding their exports; and the allegations by India that Indian insurgents secure safe haven in Bangladesh even if unaided, which Dhaka forcefully refutes. Then there is the question of maritime boundaries yet to be settled which is important, as the Bay of Bengal is said to be rich in energy. There are no easy solutions to the issues and many are very complex by nature. However, the good news is that, for almost each of these, there are mechanisms to negotiate and both governments must ensure these continue to function regularly. Both countries are members of the two regional fora, the SAARC and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, and these provide their leaderships scope for additional interactions. Sri Lanka has just emerged from a bloody three-decade long war, in which the government of President Mahinda Rajapakse succeeded in crushing the rebellion of the Tamil Tigers. The costs were enormous. The UN estimates that 80,000 to 100,000 people (including the rebel leader Velupillai Prabhakaran) were killed and over 300,000 rendered homeless. Despite the fact that millions of Tamils live in the Indian state of Tamil Nadu, and Sri Lankan politics is a factor there, the past Congress Party-led government had turned a Nelson’s blind eye to the Sri Lankan army’s onslaught, partly because Prabhakaran had ordered the assassination of former Indian Prime Minister Rajiv Gandhi, husband of the Congress Party’s President, Sonia Gandhi, and partly because of intense diplomatic activity focused on India by President Rajapakse and his Foreign Minister, Rohitha Bogollogama. They have not only been extremely mindful of India’s positions on bilateral issues but have also very supportive of India in international fora. For instance, Colombo was instrumental in projecting the Indian diplomat, Kamalesh Sharma, as the ‘agreed SAARC candidate’ for the Secretary-General of the Commonwealth Secretariat (Sharma was eventually elected). Now here lies the rub. With the conflict over, it is now time for reconciliation and India will be expected to play the role the Congress Party manifesto cited earlier said it would. The Secretary-General of the UN, Ban Ki-moon, wants quick progress on the humanitarian relief, reconstruction and a political solution between the majority Sinhalese and the minority Tamil. He said, “All three of these fronts must move forward in parallel, and it must begin now.” 15 How to deal with this situation will be a challenge for the government in New Delhi. Darini Rajasingham Senanayake has argued that a “post-conflict political solution in Sri Lanka will require India’s involvement” and “that the resounding victory of the Congress 15

Quoted in Ravi Velloor, ‘Sri Lanka rejects Red Cross help’, The Straits Times, 21 May 2009.

Party in India may mark a new chapter in relations between the two countries and a new beginning that puts the past behind.” 16 However, the Indian government may often find itself between the rock and a hard place. For instance, how should Indian deal with the call of the Human Rights Council in Geneva to deal with ‘war crimes’ in Sri Lanka. A victorious Colombo may be less easy to handle for New Delhi. Colombo has close relations with Beijing as well and New Delhi may not want it to get any closer. All this will test the deftness of Indian diplomacy. Nepal, especially with its own evolving politics, will pose a challenge and dilemma to the Indian government. It always has. Just as with Bhutan, India’s relationship with the Himalayan state was rooted in an agreement, the 1950 Indo-Nepalese Treaty of Peace and Friendship. According to it, neither government was to allow any threat to the security of the other by a foreign aggressor and, as a mark of the “special relationship”, India would grant Nepal preferential treatment in trade and provide the Nepalese in India the same economic and educational opportunities as Indian citizens. The evolution of Nepal’s foreign policy is interesting in that it has always endeavoured and managed to steer itself carefully between India and China. This was always a source of tension. For instance, when King Birendra of Nepal declared in 1973 that his country, situated between two most populous nations in the world, wanted to be declared ‘a zone of peace’, it was supported by China and Pakistan but opposed by India which felt its tradional military cooperation would be hurt by such a policy. 17 The current situation is not too dissimilar. Following the establishment of the Republic, when the Maoists, led by Prime Minister Pushpa Kamal Dahal (also called Prachanda) came to power, New Delhi was wary. When his dispute with the President connected to his dismissal of the Chief of the Army (which was nullified by the President) led to his resignation, Prachanda reportedly failed to secure India’s (or at least the Indian Ambassador’s) support. Sukh Deo Muni writes, “India’s unhappiness with the Maoists is believed to (have arisen) out of the growing proximity between China and the Maoists, and the rather assertive stance of the Maoist rule.” 18 No matter how the politics of Nepal is played out, New Delhi will have to ensure that it has not burnt its boats completely vis-à-vis Prachanda, as the Maoists will continue to remain a key factor in Nepalese politics, and they cannot be blamed if they view New Delhi with great suspicion. The Elephant in the Neighbourhood There is an Indian folklore of an elephant and some blind men who describe the animal by the body part they touch and feel. India is the regional elephant and the neighbours are the men, with the difference being that they are not blind and are in a position to view the elephant in its entirety and extrapolate for themselves how they should relate to the creature. Naturally, contemporary India wants to play a global role in consonance with its power, ‘soft’ and ‘hard’, and wants a permanent seat in the UN Security Council of the world forum, which is the most powerful international body in terms of security issues.

Darini Rajasingham Senanayake, ‘Two Victories and a Defeat: India, Sri Lanka and the Minority Question’, ISAS Brief No. 108, 19 May 2009. See Rishikesh Shaha, ‘Nepal as a Zone of Peace’, ‘Pacific Community’, Vol. 8, No. 1, 9 October 1976, p. 171. S. D. Muni, ‘Nepal in Crisis’, ISAS Insights No.67, 20 May 2009.

The regional South Asian countries are important actors in the UN, for as Amry Vandenbosch had said of small powers, that the UN enables them ‘to play a part in world politics out of proportion to their population, economic or military strength’. 19 There is a group opposing the expansion of the UN Security Council known as “Uniting for Consensus” (which argue that important decisions on the UN reforms such as the expansion of the UN Security Council requires a consensus), of which Pakistan is a key member. The Congress Party-led government will need to try and wean away the regional South Asian countries from such a role that would be negative to its interests. Conclusion The new government in India has its work cut out for it. However, the Congress Party-led government can be capable of inspiring the confidence of its neighbours. There is a burgeoning pride in South Asian-ness and the new government can and should take advantage of it, giving the process the requisite kind of leadership. Then, as the Bangladesh Foreign Advisor (Foreign Minister), I expressed these sentiments at a lunch in honour of visiting Indian counterpart Pranab Mukherjee in Dhaka in February 2007 which still holds good, “So let these (some commonalities) be the bedrock values of our South Asian home. Let us coexist and cooperate among ourselves. Let us optimise our potentials. Let us assist one another to progress and prosper. And let us deepen and strengthen the bonds that tie us all. India among us is the most blessed in terms of size, population and resources. A special responsibility, therefore, devolves on her. We know she will not shy away from it. As India grows, we would like to grow with her.” 20 In the famous ‘Bhagavad Gita’ which is a small section of the mighty Indian epic ‘Mahabharata’, Krishna, a divine incarnation in human form debates with the hero Arjuna, urging him to fight no matter what the consequences because the cause is just but Arjuna dithers pondering about the possible resultant misery and slaughter. Amartya Sen says these arguments remain valid in our times. He writes, “As we reflect on the manifest problems of our global world (from terrorism, wars and violence to epidemics, insecurity and grueling poverty) or on India’s special concerns (such as economic development, nuclear confrontation and regional peace), it is important to take on board Arjuna’s consequential analysis, in addition to considering Krishna’s arguments for doing one’s duty.” 21 Indeed, it is this philosophical capacity of the Indian ethos to be able to weigh the considerations on both sides from which India’s policies in the neighbourhood must derive its nourishment. India must be the elder, not the big brother. It must not only be the largest country in the heart of South Asia but also the country with the largest heart. It is as simple or as difficult as that.

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A. Vandenbosch, ‘The Small States in International Politics and Organizations’, The Journal of Politics, Vol. 26, p. 312. Luncheon Speech, Dhaka, 19 February 2007. Amartya Sen, ‘The Argumentative Indian’, New York: Farrar, Straus and Giroux, 2005, pp. 5-6.

ISA S Insights No. 69 – Date: 26 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

Manmohan Singh-II: The Foreign Policy Challenges S. D. Muni 1 Foreign policy did not appear to be a major issue for voters in India’s 2009 parliamentary elections. However, it did indirectly shape the electoral outcome. The Left’s stubborn position on the India-United States civil nuclear deal, stretched to the extent of almost pulling down the government, did dent its self-projected image of a constructive nationalist political force and contributed to its poll-drubbing. In contrast, the civil nuclear deal issue added to Prime Minister Manmohan Singh’s image as a quiet but firm leader. After signing the deal, nuclear commercial transactions were concluded first with France, Russia and Kazakhstan rather than the United States. The United States intelligence assessments of India’s foreign policy asserted that it will follow an independent path, collaborating with the United States only when India’s own interests so dictate. On another foreign policy issue of the ethnic conflict in Sri Lanka, the election outcome endorsed the voters’ acceptance of the ruling United Progressive Alliance’s (UPA) careful distinction between terrorism of the Liberation Tigers of Tamil Eelam (LTTE) and Sri Lankan Tamil’s welfare and rights. The voters defeated all those extremist forces that went for political mobilisation in the name of the LTTE. The second Manmohan Singh government (Manmohan-II) now has no Left hovering over it nor any other ally to dictate foreign policy priorities. The new Minister of External Affairs, S. M. Krishna, is a seasoned and suave politician. He is not much exposed to the intricacies of international politics but will learn them fast. His personality is such that he would be amenable to both the bureaucracy in his ministry as well as the Prime Minister’s office. One may, therefore, expect a great deal of continuity in foreign policy, though there are challenges that need bold and innovative responses. Turbulent Neighbourhood India’s neighbourhood is turbulent. The emerging political and security situations in Sri Lanka, Nepal and Pakistan need urgent attention. Mr Krishna’s initial remarks clearly reflect that too. Even before its formal assumption of office, the new government had to despatch the 1

National Security Advisor, M. K. Narayanan, and Foreign Secretary, Shiv Shankar Menon, to Sri Lanka to size up the post-LTTE situation. There are nearly 300,000 internally-displaced Tamils in Sri Lanka as a result of the anti-LTTE war. The international community is strongly calling for the Tamils’ immediate humanitarian support and long-term rehabilitation. India has been providing such support in bits and pieces. However, with the conclusion of the war, a massive, more focused and organised effort needs to be made. Equally important is the long-term question of resolving the Tamil ethnic issue politically. India failed to push the Mahinda Rajapaksa regime in this direction while the ethnic war was on. President Rajapaksa has made reassuring promises in this respect in his ‘victory’ address to the nation on 19 May 2009. However, there is an unfortunate history of a huge credibility gap in the promises and practices of Sinhalese establishments on the Tamil question. Having subdued the military challenge, there is no room for a Tamil homeland concept in Colombo’s scheme of things. The mindset of the people around President Rajapaksa is not very sensitive towards Tamil aspirations. The army chief, General Sarath Fonseka, and the Defence Secretary and President’s brother, Gotabaya Rajapaksa, have repeatedly asserted that Sri Lanka is a Sinhala country though Tamils can live there, perhaps as second class citizens. President Rajapaksa delivered a stern message in his victory speech without naming India that no ‘foreign formula’ will be accepted to address the Tamil political issue. There is also no clarity on the nature of the devolution package to be offered to the Tamils to their satisfaction. Elections, as promised by President Rajapaksa, may be held in the north but it does not ensure that adequate rights will be transferred to the elected provincial council. An elected government was in place in Jaffna in 1990 under the Tamil leader, Vardharajah Perumal, but no powers were devolved to that government. There is an elected Tamil government in office in the eastern province since 2008 but ordinary Tamil and Muslim residents are still painfully restless. India wields very little clout in this context to make the Rajapaksa regime evolve a political resolution of the ethnic issue to the satisfaction of the Tamils and Muslims in Sri Lanka. It will, therefore, have to be bold and innovative in this respect. One hopes that the resolve of the new Manmohan government to effectively engage with the Rajapaksa regime on the Tamil question is not weakened or diffused either under the lure of securing big rehabilitation and reconstruction projects or by the deft play of the China card by Colombo. In Nepal, India has come under strong public rebuke and criticism for siding with controversial army chief against the Maoists and for pushing the Maoist government out. This was a sensitive internal political matter where India could have been well advised to keep a distance. While the methods of the Maoists in sacking the army chief were questionable, the substance of their charges against him was not. The principle of ‘civilian supremacy’ raised by the Maoists is unquestionable in any democratic order. Will India accept its own army chief defying and ridiculing a popularly-elected government, rightly or wrongly? In the aftermath of the civil-military controversy, Indian diplomacy has been blamed for blessing the formation of a non-Maoist government which, in the long run, will make Nepal unstable. India is seen to have sided with a leader who lost in both the constituencies contested during the Constituent Assembly elections in April 2008. Nepal’s pending issues of mainstreaming the Maoists, rehabilitating the conflict affected civilians and drafting an inclusive democratic constitution, including the issue of leadership, cannot be addressed without the Maoists’ participation. The Maoists have emerged as the most popular force thus far, reinforced in their popular support by the results of the recently-held (April 2009) bi-

elections where they captured three of the six seats, leaving only one each to the other three major political parties. It is unfortunate that Indian diplomacy has erred in making precipitate moves provoked by personal egos and by exaggerated fears that the Maoists have been facilitating growing Chinese influence in Nepal. The Maoists have made no direct offence to India’s interests in Nepal. Even while chanting about their equal relationship with India and China rhetorically, they always reiterated that this equal relationship will be definitely tilted in favour of India. The Maoists’ leader, Prachanda, personally explained to Mr Menon in January 2009 that the flooding of Chinese delegations to Nepal were uninvited. The Maoists assured India that the proposed new treaty of friendship will not be signed by China without clearing it with India. Even on the sacking of the army chief issue, the Maoists had taken India into confidence and solicited its understanding and support. The new government in Delhi has to show ingenuity and courage to rectify these diplomatic slips and assure the Nepalese that India stands for popular aspirations and democratic institutions in Nepal. The pathology of the UPA’s bitter experience with the domestic Left should not be a guide to dealing with the Maoists in Nepal. Prime Minister Singh has been fond of talking about ‘out-of-the-box’ solutions. He has to make firm initiatives to rid the foreign policy establishment of a ‘traditional’ mindset, particularly in relation to India’s close neighbours. There is no viable alternative in Nepal except to build a broad-based political consensus in place of political polarisation aimed at isolating the Maoists. Pakistan is caught in a crisis of its own creation. Its fight against the Taliban in the Swat valley deserves support and encouragement. In principle, it reiterates the Indian position and that of the international community that Pakistan has to fight with the homegrown terrorists and stop being a sanctuary for Al-Qaeda and its cohorts. The new Manmohan government can come forward and offer to help Pakistan in meeting the challenge of looking after more than 2.5 million Swat internally-displaced persons even if Pakistan finds it difficult to accept such an offer. India can also quietly and firmly assure Pakistan that it will not take any undue advantage of its internal predicament when Pakistan shifts its forces from the eastern borders. However, while making bold gestures towards Pakistan, India should carefully monitor the depth and extent of its neighbour’s resolve to fight the internal terrorists till the end. Enough doubts are raised internationally, particularly in the United States, in this respect. India’s interests are particularly tied to the extent of this fight beyond Swat, against Pakistani Jihadi and extremist forces targeting India. Former United States Ambassador to India, Robert D. Blackwill, recently opined that the Pakistan army regarded Islamic terrorists as “an abiding policy instrument against India… These objectives are deep in the ISI’s (InterServices Intelligence) DNA and there is no magic wand…that will make that hard fact disappear.” There are many other United States officials and Indian observers who have expressed such views. India is also acutely aware of the fact that despite Pakistan President Asif Ali Zardari’s assertion that India poses no threat to Pakistan, the country’s security establishments persist in branding India as its principal ‘enemy’. In India’s assessment, Pakistan’s nuclear security is breached as the extremists have obtained access to some of the nuclear facility. Prime Minister Singh was reported to have brought this to the notice of Washington. India stopped the peace process and the comprehensive dialogue with Pakistan in the wake of terror attacks on Mumbai in November 2008. It even threatened to keep its military option

open. Partly, this strong rhetoric was driven by internal political considerations to keep the opposition off its back in the context of the parliamentary elections and deny the allegation that Prime Minister Singh’s government was, in any way, soft on terrorism. However, now the Bharatiya Janata Party has been defeated and the charge of India being soft on terrorism has been rejected. The new government, therefore, can consider the initiative for constructive re-engagement with Pakistan if the latter is seen forthcoming in bringing the Mumbai terrorists to the book. Even before the formal swearing in of the government, India had forwarded all the necessary evidences to Pakistan in this respect. It was disclosed by Dr Singh during the election campaign that he was about to resolve major bilateral issues with Pakistan when it was, unfortunately, pushed into internal political turmoil, resulting in the ouster of President Pervez Musharraf. In his very first statement after his appointment, External Affairs Minister Krishna, said, “We stand ready to extend a hand of peace and friendship. But Pakistan must take credible action to dismantle (the) infrastructure of terrorism.” There are strong persisting doubts in New Delhi about President Zardari’s clout and capability to carry the army and the opposition together in addressing India’s concerns. If the extremists manage to launch another Mumbai-like attack on India from their Pakistani bases, no one would be able to stop a serious deterioration in India-Pakistan relations. India’s security worries from Pakistan are more than that of cross-border terrorism. The generous United States’ assistance flowing into Pakistan to fight the global war on terror is facilitating Pakistan’s military build-up as well. The United States’ sources have claimed that about US$8 billion of the total assistance of US$11 billion provided during the George W. Bush administration was diverted by Pakistan towards India-specific military acquisitions. Pakistan’s access to drone technology and the acquisition of hi-tech helicopters are a cause of concern in the long run for India’s own security. The United States’ Institute of Science and International Security has produced satellite images showing the expansion of Pakistan nuclear programme and their assessment is that Pakistan is building more plutonium as well as uranium-based bombs. According to a Pakistani nuclear analyst, Zia Mian, the additional facilities may “allow them to make a lot more warheads…(and) much lighter and more complex weapons for longer-range missiles and cruise missiles… And triggers for thermonuclear weapons are almost always plutonium based.” Even United States’ President, Barack Obama, has expressed concern about Pakistan’s growing nuclear activities and the possibility of nuclear materials falling into the hands of the terrorist/extremist groups. While encouraging the reopening of the dialogue process, India has to be well-prepared to meet the military challenge posed by Pakistan. In addition to dealing with the specific hotspots, the new Indian government should pursue, more vigorously, its already defined agenda of building a cooperative neighbourhood. The proposals of connectivity and economic engagement will have to be pushed forward. Diplomatically, the initiatives of a shift in favour of more frequent and high-level contacts will have to be given further momentum. In the midst of lingering doubts and suspicions, there is a definite sprouting of hope and expectations in the neighbourhood towards a growing democratic India. The success of the new Manmohan government in neighbourhood diplomacy will depend upon constructively meeting those hopes and expectations. There are signs that the elements of the “Gujral Doctrine” to win over the neighbourhood are being reactivated. Prime Minister Singh’s special envoy, Shyam Saran, was called in February 2009 to “consolidate pro-actively our (India’s) economic interaction with our (its) neighbours, including through unilateral and asymmetric steps, if necessary”. The new government will do well to reinforce and expand such “unilateral and asymmetric steps” towards the

neighbours even beyond ‘economic interaction’ to cover political and socio-cultural aspects of regional relations. The Major Powers India’s neighbourhood includes China as well but China is a major Asian and global power in its own right. As was noticed in the cases of Nepal and Sri Lanka, India’s neighbourhood policy is, to a considerable extent, haunted by China. This is despite the phenomenal surge in Sino-Indian economic relations. China has emerged as India’s strongest trading partner, with their bilateral trade fast reaching the US$50 billion mark. Investment options between the two countries are also growing substantially. In its first term, the Manmohan Singh government had pursued the objective of vigorously building these relations with China. This momentum needs to be maintained. India and China can also work together to help the other Asian countries meet the pressures of the global economic downturn and even take initiatives to help the global economy come out of its present slump. Though China is responsive to constructive economic engagement with India, it is becoming more strident, if not aggressive, on strategic matters. Its assertion of claims on Arunachal Pradesh went outside the bilateral context when, in April 2009, it vetoed an Indian request to the Asian Development Bank for infrastructure projects in that province. In the hope of concretising the G2 dominance in Asia, China proposed to the United States to look after the Pacific region, allowing a free hand to itself in the Indian Ocean area. The United States declined the proposal as that would have militated against the interests of its Asian allies and friends such as Japan, Australia and India. China supports Pakistan’s demand for a deal with the Nuclear Suppliers Group on the line of the India-United States civil nuclear cooperation. China has also reportedly secured the rights of emergency access to Sri Lanka’s Hambantota port for its People’s Liberation Army Navy. Sri Lanka also feels assured that China would not let any “war crime” or the “responsibility to protect” move to be made by the international community through the United Nations (UN) Security Council against Colombo in the context of its dealings with the estranged Tamils. China’s growing support for the Rajapaksa regime, including in defence matters (China is the largest supplier of weapons to Sri Lanka), deterred western and Indian pressures to offer adequate devolution of powers to the Tamil community before the defeat of the LTTE. In the post-LTTE period, the Rajapaksa regime may also feel emboldened in not accommodating international and Indian concerns regarding the accommodation of the Tamil interests. China’s growing interest in India’s northern neighbours such as Bhutan and Nepal is already making New Delhi uneasy. India has to reckon with the fact that South Asia constitutes China’s soft-belly in its western region which is unstable and rebellious. China would, therefore, not relent in asserting and consolidating its presence in India’s neighbourhood. The Indian government is to strike a strategic balance between continuing with confidence building and economic engagement with China on the one hand, and protecting its critical security interests in the Asian neighbourhood on the other. Such a balance has to rely upon India’s own strength and resilience as not many other options are available. A section of India’s strategic community has been pleading for the mobilisation of the Tibet card to strengthen New Delhi’s bargaining position vis-à-vis Beijing. However, Dr Singh’s earlier government refused to be swayed by this option even in the heat of controversy during the Olympic Games and Tibet revolt in 2007-08. In the emerging context of Asian strategic relations, even Dr Singh’s second

government may not find this option viable, especially so if it wants to nudge the Chinese authorities towards an early and smooth resolution of the border issue. India is strengthening its strategic equations with the Asian majors such as Japan, South Korea and the Association of Southeast Asian Nations grouping. However, in this regard, China is also as active and pushing as much as it can afford to do so. Here again, a vibrant neighbourhood policy will yield rich dividends to India. The launching and consolidation of India’s strategic partnership with the United States during the Bush administration and the first Manmohan government certainly added weight to India in its relations with China as it alerted China towards new power equations in Asia. Under the Obama administration, there are creeping questions on the evolving nature of India-United States strategic partnership. A feeling has slowly started gaining ground in India that in the Obama administration’s priorities, China and Pakistan are gaining ascendance and India’s concerns, if not completely overlooked, were not being adequately factored and appreciated. India’s absence from the itinerary of the United States’ Secretary of State, Hillary Clinton’s first visit to Asia in February 2009, when allies and non-allies such as China, Japan, South Korea and Indonesia were covered, left New Delhi uncomfortable. At the G20 meeting in London in April 2009, President Obama paid considerable attention to Chinese President, Hu Jintao, and for good reasons because only China could be of substantial help to the United States in its coming out of the present economic difficulties. It was in this context that the concept of G2 was played upon by a number of European and Asian leaders. Dr Singh did have a one-on-one meeting with President Obama at the G20 conference but it did not carry much strategic significance. President Obama’s pre-election observations, taking the Kashmir issue as an integral part of the war on terror involving Pakistan and Afghanistan, was strongly rejected in India. The prospects of the Obama administration’s special envoy to Pakistan and Afghanistan also covering India and the Kashmir question was strongly resisted. India successfully hard-lobbied to keep Special Envoy Richard Holbrook’s mandate confined only to Pakistan and Afghanistan. It is possible to argue that during the initial months, the lack of enthusiasm in the Obama administration towards India was on account of two factors – the unclear political situation in India because of the pending elections and the Bush administration’s considerable warmth for Dr Singh’s first government. Now with Dr Singh’s second government assuming office, a brief review of India’s place in the United States’ strategy in Asia and South Asia (in the context of the AfPak strategy) may be in order in Washington. India understands the dependence of the global war on terror on Pakistan and accordingly the compulsions of the United States to keep Pakistan as an ally in this war. It, therefore, has no problem with the assistance, both economic and military, being provided to Pakistan to nurse this alliance and secure Pakistan’s commitment to eliminating terrorism from the region. The problem in India’s perception arises on two counts; the first to ensure that Pakistan is sincere and firm in this commitment; and secondly, the help provided to Pakistan does not impinge adversely on India’s immediate and long-term security concerns. India requires firm assurances from the Obama administration in these respects and wants the United States to fix parameters of Pakistan’s accountability that the United States’ and international support provided to Pakistan will be used for the purposes of such assistance. India has welcomed the insertion of a conditionality in the United States’ legislation for assistance to Pakistan that, “the use of its territory for terrorism against (its) neighbours will be desisted”, though the India-specific reference was dropped.

India is uncomfortable with the Obama administration’s voices on non-proliferation and its demand for India to sign the Comprehensive Test Ban Treaty and enter the Non-Proliferation Treaty regime. An editorial in the pro-Democrat paper, The New York Times, on 19 May 2009 was read with alarm in New Delhi for its advice to India to initiate arms control talks with China and Pakistan, and “declare its intention to stop producing nuclear weapons fuel even before a proposed multinational treaty is negotiated.” If the Obama administration moves on these lines, India-United States strategic partnership will be seriously damaged. The challenge before Dr Singh’s government is to bring the Obama administration to understand and appreciate the inherent long-term mutual advantages of this partnership. India is a strong and stable democratic force in Asia which is willing and capable of contributing to the stability of the whole region. The Obama administration needs to grasp the thrust of the Asia Society Task Force Report (January 2009) which underlines that “India matters to virtually every major foreign policy issue that will confront the United States in the years ahead.” Economic and Regional Issues The challenges posed by China and the United States have to be met while firming up India’s engagement with the rest of the world. Pan-regional groupings in which India is an active member like the Brazil-Russia-India-China (BRIC) and the India-Brazil-South Africa groupings must be pursued vigorously. It is good that Prime Minister Singh will be attending the BRIC Summit in Russia in June 2009. Russia also continues to be India’s major defence partner. India’s engagement with Iran had been restrained in deference to the sensitivities of the Bush administration. Since the Obama administration has a radically different approach towards Iran, India should shed its restraints and move to build a dynamic and mutuallyadvantageous partnership with Iran. There is also a need for India to step up its participation in the Shanghai Cooperation Organisation to facilitate and support its engagement with the Central Asian republics. Greater and constructive engagement with Iran and Central Asia will enhance India’s standing in the turbulent Islamic world. The first Manmohan Singh government had not succeeded in its moves to reform global governance but that is no reason to give up on the initiatives such as the restructuring of UN Security Council and other organs, and also to streamline international financial institutions such as the World Bank and the International Monetary Fund. There are glimmers of hope that the global economic slowdown has at least been halted, if not reversed. The Indian economy has considerable dynamism to continue to grow. Concerted domestic reforms in infrastructure, the financial sector, corporate governance and economic administration will sustain India’s growth dynamism. The new Manmohan Singh government has no internal political constraints in carrying out these reforms to help boost, not only its own economic performance, but also to help others fight the pangs of the downturn in the global economy. For a meaningful foreign policy projection, India needs to shed its inertia and stereotypes. Dr Singh may not have another term to make his mark on India’s policy spectrum, as the young leadership in India is waiting in the wings.

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ISAS Insights No. 70 – Date: 28 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

Three Elections and Two State Actions – Has South Asia Finally Turned the Corner? Shahid Javed Burki 1 There are two, perhaps three, nation-building ideas that have been in conflict in South Asia since the British left the subcontinent in the late 1940s. One was espoused by Jawaharlal Nehru, the first Prime Minister of India, who governed the country for the first 17 years after independence in 1947. According to this belief, even in a country with such diversity as India, it was possible to construct economic, political and social systems that would protect all citizens, not only those who constituted the majority. Sunil Khilnani, the Indian political theorist, has called this the “idea of India”. 2 There were, in fact, two ideas, both supported by Nehru and both with good historical justification. These two ideas were brought together in the Indian Constitution promulgated in January 1950. According to the historian, Ramachandra Guha, the Constitution brought together what he calls the “national” and “social” revolutions. “The national revolution focused on democracy and liberty – which the experience of colonial rule had denied to all Indians – whereas the social revolution focused on emancipation and equality, which tradition and scripture had withheld from women and low castes.” 3 The idea of India, in other words, was a composite one. This idea, however, was rejected with some vehemence by Muhammad Ali Jinnah, the founder of Pakistan. He maintained that the land over which the British ruled was not inhabited by one Indian nation but by two – one Hindu and the other Muslim. Jinnah believed that each nation deserved its own political space within which it could order the lives of its citizens according to their religious beliefs and social norms. This came to be called the “twonation theory” which became the basis for the creation of Pakistan as a homeland for the Muslims of British India. The American political scientist, Stephen Cohen, has called this the “idea of Pakistan”. 4 However, there were serious contradictions in Jinnah’s theory and in the idea of Pakistan. Two of these had significant consequences for the history of South Asia. First, the Muslim 1

2 3

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. 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. Anil Khilnani, The Idea of India, New York, Farrar, Straus and Giroux. 1999. Ramachandra Guha, India after Gandhi: The History of the World’s Largest Democracy, New York, Harper Collins, 2007, p. 119. Stephen Cohen, The Idea of Pakistan, Washington DC, Brookings Institution Press, 2004. University Press, 2007.

population did not come concentrated in one place – Islam had been present in the subcontinent from almost the time of the birth of the religion. Muslims were to be found in all parts of India. Even if the two Muslim majority areas – one in British India’s northwest and the other in the northeast – could be separated to form the state of Pakistan, that state would be territorially unique. Its two parts would be separated by a thousand miles of Indian territory. Second, the Pakistan that Jinnah demanded could not accommodate the entire Indian Muslim community. No matter where the boundary was drawn, it would still leave a sizeable Muslim community in India. If rescuing the Muslims was the purpose of the idea of Pakistan, then it should have applied to all Muslims, not only to those who lived in the Muslim majority areas. In any event, the line the British drew left about the same number of Muslims in India as there are in Pakistan today. Jinnah must have seen these contradictions. This is the reason why some revisionist historians, in particular Ayesha Jalal, have suggested that he was not entirely serious about the idea of Pakistan. His demand for the creation of a separate homeland for the Muslim community of British India was meant to obtain protection for them from the Hindu majority once India became independent. 5 However, the leaders of the Congress Party granted him his wish and, in Jinnah’s own words, a “moth-eaten” Pakistan was born on 14 August 1947, a day before India gained independence. However, religion, as a glue for nation-building, turned out to be a weak device. The leaders of West Pakistan were reluctant to fully accommodate the wishes and aspirations of the citizens of East Pakistan. The result was a number of serious differences – on political, economic, cultural and linguistic grounds – between the leadership groups of the two halves of the country. They turned into bitterness and eventually resulted in a civil war fought over a period of nine months from March to December 1971. The result was the emergence of East Pakistan as an independent Bangladesh, led by Sheikh Mujibur Rehman whose “six-point” formula for granting considerable autonomy to the eastern wing was not acceptable to the West Pakistani leaders. The six points were, in fact, the third nation-building idea to take hold in the South Asian mainland. According to this, ethnicity and culture are powerful attributes of nationhood, even stronger than religion. 6 This line of thought, in terms of nation-building, was also pursued by the Liberation Tigers of Tamil Eelam (LTTE) of Sri Lanka, a separatist group which fought for a couple of decades to establish an autonomous, perhaps even an independent, state in the northeast of the island. This group resorted first to militancy and then to open rebellion against the state in pursuit of its ends. The “Tigers” were the first group in modern times to use suicide bombers as weapons. It was a young Tamil woman on a suicide mission who assassinated Rajiv Gandhi in 1991 as he campaigned in the Indian state of Tamil Nadu as the head of the Congress Party and as the party’s candidate for the position of prime minister. These three ideas have contributed to the persistence of tensions in South Asia. These have been very strong in the case of Pakistan’s relations with India. Religion was at the centre of this conflict, at least from the perspective of Pakistan. This religion-based conflict between 5

Ayesha Jalal, The Sole Spokesman: Jinnah, the Muslim League and the Demand for Pakistan, New York, Cambridge University Press, 1985. The emergence of Bangladesh as an independent state after spending a quarter of a century as a part of Pakistan has attracted a fair amount of academic interest. Among the more notable contributions to this literature is Rounaq Jahan, Pakistan: Failure of National Integration, New York, Columbia University Press, 1972,

the two nation-building ideas sharpened after Pakistan, starting from the late 1970s, became a more conservative society religiously. It is not clear from Jinnah’s speeches and the few writings he left behind as to what his precise intensions were with respect to the role of religion in the state of Pakistan. He often spoke about the need to be guided by the teachings of Islam. This was inevitable since he had used the idiom of religion to make his case for a separate homeland for the Muslims of South Asia. However, it appears that he was inclined to lead the country towards a secular democracy, not too different from the one Nehru and his colleagues were able to enshrine in their country’s constitution. The Indian Constitution has proved to be a flexible instrument of governance. It has been amended scores of times to keep it current with the demands of a society that has seen rapid economic and social change. To take just one example, the political system embedded in the Constitution was unitary in form with a strong centre and only limited rights granted to the states. This was to change through the amendments to the Constitution as well as the practice of governance. For Pakistan, the case for keeping religion out of politics was weakened by the unanticipated transfer of the population that occurred around the time India and Pakistan obtained independence. Using the censuses conducted by the two countries in 1951, I have estimated in an earlier work that some 14 million people moved across the border in the span of a few months in the summer and autumn of 1947. This was the largest movement of people in recorded human history. Eight million Muslims migrated from India to Pakistan while six million Hindus and Sikhs moved in the opposite direction. 7 By 1951, Pakistan had been thoroughly “ethnically cleansed” – a term that was not used but later gained currency when Yugoslavia fell apart in the early 1990s. Pakistan’s first census in 1951 highlighted the trauma of this event – 25 percent of its population of 32 million was made up of refugees. This was perhaps the largest concentration of displaced people ever in a country as large as Pakistan. What was not realised then but proved to be a political trauma in the long run was the “Muslimisation” of Pakistan. In the late 1940s, non-Muslims in the areas that make up today’s Pakistan constituted about a third of the population. Today, the religious minorities account for less than five percent. It was inevitable that, with Muslims constituting such an overwhelming share of the population, religion would become a force in politics and in social discourse. Islamic parties fought hard for the inclusion of religious clauses in the Constitution, one reason why constitution-making became such an arduous exercise in the country. A preamble which promised that no laws considered to be “repugnant” to the tenets of Islam would be made was incorporated in the short-lived Constitution of 1956. The Constitution was abrogated in 1958 by the first military ruler, General Ayub Khan, who went on to give his own Constitution in 1962. The only thing common between the two Constitutions was the preamble’s “repugnancy clause”. However, to appease the Islamic forces, Ayub Khan changed the name of the country to the Islamic Republic of Pakistan. He also decided to name the new capital he had decided to build close to the garrison town of Rawalpindi, Islamabad. The third Constitution was promulgated in 1973 after Pakistan broke into two halves. It represented a broad consensus among the remaining four provinces and provided for a federal state with a considerable devolution of power to the provinces. The “repugnancy clause” remained as did the name of the country. When Prime Minister Zulfikar Ali Bhutto came under pressure from the Islamic parties, he made some more concessions, including banning the sale and consumption of alcohol.

Shahid Javed Burki, Pakistan Under Bhutto, 1971-77, London, Macmillan, 1980.

The move towards Islamisation began in real earnest under General Zia ul Haq, Pakistan’s third military ruler. He brought in both cosmetic and real changes into the way the country was governed. Not only were the political and legal systems brought closer to what he thought were the dictates of Islam, he also moved to incorporate such Islamic practices as the banning of interest rate in economic transactions. Since the impracticality of such a move was soon demonstrated, his government decided to set up a separate Islamic banking system to co-exist with modern banking. However, all these moves need not have bred religious extremism but for the way the United States, under President Ronald Reagan, decided to fight the Soviet Union’s advance into Afghanistan. Since it was not practical to send American troops to counter the Soviet occupation of Afghanistan, Washington decided to use surrogates to do the fighting. These were the Mujahideen who were trained and motivated in a string of madrassas set up in the dozens of refugee camps that were established on the Pakistani side of the border to accommodate three to four million refugees who left Afghanistan to escape the Soviet invasion. These Mujahideen eventually morphed into the Taliban. 8 While the idea of India worked in India, it did not keep religion entirely out of politics. The Bharatiya Janata Party (BJP), one of the two national political parties in the country, traces its origin to the Rashtriya Swaynamsevak Sangh (RSS). The RSS was founded in 1925 to protect what were perceived to be the rights of the Hindu population in British India. The BJP gained ground in the 1990s by drawing upon the grievances of those who believed that the Indian state had given too much ground to the lower castes and the Muslim minority. The party drew support, in particular, from the Hindus who had migrated from what was now Pakistan. L. K. Advani, the party’s leader in the 2009 elections and its declared candidate for prime ministership, was born in Karachi and left for India at the age of 20. The party’s overt pursuit of Hindu interests led to the demolition of the Babri mosque on 16 December 1992. The mosque’s destruction occurred at the culmination of a long march led by Advani. The mosque was located at Ayodhya in the state of Uttar Pradesh. It was supposed to have been built on the ground where Rama, an incarnation of Lord Vishnu and the ruler of Ayodhya, was said to have been born. The assault on the mosque led to riots, in particular, in the always restive city of Bombay, now called Mumbai. Thousands of people were killed, many of them Muslims. Three elections in South Asia and two firm state actions against insurrections against the established authority may make the 2008-09 period the turning point in the subcontinent’s history. First, in Pakistan in February 2008, then in Bangladesh in January 2009, and then in April-May 2009 in India, the people seem to have spoken out against the expression of radicalism in religion and extreme nationalism. The parties that have come to power in the three countries have openly expressed their disdain for the use of religion in politics. The firm action by the state in Sri Lanka and in Pakistan against the forces of extremism and politics of exclusion may have set the stage for the further reduction in the force of religious politics. There is also change afoot in Pakistan. The elections of February 2008 were decisively in favour of rejecting the past in which the military dominated the political stage by claiming to be the custodian of national security, and by suggesting that it could govern more efficiently 8

There are several accounts of the emergence of the Taliban as a potent force first in Afghanistan and then in Pakistan. See the two books by Ahmed Rashid, Taliban: Islam, Oil and the New Great Game, London, I. B. Tauris, 2000 and Descent into Chaos: The U.S. and the Disaster in Pakistan, Afghanistan and Central Asia, New York, Penguin Books, 2008. See also Steve Coll, Ghost Wars: The Secret History of the CIA, Afghanistan, and Bin Laden from the Soviet Invasion to September 10, 2001, New York, Penguin Books, 2004.

and effectively compared to any grouping of civilian politicians. The voters were not impressed by its economic record. In the five-year period between 2002 and 2007, Pakistan’s gross domestic product (GDP) grew by an average rate of seven percent a year but that did not win the hearts and minds of the ordinary citizens. This was the “Shining India” moment for Pakistan. Much as the BJP-led coalition in India in 2004 had failed to translate good economic performance into electoral success, President Pervez Musharraf in Pakistan failed similarly and for the same reason in 2008. The two regimes had followed similar economic models; they produced high level of GDP growths which were exclusive rather than inclusive in their orientation. The rich and the well-to-do benefitted, some large cities saw booms and prosperity; the levels of consumption improved significantly for a small number of people, and many shiny and imported goods appeared in the market place. On other hand, the incidence of poverty did not decline much, interpersonal and inter-regional income distribution disparities worsened, and for the less advantaged people and regions in India and Pakistan, there was not a great deal of faith in the future. The difficult transfer of power from military to civilian rule in Pakistan also produced hope once the process was complete. What was also important was the fact that the Pakistan Peoples Party and the Pakistan Muslim League-Nawaz (PML-N) were not at each other’s throats but willing to work together to produce a grand coalition. However, that lasted for only a few weeks. President Asif Ali Zardari attempted to use the old tactics to force Nawaz Sharif’s party, PML-N, out of the government in Punjab, the country’s largest and richest province. He succeeded only for a short time. The PML-N’s Chief Minister, Mian Shahbaz Sharif, was restored to his office by the courts soon after the officers of the courts themselves were restored by a movement initially started by lawyers and later joined by several political parties. All these fast-paced developments suggest the birth of a new Pakistan. It will become really new if it sheds some of the India-centric approach it has followed in its view of the world and in the way it had conducted international relations. 9 That may also happen as there is a growing recognition in the country, particularly by the large middle class and now by the military, that the rise of Islamic militancy and radicalism has to be checked even if it means the use of a great deal of force. The next epoch-making elections in South Asia were held in Bangladesh in January 2009 after two years of rule by a caretaker administration that took office following a period of political chaos in which the mainstream parties fought each other mostly by using unconstitutional means. The army forced a cooling period and placed the country in the hands of a group of technocrats led by Fakhruddin Ahmed who had served for a number of years as an economist at the World Bank. The caretakers achieved their objective. They cooled the political temperature, stabilised the economy and prepared the country for another general election. The election, held in January 2009, brought the Awami League back to power and Sheikh Hasina Wazed returned as the Prime Minister. Under the Awami League, Bangladesh may be able to resolve some of its outstanding differences with India. According to Iftekhar Ahmed Chowdhury who served as the caretaker administration’s Foreign Minister, while “Pakistan is a category by itself”, other somewhat smaller neighbours of India are prepared “to live in concord (with India) but distinct from it…The government, 9

See Ishtiaq Ahmed, “Pakistan’s India fixation can bring the Taliban into power”, Institute of South Asian Studies, ISAS Brief No. 104, 28 April 2009.

as well as the very vibrant civil society in Bangladesh, tend to be secularistic, which sits in very nicely with the Congress” Party in India. “Yet, there seems to persist in Bangladesh a deep suspicion of India, justifiably or otherwise, as a result of several issues. These involve the sharing of the water of the common rivers; the questions of transit and connectivity, in which each side suspects the other of wishing to secure undue advantages; the complaints of non-trade barriers in India by Bangladeshis impeding their exports; and the allegations by India that Indian insurgents secure safe haven in Bangladesh even if unaided, (something) which Dhaka forcefully refutes. Then there is the question of maritime boundaries yet to be settled, which is important as the Bay of Bengal is said to be energy rich. There are no easy solutions to the issues and many are very complex by nature.” 10 Whenever there are deep suspicions on the part of those involved in a dispute, nations do better by using a multinational forum to make an advance. Such a forum exists in South Asia. The South Asia Free Trade Area is the by-product of the endeavours of Bangladesh. It grew out of the South Asian Association for Regional Cooperation founded in 1986 at the urging of then President of the country, General Zia ur Rahman. The last of the three elections in South Asia that may change the area’s political and economic landscape was held in India in April-May 2009. The elections attracted worldwide attention for a number of reasons. They were an impressive exercise in the management of the largest electorate to ever vote in human history. The large size of the electorate meant that the elections had to be staggered over a period of more than a month. A record number of candidates took part in the elections. The electorate was basically asked to address three issues. Should India turn away from its secular tradition and adopt a stern approach towards the religious minorities? This question was put on the front burner by a statement by Varun Gandhi, the grandson of Indira Gandhi and the estranged cousin of Rahul Gandhi. Varun Gandhi’s threat to the Muslim community landed him in jail but won him a large victory as a candidate for the BJP. The second issue concerned the degree of inclusiveness in India’s economic development model. The Congress Party had launched a couple of programmes to directly help the less advantaged segment of the population. Its promise to pursue those programmes and its campaign suggesting that the BJP’s record in office had demonstrated that it stood for economic growth without regard for the poor won the party a significant amount of support, in particular in the countryside where the vast majority of the Indian population still resides. The fact that the BJP won decisively in one state, Karnataka, one of the richest in the country and also the one in which the Hindu extremists had run a vicious campaign aimed against modernisation, underscored the image the general population had formed of the BJP. The third issue concerned the Congress Party’s record of dealing with terrorism sponsored by some of the Pakistan-based Islamic extremists. The BJP maintained in the campaign that Prime Minister Manmohan Singh and his party had shown weakness in not punishing Pakistan for the attack on Mumbai in November 2008 that was carried out by Islamic extremists who had travelled by boat from Karachi. The Congress Party suggested that it had shown maturity in dealing with India’s neighbour that too had been hit hard by the same terrorist groups. The fact that the Pakistan government launched a military assault against the Islamic dissidents in Swat district underscored the validity of the Congress Party’s position. The Congress Party won a decisive victory not anticipated by most analysts in the preelection period. The elections confirmed the longevity of the “idea of India”. The Congress 10

Iftekhar Ahmed Chowdhury, “Post-election India: How the Neighbours view the Elephant”, Institute of South Asian Studies, Singapore, ISAS Insights No. 68, 22 May 2009.

Party won handily against the BJP-led alliance as well as an alliance of regional parties that would have liked to see further a weakening of the central authority. Although it is difficult to impose a national narrative on the individual choices made by 420 million Indian voters, the electorate appears to have given its collective voice against Hindu extremism and against the further weakening of the Indian state. The BJP’s national decline seems to indicate that most Indians want economic development rather than an attachment to some romantic religious past. The 2004 Indian elections were a negative moment in the sense that the voters rejected the past and challenged the leadership group to produce a better future for them, their children and grandchildren. The five years that followed seemed to have vindicated their choice. The rates of growth produced by the Congress Party-led government were even more impressive than those achieved by the BJP in the previous period. The government’s employment guarantee scheme in the countryside and the write-off of the debt of small farmers persuaded the ordinary voter in the villages that Prime Minister Singh has both his heart and mind in the right place. Exceptionally good monsoons also helped in the Congress Party’s victory. By voting Dr Singh back into office, the Indian electorate seems to have broken the long tradition of throwing out the incumbents. There was some worry that the final drive by the Sri Lankan military against the Tamil Tigers may influence the Indian elections. The fear did not materialise. On 19 May 2009, three days after the results of the Indian elections were announced, Mahinda Rajapakasa, the Sri Lankan President, went on television to declare that the military had won the final victory against the LTTE. Its leader, Velupillai Prabhakaran, was killed. However, the victory was not without controversy. The President faced severe international criticism over “the more than 20,000 civilians that the leaked United Nations estimates indicated have been killed or injured in the conflict.” 11 However, the move by Islamabad against the Islamic militants that had terrorised the people in the country’s northeast was well received by the international community. The decision by the elected government in Pakistan to send the military to chase out the Islamic militants from Malakand in northeastern part of the country may have ushered in a process that would bring the country back towards religious moderation and political modernisation. The operation is proceeding at the time of this writing (late May 2009) and it is taking a heavy human toll. The United Nations’ official responsible for looking after internally displaced persons has suggested that the displacement of people by the military’s action in the Valley of Swat and in the districts surrounding it has reached the proportions last seen in the Rwanda conflict in 1994. Relief agencies have warned that the number of refugees is not likely to stabilise while the fighting continues. The number could swell to three million. Soon after the exodus of refugees began from Swat, the United Nations estimated that the country will require US$0.5 billion to provide relief to the displaced people. A donors’ conference pledged about half of that amount. On 19 May 2009, the United States announced an emergency assistance package for US$110 million. “President Obama is determined to match our words with our actions because Pakistan’s government is leading the fight against extremists that threaten their country and our collective security”, said Secretary of State, Hillary Clinton in a statement issued to accompany the announcement for the aid package. 12

11 12

Joe Leahy, “Sri Lankan leader savours high point after rout of rebels”, Financial Times, 20 May 2009, p. 6. Based on the report by Farhan Bokhari, James Lamont and Daniel Dombey, “US pledges aid as Swat threatens to rival Rwanda” Financial Times, 20 May 2009, p. 6.

This help from the United States, along with that to be provided by other donors, will certainly help Pakistan deal with this extraordinary situation. That said, three things need to be underscored in this context. One, Pakistan has experienced large displacement of people in the past. As noted above, it received eight million refugees from India soon after the partition of British India and the birth of Pakistan. It hosted three to four million refugees that left Afghanistan and sought refuge in the areas on the Pakistani side of the border. An earthquake in October 2006 in the northern areas and in Pakistan-held Kashmir produced another flow of two to two-and-a-half million refugees. All these were near catastrophic situations but the government was able to deal with all of them and from all of them flowed political, social and economic consequences that were not anticipated when these displacements occurred. There is no doubt that the Swat displacement will also have similar consequences but that is a subject for a later analysis. 13 What is important is that there is a consensus in the country that this is a price worth paying for dealing with an existential threat to Pakistan posed by the rise of Islamic extremism. The second area of concern is the nature of the United States’ deeper involvement in what the current set of American policymakers have begun to call the AfPak area. From the six-year long engagement in Iraq, the Americans are developing a new counterinsurgency approach for this part of the world. That involves a considerable focus on winning the hearts and minds of the people who are economically and socially very backward. They need to focus on human and physical development, work which will involve not only the provision of funds but also the technical know-how and institution building. The Obama administration seems keen to move in that direction but by using unmanned aircrafts – the drones – to hunt and eliminate suspected terrorists, it is producing a great deal of collateral damage. Colonel David Kilkullen, who has written on the subject of counterinsurgency after having experienced it first hand in Southeast Asia while working for the Australian military, 14 sees serious problems with the use of the drones as a weapon of choice. On a recent visit to Pakistan, he was told that 17 militants had been killed by the drone attacks while 700 civilians also died. He called a two-percent hit ratio “not moral”. Also, the use of air muscle reminds the people of this area of the atrocities committed during the colonial times. According to the historian, Priya Satia, “Only a permanent end to the strategy will win the Pakistani hearts and minds back to their government and to its United States’ ally. They, like Afghans and Iraqis, are less struck by the strategy’s futuristic qualities than by its uncanny echo to the past: aerial counterinsurgency was invented in precisely these two regions – Iraq and the PakistanAfghanistan borderland in the 1920s by the British. In the memory of that colonial and political dynamics of any aerial strategy in the region, Pakistanis sees the drones as ‘postcolonial’.” 15 The third concern is even trickier than the first one but is germane to the main thesis presented in this short work. It is my belief that the rise of Islamic extremism and militancy is one of those areas that call for a regional solution. However, calling the region “AfPak” does not do full justice to the regional aspect of the problem. The Obama administration’s instincts were correct when the terms of reference it issued for the appointment of Richard Holbrooke 13

For a brief but highly informative account of the Swat situation see Iftekhar Ahmed Chowdhury, “The Sorrows of Swat and the Mayhem in Malakand: What Now?” Institute of South Asian Studies, ISAS Insights No. 66, 19 May 2009. David Kilkullen, The Accidental Guerrilla: Small Wars in the Midst of Large Ones, New York, Oxford University Press, 2009. Priya Satia, “The shadow of history passes over Pakistan” Financial Times, 21 May 2009, p. 11.

as a special representative to the region implicitly included India. This led to protests from New Delhi and the expression of considerable satisfaction by the Indian officialdom and think-tank community when that reference was removed. However, the Indian involvement in dealing with the matter is critical because it has also suffered from several acts of terrorism, most recently, in Mumbai in November 2008, which can be traced to some terrorist groups operating on the Pakistani soil. India also needs to ensure that the countries on its periphery are economically, politically and socially stable. Only then would the rise of extremism in the area be checked. It would not be too great an exaggeration to suggest that the Pakistan, Bangladesh and Indian elections – all in the 18-month period between February 2008 and May 2009 – and state actions against the Tamil rebels in Sri Lanka and Islamic dissidents in Pakistan would begin to cleanse the political systems in South Asia of religious influences. In that respect South Asia may indeed have turned the corner in 2009. These events and developments should also create a respect for the authority of the state and give a strong message to those who are disaffected in the population that it is only through institutional means that groups of people should seek to address their grievances. The South Asian tables may have been cleared for making moves in the direction of greater understanding and cooperation of the countries in the region on economic, social and even political matters. I happen to believe that without better cooperation among the countries of the region, South Asia will not be able to take advantage of the opportunity offered by the ongoing reconstruction of the global economic order. It will require the leaders from both sides – India and the states on its periphery – of the South Asian divide to take advantage of these events.

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ISAS Insights No. 71 – 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

Indian Elections 2009: A Prognosis of the Verdict Amitendu Palit 1 The results to the 15th general elections for the Lower House (Lok Sabha) of India’s parliament were announced on 16 and 17 May 2009. Subsequently, the Congress-led United Progressive Alliance (UPA), under the leadership of Dr Manmohan Singh, formed the government for its second successive tenure. This paper analyses the outcomes of India’s general elections by examining the performances of the different political parties in terms of seats won and votes obtained. It tries to identify the reasons behind the Congress winning far more seats than the Bharatiya Janata Party (BJP) by comparing their regional performances. It also analyses, in the same vein, the poor performance of the Left parties and the failure of the Third Front to make an impact in the elections. Comparative Analysis of Party-wise Seats Won The elections were held in 543 Parliamentary constituencies spread across 29 states and six Union Territories. The exercise involved 713.77 million voters determining the fate of 8,070 candidates. Table 1 shows the comparative performances of the major parties in terms of seats won in the 14th (2004) and 15th (2009) general elections. The Congress improved its performance vastly in 2009 by winning 61 more seats. The BJP’s tally reduced from 138 seats to 116, resulting in the loss of 22 seats. The biggest loser, however, was the Communist Party of India (Marxist) [CPI(M)], whose seats reduced from 43 to 16. Three of the Congress’s major allies, the Dravida Munnetra Kazhagam (DMK), the Trinamool Congress (TC) and the Nationalist Congress Party (NCP), belonging to the key states of Tamil Nadu, West Bengal and Maharashtra respectively, either won more seats than in 2004 or retained those won the last time. The TC’s performance was particularly impressive. By gaining 17 more seats, the TC, led by Ms Mamata Banerjee, severely damaged the Left parties in West Bengal. The DMK also conclusively retained its hold over the key southern state of Tamil Nadu. Though the BJP lost 22 seats from its earlier tally of 138, one of its main allies, the Janata Dal (United) [JD(U)], put up a much improved performance. Led by Bihar’s Chief Minister, 1

Mr Nitish Kumar, the JD(U) expanded its presence considerably in Bihar. The JD(U)â&#x20AC;&#x2122;s success came at the expense of the Rashtriya Janata Dal (RJD). The recent elections delivered a body blow to the erstwhile Minister of Railways and Chief Minister of Bihar, Mr Laloo Prasad Yadav, chief of the RJD. From being a core constituent of the previous Congress-led UPA government, the RJD has been relegated to the sidelines. Table 1: Party-wise Seats (2004 and 2009) 2004

2009

Gain/Loss

145

206

+61

+17

NCP

BJP

138

116

-22

+12

CPI

-6

CPI(M)

-27

BSP

AIADMK

TDP

TRS

-3

-13

RJD

-20

Congress DMK

JD(U)

Source: Election Commission of India

Along with Mr Laloo Yadav, Mr Mulayam Singh Yadav, leader of the Samajwadi Party (SP) has also become relatively insignificant, with the SPâ&#x20AC;&#x2122;s tally reducing by 13 seats. The SP, however, can draw solace from the fact that its key political rival, the Bahujan Samaj Party (BSP), led by Ms Mayawati Kumari, is no better off. The BSP was widely expected to be a critical force in the post-election government formation. However, by improving its position by merely two seats compared to 2004, the BSP has not been able to emerge as a decisive force. The poor performances of the key members of the Third Front are evident in Table 1. The Left parties, the CPI(M) and the Communist Party of India (CPI) suffered major losses in the

elections. Other members of the Third Front such as the All India Anna Dravida Munnetra Kazhagam (AIADMK), the Telegu Desam Party (TDP) and the Telengana Rashtra Samithi (TRS) did not win as many seats as expected. While the AIADMK, led by Ms J. Jayalalitha, remained far behind the DMK in Tamil Nadu, the TDP, led by Mr Chandrababu Naidu, along with its ally the TRS, were humbled by the Congress in Andhra Pradesh. Coupled with the hardly flattering performance by the BSP, the Third Front experiment has met a rather tame end. Zone-wise Performance of Parties North India India’s largest state, Uttar Pradesh, sends 80 members to the Lok Sabha. The Congress improved its performance significantly in the state. Its tally went up to 21 seats in 2009 from only nine in 2004. Much of the gains of the Congress came at the expense of the SP, whose seats dropped from 36 to 23. The BSP improved its position marginally in Uttar Pradesh from 19 seats in the previous elections to 20 in 2009. The BJP’s tally in the state remained at 10 seats. Thus, Uttar Pradesh appeared to have been split trilaterally between the Congress, the SP and the BSP. This has made the Congress a significant force in Uttar Pradesh after several years of almost insignificant political presence. The Congress gained significantly in the elections at the expense of BJP in two other northern states, Rajasthan and Madhya Pradesh. In Rajasthan, the Congress won 20 seats compared to only four in 2004. The BJP’s seats in the state reduced from 21 in 2004 to four this year. The results are similar to those of the Rajasthan assembly elections held in December 2008, where the Congress swept the polls. In Madhya Pradesh, the Congress improved its tally from four seats in 2004 to 12 in 2009 while the BJP’s seats reduced from 25 in 2004 to 16 in 2009. The Congress staged a strong turnaround in Punjab by winning eight seats compared to two in 2004. The combined seat tally of the BJP and its ally, the Shiromani Akali Dal, in Punjab reduced from 11 in 2004 to five. The Congress retained its hold over Haryana by winning nine seats this time as well. In the national capital region of Delhi, it won all seven seats, with the BJP being unable to retain even the solitary seat it won in 2004. The Delhi results were again similar to Rajasthan, with both reflecting the continuation of popular support for the Congress as seen in the respective assembly elections held in November-December 2008. In Jammu & Kashmir, the Congress and its ally, the Jammu & Kashmir National Conference, won five out of six seats. East India While the Congress increased its presence significantly, in terms of number of seats won, in most of the northern states, the situation was a little different in the east. In eastern India, the Congress and the UPA essentially benefitted from the state of West Bengal. In West Bengal, the TC and the Congress won 25 seats between them, compared to only seven in 2004. The gains came at the expense of both the CPI(M) and the CPI, whose combined tally reduced from 29 in 2004 to 11 in 2009. In two other eastern states – Bihar and Orissa – neither the Congress nor its allies emerged in commanding positions. Bihar is one of the few states where the BJP-led National Democratic Alliance (NDA) performed well. The BJP and its ally, the JD(U), bettered their combined

tally in the state from 11 in 2004 to 32 in 2009. The gains came at the expense of the RJD, whose tally has dropped from 22 in 2004 to only three in 2009. On the other hand, in Orissa, the Biju Janata Dal, the estranged ally of BJP, emerged as the most successful party by winning 14 seats. The Congress also won the largest number of seats (seven) in Assam, where the BJP improved its position from two seats in 2004 to four seats in 2009. The Congress emerged as the dominant party in the rest of the north-eastern states, except for Tripura, where the CPI(M) won both seats. South India All the southern states, except for Karnataka, brought considerable gains to the Congress and its allies. Andhra Pradesh and Tamil Nadu saw the Congress and its allies successfully overcoming anti-incumbency sentiments. In Andhra Pradesh, the Congress improved its tally from 29 seats in 2004 to 33 in 2009. The improved performance is notwithstanding the severing of ties with its erstwhile partner, the TRS. The Congress also obtained a convincing majority in the Andhra Pradesh assembly elections which were held simultaneously with the general elections. Tamil Nadu saw the Congress and the DMK retaining their hold over the state by winning a total of 26 seats, the same as in 2004. The AIADMK won only nine seats. Evidently, antiincumbency did not affect the prospects of the Congress and the DMK at all, against much expectation. However, the Congress’s biggest incremental gains in the south came in Kerala. From not a single seat in the state in 2004, it won 13 seats in 2009. All the seats came at the expense of the CPI(M) and the CPI, whose combined tally shrunk from 15 in 2004 to four in 2009. The only southern state where the Congress did not make a dent is Karnataka. The BJP won 19 seats in the state, one more than it did in 2004. The Congress’s tally in the state reduced from eight in 2004 to six this time around. West India Maharashtra was a keenly fought state in western India. One of the largest states in the country with 48 seats, it remains almost evenly split between the Congress, the BJP and their respective allies. The balance, however, tilted partially towards the Congress and its ally, the NCP, who won a total of 25 seats, three more than in 2004. The BJP and its ally, the Shiv Sena, won 20 seats, compared to 25 in 2004. Gujarat is one of those few states where the BJP improved its position vis-à-vis 2004. The state is currently ruled by the BJP under Chief Minister Mr Narendra Modi. As in the case in Andhra Pradesh and Tamil Nadu, anti-incumbency did not influence the mandate in Gujarat, with the BJP winning 15 seats compared to 14 in 2004. The Congress lost one seat to end at 11, compared to 12 in 2004. Comparative Analysis of Party-wise Vote Shares India’s election results often do not indicate the equivalence between seats won and the share of votes obtained. The causality in this regard is not always linear in nature. The share of the votes of the different parties (as proportion of the total votes cast) can be taken as an indicator of the popular support enjoyed by the different parties. These shares are indicated in Table 2. Due to the lack of disaggregated data on vote shares of all recognised parties, Table 2 captures only five major parties.

The party-wise statistics on seats won (Table 1) show the widening gap between the Congress and the BJP in the recent elections. The same is revealed by the relative vote shares as well. While the share of the Congress in the total votes increased by 2.02 percent, the corresponding share for the BJP reduced by 3.36 percent. Since the loss in the BJP’s vote share is more than the gain achieved by the Congress, it is clear that it is not only the Congress but the other parties as well which have made inroads into the BJP’s vote bank. Deeper insights on this, however, require a closer constituency-based analysis. Table 2: Party-wise Vote Shares (in %) 2004

2009 Gain/Loss

Congress

26.53

28.55

+2.02

BJP

22.16

18.8

-3.36

CPI

1.41

1.43

+0.02

CPI(M)

5.66

5.33

-0.33

BSP

5.33

6.17

+0.84

38.91

39.73

0.82

Others Source: Election Commission of India

From an all-India perspective, apart from the Congress, the BSP’s vote share increased by 0.84 percent. A comparison of the increase in the vote shares and the additional seats won throws up divergent conclusions. A 2.02 percent increase in the vote share resulted in 61 additional seats for the Congress. This implies that every one percent increase in vote share produced roughly 30 additional seats for the party. By the same logic, a 0.84 percent increase in the vote share should have led to an extra 25 seats for the BSP. However, it only won two extra seats. The difference can probably be explained by the Congress being the second largest party (in terms of the number of votes) in 2004 for most of the ‘new’ seats it won this time. Arithmetically, it was able to emerge victorious in all these seats on the basis of an average increase of 0.03 percent (the ratio of the extra vote share and the extra seats won) in its votes. It clearly did not require a substantially large increase in votes to win these seats as it was probably already a close second. However, the BSP was probably not the second-largest party for most of the seats that it contested. Thus, while more people certainly voted for BSP this time, such votes did not result in it winning more seats. More votes probably helped it become the second-largest party in many of the seats it contested by narrowing the margin of votes vis-à-vis the winning

party. These hypotheses, however, can only be verified after the detailed constituency-wise data on vote shares becomes available. It is also important to note the rising vote share of the ‘others’. These include all the allies of the Congress and the BJP. The higher vote share of this block is primarily on the account of the strong show put up by the Congress’ allies such as the TC and the DMK. However, one must also note the combined share of the CPI and the CPI(M) which showed a marginal loss of 0.31 percent. Thus, while the seat-wise performance showed a marked reduction in the seats won by these two parties (Table 1), the vote share did not reflect an equivalent decline (Table 2). These two parties lost most of their seats in Kerala and West Bengal to the Congress and the TC. In both states, the Congress and the TC were the second highest parties in almost all the seats that the CPI and the CPI(M) won in 2004 but lost this time. A more detailed analysis is likely to reveal that the votes separating the highest and the second highest parties in many of these seats were not too large in 2004. As a result, the Congress and the TC were able to turn the tide this time with relatively small incremental gains in vote shares while the overall vote shares of the Left parties remained more or less unchanged. Voter Turnouts The all-India average voter turnout at 58.43 percent was slightly higher than 58.07 percent in 2004. However, the turnouts were distinctly different across the country and ranged from a low of 39.9 percent in Jammu & Kashmir to a high of 90.99 percent in Nagaland. There were more voters in India’s south and east than in the north and the west in 2004. This time too, the same trend prevailed. The turnouts in all four southern states – Andhra Pradesh (72.36 percent), Tamil Nadu (72.57 percent), Karnataka (63.33 percent) and Kerala (73.35 percent) – were higher than the national average. Similarly in the east, Assam (69.58 percent), Orissa (65.34 percent) and West Bengal (80.07 percent) had higher turnouts than the national average. The turnout in Bihar, however, was at a much lower 44.84 percent. In the north and the west, the voter turnout was much lower than the national average. This could have been on the account of the elections being held in the peak summer months of April-May and the onset of high temperatures in north India. It is interesting to note that a high voter turnout was not necessarily a mandate of anti-incumbency. While high turnouts in Kerala and West Bengal produced large votes against the CPI(M) and the CPI, in Andhra Pradesh, Tamil Nadu, Karnataka and Orissa, the voters supported the incumbent parties. The Final Outcome The Congress-led UPA emerged victorious in the 15th general elections. The BJP-led NDA continues to remain in the opposition. The elections have put the Congress in a much more commanding position compared to 2004. The number of seats separating the ruling-combine and the opposition increased significantly, putting the UPA in a far greater position of strength in the parliament. The UPA’s strength also emanates from its ‘independence’ from the Left parties as well as from demanding allies such as the RJD. The sharp shrinkage in the number of seats won by the Left has ended the political ambitions of the Third Front for the time being. At the same time, several regional parties and their respective leaders have been marginalised in India’s

15th Lok Sabha. Among the regional parties that have gained significantly are the TC and the DMK. It would, however, be erroneous to write off the regional parties and their influence on Indiaâ&#x20AC;&#x2122;s politics. The vote shares clearly show that some of these parties are steadily enlarging their vote banks. Arithmetically, of course, their vote banks are still much smaller than those of the Congress and the BJP. However, they are becoming increasingly important in deciding the outcomes in multi-cornered contests. Their significance in this regard is likely to enhance in the future.

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ISA S Insights No. 72 – Date: 18 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

Tackling Battlefield Asymmetries: Changing Tactics in Emerging Insurgencies Iftekhar Ahmed Chowdhury 1 War never leaves where it found a nation; it is never to be entered upon without mature deliberation. Edmund Burke Introduction Most current military conflicts are between apparent unequals. Yet, we see that the obvious and expected result, which is the victory of the superior power, is not so easily achieved. For instance, the North Atlantic Treaty Organization has not scored remarkable victories against the ragtag Taliban in Afghanistan; the well-armed and equipped Pakistani army has been unable to bring the unruly Frontiers under its control and; not so long ago, the Hizbullah was able to grind to a halt the advance of the powerful Israeli forces in Lebanon. In each case, the numerically smaller and poorly equipped adversary, all non-state actors, resorted to unconventional means to deter the more powerful. This is also why the defence establishment in Islamabad has been cautious about proclaiming the end to the conflict in Swat. Lanchester’s Laws There was a time when two military opponents confronted each other in a conventional battlefield, one could predict the outcome based on certain straightforward equations. Usually, the higher numbers or greater firepower had better chances of winning. Indeed, during the First Great War, a mathematical model on these lines was developed by Frederick Lanchester. He held that, if two forces, occupying the same land area and using the same weapons, fired randomly into the same target area, they would both suffer the same rate of casualties and, consequently, the smaller force would be eliminated earlier. This is known as Lanchester’s Linear Law. However, if targets are aimed at and multiple targets receive fire from multiple directions, then the rate of attrition will depend on the number of weapons that carry out the firing. This is more likely to happen in modern combat. In such situations, Lanchester’s view was that the power of such a force would be proportional not to its number of units, but to the square of 1

the number of units. This formula is known as Lanchester’s Square Law. The two principal factors in this equation are, therefore, first, the size of the combating group and, second, the rate of damaging. It ignores all other circumstances. The principle has too many limitations to be useful in contemporary conflict. It is only applicable if one unit, that is, one soldier, one tank, one ship or one aircraft can take out one equivalent adversary at one time. It would not, therefore, apply to rapid-firing machine guns, artillery barrages or nuclear ordnances, where a single unit could inflict multiple damages. Moreover, it would not apply to whole armies where the tactical deployment at any given time would not involve total numbers. Also, it would only apply to numerical force and not technological power. In other words, it would take an N-squared-fold increase in quality to make up for an N-fold increase in quantity. 2 ‘Netwar’ Techniques In the mid-1970s a military analyst Andrew Mack had pointed to how a weaker side could profit from correct tactics employed in an ‘asymmetric’ match. 3 Nearly two decades later, in the mid-1990s, two RAND Corporation researchers, John Arquilla and David Ronfeldt, coined the term ‘Netwar’ to describe an emergent technique or form of conflict by which ‘rogue’ non-state actors may be able to organise themselves to counter more powerful adversaries. These groups would employ decentralised, flexible ‘network’ structures. According to the two researchers, three basic types of networks may be used by these nonstate actors – first, chain network, where end-to-end exchanges must travel back and forth between intermediary nodes; second, the ‘hub’ or ‘star’ network where disparate actors are tied to a central, though not necessarily hierarchical node, through which all communications travel; and third, the ‘all-channel’ network, where every individual actor is able to communicate fully with all other nodes in the system. Arquilla and Ronfeldt put their ideas into a 1996 document entitled ‘The Advent Of Netwar’. 4 They point to the rising significance of the third ‘all-channel’ type that is acquiring significance. A principal element of this is the absence of a central command or key node whose elimination would entirely degrade its capability. The complete decentralisation allows for considerable local autonomy. This implies that, at times, the organisation in question appears to be ‘acephalous’ (headless) or, at other times, ‘polycephalous’ (hydraheaded). However, despite the autonomy, there needs to be a linkage between the nodes in terms of shared doctrines, beliefs, ideologies or interests. This common objective provides an “ideational, strategic and operational centrality that allows for tactical decentralisation”. 5 A more sophisticated version that only conventional and well-equipped armies are capable of conforming to is ‘network-centric operations’, a doctrine that the United States Department 2

See Lanchester, F. W., Aircraft in Warfare: The Dawn of the Fourth Arm, (London, Constable and Co Ltd, 1916). Also see Taylor, James G., Lanchester Models of Warfare (Arlington, A., Operations Research Society of America, Military Applications Section, 1983, 2 vols.). For a critique of these models and new alternative equations of his own, see Epstein, Joshua M., The Calculus of Conventional War: Dynamic Analysis without Lanchester Theory, (Washington, Brookings Institution, 1985). Mack, Andrew J. R., “Why Big Nations Lose Small Wars”, World Politics, Vol. 27, No. 2 (January 1975), pp. 175-200. See Arquilla, J. and Ronfeldt, D., The Advent of Netwar, (RAND: Santa Monica, California, 1996). Also see Networks and Netwars: The Future of Terror, Crimes and Militancy by the same authors (RAND, Santa Monica, California, 2001). http://www.rand.org/pubs/monograph_reports/MR789/index.html.

of Defense now pioneers. 6 It seeks to increase competitiveness in war-fighting capability through robustly linking up geographically dispersed forces via information technology. This would require the establishment of a ‘Global Information Grid’. There are those who have cautioned against this, arguing that the enemy may hack the system by introducing false or incorrect information. 7 There is considerable evolving literature on how and why the strong lose combats. 8 These point to the fact that material and numerical strength are no guarantees of success against deeply committed opponents with superior will and strategy. Powerful conventional militaries in the world today, of course, understand this (much of this analyses is directed towards building their awareness in this area) and wish to employ and marshal their technological advantages to further degrade the capabilities of the weaker foe. The Hizbullah in Lebanon: A Case Study However, there are alternatives in the same genre of warfare for weaker protagonists to follow. An example of how asymmetric imbalance was sought to be corrected by the apparently weaker party on the battlefield is perhaps the war between Israel and the Hizbullah in Lebanon in July 2006. 9 The strategy the Hizbullah employed was similar to the ‘Netwar’ model, by which they were able to halt the Israeli advance and also secure Israeli withdrawal from the village of Bint Jbail in southern Lebanon. It was, however, a far simpler version of the complex ‘network-centric operations’ doctrine discussed in the preceding paragraphs. When superior numbers, armour and firepower are successfully countered in a battle situation, it is natural that the attention of analysts would be focused on the methods employed by the obviously weaker adversary, as was the case in the Lebanese situation. At this point, it may be worthwhile analysing Israel’s strategic goals in that conflict. Its intelligence would have provided a list of Hizbullah targets. The initial battle plan most likely was to take them out with a series of airstrikes. In addition, there was to be a bombardment of cities, towns and villages with the purpose of destroying infrastructure the guerillas or Hizbullah might use for military purposes. Another reason for this could also have been to demoralise civilian population and turn them against the guerillas. The assessment was perhaps that a couple of weeks of such operations would achieve these objectives and then a ceasefire at the Lebanese request would be put in place – this would also involve disarming and politically eliminating the Hizbullah. There would, thus, be no need to expose the Israeli infantry to unnecessary hazards, as the risk-assessments were deemed high. Alas for the Israelis, one conventional axiom of military wisdom came to surface very quickly in the day. It was that no plans survive the first contact with the enemy. The Hizbullah were better able to protect and conceal their caches of weaponry than thought possible or capable, while raining rocketry on northern Israel at a rate surpassing hundreds a day. Since airpower could not achieve the desired result, Israel was forced to move in ground 6

See Gartska, David, Alberts, S. and Stein, Fred, Network Centric Warfare: Developing and Leveraging Information Superiority (http://www.dodccrp.org?files/Alberts NCW.pdf (Washington, 2000). For a serious critique of the doctrine, see Perrow, Charles, Information Assurance, (National Defense University, May 2003). For instance, Record, Jeffrey, Beating Goliath: Why Insurgencies Win, (Washington D. C., Potamac Books, 2007), and Arreguin-Toft, Ivan, “How the Weak Win Wars: A Theory of Asymmetric Conflict”, International Security, Vol. 26, No. 1 (Summer 20010), pp. 93-128. The author at that time was Bangladesh’s Ambassador to the United Nations in New York and followed the conflict closely.

troops to deny the Hizbullah territory between the northern border and the Litany River, approximately 20 kilometres away. It is here that they came across fierce resistance and sustained heavy casualties, ultimately forcing their withdrawal from Bint Jbail. 10 What are, thus, some of the tactics on the ground that the Hizbullah used for their successes? It was not unlike some of the elements discussed earlier as the ‘netwar’ strategy. It was apparent that the Hizbullah was using their capability to establish inter-unit connectivity through high-technology, or even low-technology means, with such better communications enhancing the overall action capacity. Unlike a traditional army, the Hizbullah did not appear to be organised with a strict hierarchy in a pecking order from generals through officers to soldiers, and from divisions through battalions, and companies to platoons. Instead, they appeared to have a flattened command structure, with perhaps a single commander heading a small fighting unit. Thus, they were easily dispersable, mobile, agile and better able to improvise. Also, since the time of the Roman cohorts, conventional warfare has depended largely on ignorant masses of soldiers motivated into action through the inculcation of ‘do or die’ values, often through ‘pep-talks’ by generals before the commencement of hostilities. The charge of the light brigade during the Crimean War is a good example of an army being wiped out through an irrational frontal attack. Nor are strategists today apt to look kindly upon the devastating attrition of the ‘trench war’ in France between the allies and the Germans that led to horrific casualties or upon the much celebrated landing in Normandy on 6 June 1944, immediately following which hundreds and thousands were slaughtered. In Lebanon, as we see, completely different tactics were followed by the Hizbullah. Their weapons were stored in caches and not distributed until just prior to the time of operations. Since the troops were unmarked and did not carry arms at normal times, it became difficult to identify them or distinguish them from the civilian population. At the conclusion of each operation, they could return quickly to normal lifestyle. In contrast, the armies and the uniformed soldiers in conventional formations are normally far more targetable. Also, in Lebanon, when the Israelis moved in armour as they did in their heavy, high-technology and modern Merkava tanks, which left large location-signatures, they could easily be acquired as targets and destroyed by the quick footed adversary. 11 The ordnances that the Hizbullah used were also far less complex and easily modifiable to respond to situational needs. An example is the Khaybar-I rockets capable of packing in almost 200 kilogrammes of bomb materials or explosives. The Hizbullah, it is said, could enhance their range by simply elongating their shape and adding propeller power. Thus, they were able to bring more distant Israeli towns within their range. The rockets did not do too much damage or cause casualties but managed to create panic among the Israeli population, which might have been the purpose in the first place. The Battles in Swat and the Tribal Areas At the time of writing, there is a furious battle being fought for the control of the Swat valley between the Pakistan army and the insurgents, mainly, though not necessarily restricted to the 10

According to information released by the Israeli Foreign Ministry, the Israeli Defence Forces reported a casualty rate of 121 dead and 628 injured. Merkava IV is the main battle tank of the Israeli forces. Merkava means ‘Chariot’ in Hebrew. It is extremely sophisticated and four main versions of it have been deployed.

Taliban. The army is already said to control the main towns of Saidu Sharif and Mingora, though swathes of terroritory are still possibly under insurgent control. In fact, some recent gains of the Taliban come on the heels of the United States intensification of remotely piloted air strikes, 16 in the first four months of 2009 compared to 36 in all of 2008. 12 The tribal areas of Federally Administered Tribal Areas largely continue to remain outside the pale of the influence of Pakistani law-enforcing agencies. There is also sporadic resistance in those territories, complemented by attacks on Pakistani cities such as Lahore, Charsada and Peshawar. This is a part of the Taliban tactics of “taking the war to the cities” where a series of bomb blasts have killed nearly 170 people since the army launched their anti-Taliban offensives in April 2009. In retaliation now, the army has taken the battle beyond the immediate region of Swat to the tribal areas of North and South Waziristan, opening up a second front. The fighting has, therefore, expanded. As in Swat, earlier air strikes and shelling by gunships appear to be the preferred mode of Pakistani attack. 13 This will mean some heavy destruction. More ‘collateral damage’, including civilian casualties, will mean greater and more strenghthened opposition from the tribals, in a dangerous mix of religiosity and Pushtun nationalism. Some analysts have contended that the Pakistani army is not trained to fight insurgencies of this type. Is this why its efforts do not appear to achieve instantaneous success, or is it also that the insurgents are adopting innovative tactics, albeit even a simpler version, than adopted by the Hizbullah? There is perhaps a modicum of truth in both. However, it is also a fact that in order to better wage the counterwar, there must be an understanding of the evolving strategy of the insurgency. In some ways, the ‘resistance’ does appear to copy ‘netwar’ methods, even if unbeknowingly. One element is the absence of a single military commander. The other is a flattened command formation without a clearly defined hierarchical command and control structure. A third is the use, as is obvious from the many photographs, of hand carried communications equiptment which complements the Kalashnikov rifle (or, as is now quite often the case, a superior weapon). Finally, there is the loose ideology, the common objective of a ‘nizam-e-adl’ or the rule of Shari’a that joins the units or nodes of insurgency. Over time, the skills of the resistance in all areas are also being sharpened and honed. This will be even more so if the fighting is prolonged. Conclusion If there is to be a military solution to the problem, the Pakistani army would need to rethink its strategy and doctrine, and adopt methodologies required for counternet war, including, indeed mainly, the simplest versions of it. The problem is there are not any that guarantees success, at least purely militarily. At the moment, the situation is not, in the words of a military analyst, David Kilcullen, ‘hopeless but extremely serious’. 14 The Pakistan army is indeed caught between the rock and a hard place in a very difficult and hostile terrain. Heavy 12 13 14

Satia, Priya, “The Shadow of History Passes Over Pakistan”, Financial Times, 20 May 2009. The Straits Times, Singapore, 16 June 2009, p. A10. Kilcullen, David, ‘Crunch Time in Afghanistan-Pakistan’, Small Wars Journal (Blog posted in February 2009), p. 5. David Kilcullen, who was an Advisor to the United States General David Petraeus, has argued that, about 90 to 95 percent of the insurgents that the United States are fighting have become ‘accidental’ enemies due to wrongly pursued heavy-handed methods. See his The Accidental Guerilla; Fighting Small Wars in the Midst of a Big One, (Washington, Oxford University Press, 2009). The same would presumably also apply in the Pakistani tribal regions.

handed military action might increase collateral damage, consequently stiffening the resolve and spread of resistance. There may, therefore, be no military solution or certainly none that can be easily achievable. In the final analysis, there is no substitute to taking the fruits of good governance to the doorsteps of the people in Swat. The dividents of peace must be made obvious to the people. The elements of education, employment and empowerment must be ensured. Without these, there will be no long-term peace in the valley till the cows come home.

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ISA S Insights No. 73 – 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

Presidential Elections in Afghanistan: Unintended Consequences? Shakti Sinha 1 Incumbent Hamid Karzai is the front-runner, by a considerable distance, in the upcoming Presidential elections in Afghanistan – a far cry from predictions made as recently as six months ago that he had become lame duck as he had lost the confidence of both the Afghans and the Americans. His opposition was clustering around a new grouping, the United National Front, his allies were deserting him and he seemed doomed to be in the footnotes of Afghanistan’s history. Critically, there were constitutional and legal issues about his term that seemed to seriously question his continuance in office beyond 22 May 2009, with elections scheduled only for 20 August 2009. However, the circle seems to have come around and those Afghans and foreigners hoping for a change of leadership and fortunes are sounding extremely demoralised. The increased insecurity in the country, the rise of the drug economy and failure on the development front had eroded confidence in the President. Different opinion polls showed decreasing confidence of the Afghan people in the way things were going on in the country, signalling the loss of support for the government and its international backers. As early as December 2006, according to one poll (worldpublicopinion.org), a majority of Afghans saw their “country as going in the right direction and are positive towards the central government, President Karzai, the North Atlantic Treaty Organization (NATO) forces and the United States. But all of these majorities are declining.” Similarly, the Asia Society, which conducts annual surveys, showed a fall in the number of (Afghans) who believe that their country is going in the right direction from 64 percent in 2004 to 38 percent in 2008. Karzai’s approval ratings declined from 83 percent in 2005 to 52 percent in February 2009. Overall, Karzai was seen as weak and ineffectual at best, and downright complicit with warlords and the drug mafia at worst. He had frequent stand-offs with the Lower House of the National Assembly, the Wolesi Jirga, which passed motions of no-confidence on two of his ministers and over-rode his veto on the Media Bill. 2 Both his Vice Presidents, Ahmad Zia Massoud, the younger brother of the legendary Ahmad Shah Massoud and representative of 1

Mr Shakti Sinha 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 isassinh@nus.edu.sg. The National Assembly passed a relatively liberal Bill that would reduce the government’s control over the media, particularly the government-owned television and radio channels, and ease funding flows to the independent media. However, despite the National Assembly passing the Bill again to over-ride the Presidential veto, the government has not notified the Bill into an Act, though according to the Constitution, such laws should come into effect 15 days after their second passing.

the Tajiks, the second biggest ethnic group, and Karim Khalili, the leader of the Hazaras, the third biggest ethnic group, had supported the formation of the United National Front, which brought together disparate opponents of Karzai, including members of the erstwhile Northern Alliance, ex-communists and even royalists. They argued for a Westminster-style parliamentary democracy with much greater accountability of the provincial executive to the local elected bodies. Less than a year ago, then Senator Joseph Biden, then Chairman of the United States Senate’s Foreign Relations Committee, had famously walked out of Karzai’s dinner, furious at Karzai’s denial of corruption in his administration. Then United States presidential candidate Barack Obama, in his first visit to Afghanistan, called upon Karzai “to get out of the bunker” and link with the people. When Obama became President, he did not call Karzai for weeks, a very different treatment from the weekly calls from President Bush. In fact, for his inauguration, of the Afghans invited, none was considered close to Karzai, and one, Gul Agha Sherzai, a rival from Karzai’s hometown of Kandahar and presently Governor of the eastern province of Nangrahar, was seen as a potential challenger in the forthcoming elections. Karzai was clearly in the American doghouse. On his part, Karzai, over the past two years, had started openly clashing with his American allies on the issue of civilian deaths, particularly with the indiscriminate use of air strikes. These had killed members of marriage parties and innumerable women and children in their homes, occasionally victims of the Taliban tactic of using human shields but, more often, of bad intelligence and personal enmity. One American convoy attacked on a highway reacted by going on a ten-mile shooting spree. In many cases, the United Nations, the Afghanistan Independent Human Rights Commission and respected non-government organisations had come up with impeccable findings which demolished the American army’s and NATO’s arguement that they had targeted the Taliban. However, no action was taken to punish the guilty. There was also the potential legitimacy issue looming over Karzai’s tenure. According to Article 61 of the Afghanistan Constitution, the term of a new President begins on the 1st of Jowza (22 May) and elections should be held 30 to 60 days before that date. Karzai was elected on 9 October 2004 and took over as the first directly elected President on 7 December 2004. The President’s term is for five years. Since his term could not extend beyond 7 December 2009, it was agreed that the new President’s term would have to begin in May 2009. A further complication arose as the elections for the National Assembly, elections first held in 2005, are due in mid 2010. To further complicate the issue, the Provincial Council elections are also due in 2009. There were attempts by various international players to bring an element of synchronicity in holding these elections as it has been calculated that over the next 50 years, Afghanistan would be holding some election or the other in 38 of them. An agreement was almost reached by which the President’s term would be extended by six months and that of the Wolesi Jirga curtailed by six months. However, mutual suspicion among the parties meant that there was deadlock. This failure to agree would not have been a problem if not for the fact that the Independent Election Commission (IEC) and neutral observers said that the earliest the Presidential elections could be held was in August 2009 and not March or April 2009. Adverse weather conditions would have meant that a considerable part of the country, particularly the Central

Highlands, would not be able to participate if the elections were held on schedule. The international community also indicated that it would not be able to provide adequate security for the elections till late summer. Amending the Constitution would be a cumbersome procedure requiring the summoning of a Loya Jirga (Grand Assembly) as well as political compromise. Karzai, in a sudden move in February this year, asked the IEC to conduct the presidential elections as per constitutional provisions although he had no legal authority to do so. Not unexpectedly, there was a furore, with the IEC, the United Nations, the United States and others saying that it would not be possible to do so. His own Interior Minister, Hanif Atmar, who has presidential ambitions, said that his ministry would be in a position to give the IEC the security cover required. Having ‘established’ that he was not keen on extending his term, Karzai then asked the Supreme Court to give its opinion on the issue. Again not entirely unexpectedly, the Court ruled that the President and his deputies can continue to be in power until a new President was elected, largely to avoid a legal vacuum. This opinion had the effect on silencing his critics and has made Karzai’s continuance in office beyond 22 May 2009 a non-issue. Karzai has shown similar political élan in re-establishing himself as the main political player in the country, dividing and defanging his opponents so much that he hardly faces any challenge in the elections. Initially, a number of notables had positioned themselves as potential candidates. These included two of Karzai’s ex-Finance Ministers, Ashraf Ghani Ahmedzai, who was an anthropologist at the World Bank for many years, and Anwar-ul Haq Ahady, a former professor of political science, as well as ex-Foreign Minister Dr Abdullah, ex-Interior Minister Ali Ahmad Jalali, a grandson of the former King, Prince Mustapha Zahir, Nangrahar Governor Gul Agha Sherzai, and Ex-United States’ Ambassador to Afghanistan, Iraq and the United Nations, Zalmay Khalilzad. Hanif Atmar, a successful Rural Development and, later, Education Minister, was also seen as a dark horse. He has had tremendous recognition throughout the country due to the success of the community-based development programme, the National Solidarity Program that had established the Community Development Councils in over 22,000 villages. The fact that four of the potential candidates had been Karzai’s ministers, and three of whom, at different times after leaving office, had negotiatedtheir rehabilitation with him, exposed their weaknesses. In recent times, either they or Karzai had announced that they would be taken back in the cabinet or would work together but, ultimately, Karzai kept them hanging. The fourth (Ahady), although a son-in-law of the influential Sayyid Ahmad Gailani who is the recognised head of the Qadiriyyah Sufi order and the head of a political party (Milli or Federal Party), had been in the cabinet until March 2009 and could not distance himself from Karzai. Jalali, a professor at the National Defense University at Washington, D. C., a United States citizen, like Ghani and others, made a number of trips to Afghanistan to assess his chances. Ultimately, he did not enter the race. Khalilzad sent out a number of subtle messages about his intentions and convened a meeting of many potential candidates in Dubai with a view to agreeing on a single candidate to challenge Karzai. However, he did not succeed and gave up the idea. As Ahady reported, each person thought that he had the best chance to unseat Karzai and was not prepared to withdraw in favour of any other. The fact that Khalilzad was an American citizen went against him. Atmar, in his mid-forties, was moved into the pivotal Interior Ministry, a move welcomed by many Afghans and internationals as he was seen as somebody who could deliver. That would place him as a favourite for the next elections. Mustapha Zahir, the head of Afghanistan’s National Environment Protection

Agency, was never considered a serious candidate although he attended meetings of the United National Front. Sherzai met Karzai and pledged his support, reportedly after striking a deal. Karzai was further able to strengthen his position by luring three key opposition figures, Marshal Fahim, Mohammad Mohaqiq and Abdul Rashid Dostum. Marshal Fahim had been Karzai’s first Defense Minister and a Vice President in the Afghanistan Interim Administration but was sacked just before the 2004 elections on account of his unsavoury reputation – the army had a very large number of ‘ghost’ soldiers whose salaries were collected and Fahim also reportedly presided over an extortion racket. International forces were put on alert at the time of his dismissal to prevent any attempted coup since Fahim was Ahmad Shah Massoud’s successor as head of the Northern Alliance army, which marched into Kabul after expelling the Taliban. Karzai’s selection of Ahmad Shah’s younger brother, Ahmad Zia, as his candidate for First Vice President was hailed as the latter represented a younger breed of Panjsheris, untainted by human rights violations and other charges. This time around, with Massoud’s loyalty in doubt, Karzai reached out to Fahim and offered him the Vice Presidency, a hard blow to the unity of the main opposition grouping. He then made a deal with the leader of the Hezb-i-Wahadat, Mohaqiq who had come in third in the last presidential elections, by promising to upgrade two districts, which are dominated by Hazaras but are loacted in Pashtun-majority provinces, into provinces. Karzai’s second Vice President, Khalili, is a Hazara, this new alliance means that Karzai has managed to ensure that he would carry the Hazara votes quite substantially. Dostum had been pushed to the wall, losing his executive position in the Ministry of Defense, marginalised in his former stronghold of Mazar-i-Sharif by the Tajik Governor, Atta Mohammad, and challenged within his own Uzbek community and Jumbish-i-Milli party so much that he flew into ‘voluntary’ exile to Turkey to save himself the ignominy of prosecution. Karzai has reportedly agreed to allow him control of his native province of Jowjwan and the neighbouring Andkhoi district of Faryab, which controls considerable traffic in carpets and other commodities to Central Asia. Atta’s reported backing of Dr Abdullah could also be a factor for this new and unlikely alliance. With these three new allies, Karzai has dealt a serious blow to the main opposition grouping, the United National Front, as the latter’s main base was in the grievances of the three main minorities, the Tajiks, the mainly Shi-ite Hazaras and the Uzbeks. The IEC scheduled a two-week period (26 April to 10 May 2009) to receive nominations. According to the Constitution, the President must be an Afghan, Muslim, at least 40 years of age, holding no foreign citizenship and with no record of human rights violations or war crimes. The wining candidate must win a 50 percent plurality, otherwise the election would go into the second round between the top two candidates. Forty four candidates filed their nominations, of which one withdrew and two were disqualified by the IEC. Of the 41 candidates in the race, there are two women. The elections will be held on 20 August 2009 and in the terms of Article 38 of the Constitution, the campaign period will run from 16 June to 17 August 2009. Karzai’s main challengers are Dr Abdullah and Ashraf Ghani Ahmedzai; the latter gave up his United States citizenship just before filing his nomination. Others include Wolesi Jirga’s deputy speaker Mirwais Yasini, Communist-era Defense 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, ex-Planning Minister Ramzan Bashardost and exVice President Hedayat Amin Arsala who is a well-connected eastern Pashtun from Nangrahar.

According to an opinion poll by the International Republican Institute in May 2009, Karzai was the first choice of 31 percent of the voters. Dr Abdullah was a distant second at seven percent and Ashraf Ghani at four percent. Karzai’s approval ratings have gone to 69 percent and 43 percent of the voters think he deserves a second term. During the 2004 elections, Karzai won in the first round itself, polling over 55 percent of the votes. His next closest rivals were Yunus Qanoni (Tajik) with 16.3 percent, Mohaqiq (Hazara) with 11.7 percent And Dostum (Uzbek) with 10 percent of the votes. The costs of the elections are estimated at over US$350 million, including the already completed voter registration, and the international community has pooled its resources through a United Nations Development Programme project, ELECT. There will be 29,000 polling stations over the 34 provinces. This time, there are 17.5 million voters, as compared with 11 million at the last elections. Besides supporting the IEC, ELECT has been working with local civil society organisations to generate voter awareness. In order to ensure that elections are credible, ELECT is supporting the Free and Fair Election Foundation of Afghanistan to hire and train 8,000 local election observers. The European Union, the Organization for Security and Cooperation in Europe and others are also expected to send international observers to the elections. In an interesting development, the United States has gone out of the way to stress that it does not have a favourite candidate. The United States Ambassador Karl Eikenberry quoted the United States President as saying that the “United States does not support or oppose any particular presidential or provincial council candidate. The United States seeks an enduring partnership with the Afghan people and not with any particular Afghan leader”. The National Security Advisor Jim Jones had, more or less, the same opinion, adding that the United States “is interested in creating a level playing field for all”. However this time around, it is Karzai who is on the offensive, with his spokesperson charging that the United States has gone too far by meeting different candidates and discussing their political platforms. This, he said, amounted to interfering in Afghanistan’s political processes, that it was “a clear violation of national sovereignty”. This new-found aggressiveness is likely to help Karzai as Eikenberry’s statement was made at his joint press conference with Dr Abdullah, and Jones held a joint meeting at the United States Embassy with Dr Abdullah, Ashraf Ghani and Mirwais Yasini. Clearly, Karzai has outwitted his many critics and rivals, and made a virtue of the American displeasure about his obvious failings, gambling that the Afghans would like to support a candidate who can stand up to the Americans and yet keep foreign assistance flowing, without which they realise the country’s stabilisation and development efforts would be doomed. This is indeed a far cry from when he was seen as little more than an American puppet. oooOOOooo

ISA S Insights No. 74 – Date: 3 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: Making the Budget in Difficult Times Shahid Javed Burki 1 These are extremely difficult times for Pakistan. It is not only the challenge thrown at the state by the Islamic extremists that has caused so much anxiety inside and outside the country. Many people that have influence in shaping world politics have called this challenge an “existential threat” for Pakistan. Among them is Hillary Clinton, America’s Secretary of State, who issued the warning that, unless Islamabad realises the enormity of the threat extremism poses to the very existence of the country, the Pakistani state may simply unravel. There is certainly some exaggeration in this assessment – it was made, most probably, to draw the attention of the policymakers in Islamabad. It seems to have served that purpose. In mid-May 2009, the military was ordered into Swat, a district in the North-West Frontier Province, and it seems to have taken the area back from the extremists. The armed forces have now been told to go after the leadership of the group that goes by the name of the Tehrik-e-Taliban Pakistan. It is loosely associated with Al-Qaeda, and in Baitullah Mehsud, it has his own charismatic leader. There is a reason why I have begun this assessment of the 2009-10 budget with a reference to the ongoing struggle between the state and the non-state actors and why I said that extremism is not the only problem the country is faced with today. There is also the problem of an economy that has suffered perhaps the most severe shock in the country’s history. The budget is supposed to address that situation and bring the economy back to health, or at least set the stage for its recovery. Will it meet these objectives? The government’s own estimate is that the rate of gross domestic product (GDP) growth will be only two percent in 2008-09, a rate lower than the more pessimistic assessments made earlier in the year. When a decline occurs in economic activity, it usually takes the economy down fast. That was the experience of the countries which faced what is generally referred to as the Asian Financial Crisis of 1996-97. This is precisely what has happened in Pakistan. When the final numbers for 2009-10 are posted, I will not be surprised if the GDP growth is even lower than the one indicated in the Pakistan Economic Survey, 2008-09, released a few days before Hina Rabbani Khar, Minister of State for Finance, made the budget speech in the national assembly. 2 In fact, the economy may not show any increase at all. A fast plunging economy needs firm and quick public policy response. The budget is a good place to begin. 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 isassjb@nus.edu.sg. Government of Pakistan, Pakistan Economic Survey, 2008-09, Islamabad, Ministry of Finance, June 2009.

Reviving the economy is, therefore, an urgent task for the government. If it succeeds, this will aid its efforts against extremism. If it fails, it will only drive more young people towards extremist causes. This is one reason why the two struggles – against extremism and economic stagnation – are tied so closely to each other. Failure in one will lead to the failure of the other. Although Ms Khar, in her speech, tried to draw some cheer from an otherwise cheerless situation, she communicated a sombre message to her audience. What she thought should bring comfort to those who were desperate to see Pakistan modernise rather than be shoved back into the Middle Ages was the fact that she was the first woman in the country’s history to present the budget in an assembly presided over by the first ever woman Speaker of the House. And both are members of the Pakistan Peoples Party, once headed by Benazir Bhutto who was assassinated in December 2007. Ms Bhutto was the first female prime minister of Pakistan. “These are important milestones in our quest for women empowerment and gender equality”, she told the assembly. 3 This was also some sort of a challenge to the extremists whose one goal is to keep women socially and economically backward. Does the budget reveal a strategy aimed at economic revival? I believe, given the grim situation the country is confronted with, the government has done a credible job of focusing on the right areas. I will identify six of them in this assessment. Firstly, the government has pointed out to the people the enormous cost to the economy of continuing terrorism. This should certainly help to build support for the action by the army. There has to be recognition in the country that indifference towards the rise of Islamic extremism and associated terrorism also has an economic cost. According to Ms Khar, the cost to the economy is of the order of US$35 billion since 2001-02, an average of US$6 billion a year. And it is increasing. The government’s estimate keeps increasing, presumably because of the better understanding of how the economy is suffering from the impact of terrorism. Earlier in the year it had estimated the cost at Rs 376 billion (US$4.7 billion) for 2007-08. The Institute of Public Policy, a Lahore-based think-tank, estimated the cost at Rs 230 billion (US$2.9 billion). 4 Even the lower estimates are fairly high in terms of the proportion of the GDP. Ms Khar stated that, “We have to meet the maintenance and rehabilitation costs of almost 2.5 million brothers, sisters and children displaced as a result of the insurgency”. The government has allocated US$6.25 billion for “relief, rehabilitation, reconstruction and security” as part of its relief effort. This is equivalent to 3.4 percent of the GDP. Adding that to the cost of terrorism means that the fight against extremism is costing the country 6.7 percent of the GDP. Commitments from its own resources notwithstanding, the government was banking on receiving a fairly generous amount of assistance from the international community for this effort. The message from Islamabad, in other words, was clear. The war against terrorism was not just Pakistan’s war. It was a war being fought on the Pakistani territory on behalf of the world. The country was prepared to sacrifice but it was incumbent upon its many friends to be generous in providing financial assistance. The country did not need foreign soldiers but it needed foreign aid. Without adequate support, the effort could fail and would create a tsunami that will hit many shores across the globe. The second message of the speech concerned the need to raise domestic resources for investment. Pakistan recognised that it had not done enough in this area. Ms Khar stated that, 3

The quotes from her speech are taken from the text posted on the official website of the Ministry of Finance, Government of Pakistan. Institute of Public Policy, State of the Economy: Emerging from the Crises, Lahore, May 2009, p. 15.

“In the outgoing year, we were only able to attain tax revenues equivalent to nine percent of our GDP”. A number of actions were indicated that would be taken to remedy the situation but that would take time. Read any speech by a Pakistani Finance Minister over the last two to three decades, and one would find many references to the need to increase the tax base and reform the tax collection system. Many development agencies have written reports on how the tax-to-GDP ratio could be improved. None of these has worked. The trend continues to be downward which means that growth in the economy depends upon the ability to raise resources from outside the country. This is what has produced a roller-coaster ride for the economy. The economy does reasonably well when large amounts of external flows are available. The growth plunges when external savings decline. 5 The fact that this time around the rate of increase in the GDP has declined significantly despite the flow of large amounts of foreign money is even more worrying. Some simple arithmetic would illustrate Pakistan’s dependence on foreign flows at this critical time in its history. If the war against terrorism is costing the country 6.7 percent of the GDP and if the expenditure on one of the programmes aimed at caring for the poor – the Benazir Income Support Program (BISP) discussed below – is to cost 0.6 percent of the GDP, then not much is left with the government – only 2.3 percent of GDP – even if it raises the tax-to-GDP ratio to 9.6 percent, a target set for 2009-10. The situation, in other words, is grim from the perspective of government finance. The third element in the financial strategy unveiled in the budget is the promise to protect the poor against the fallout from the severe economic recession in the country. With very little increase in the GDP growth, there may not be any increase in income per head of the population. We know from the empirical work done at some development institutions that the GDP must increase at the rate equal to twice the rate of increase of the population for the incidence of poverty to remain unchanged. 6 For the incidence to decline, Pakistan’s rate of GDP increase has to be higher, perhaps as much as six percent. It needs to be even higher when income distribution is inequitable, as is the case in Pakistan. This means that the dismal performance of the economy in 2008-09 must have added to the number of people living in poverty. The incidence may have increased from 50 million to 55 million. This is an untenable situation, which could have severe political and social consequences. A rising incidence of poverty means a higher rate of unemployment. In Pakistan’s case, with a very young population – the median age now is 18.2 years – this means a very large number of young people without productive jobs. The problem Pakistan faces today has two dimensions. The government needs to assist the poor to meet their basic needs and it needs to engage the youth in productive work. The government has shown considerable sensitivity about this development. It is adding more resources to a number of programmes aimed at alleviating poverty as well as providing relief to the poor. Much of the effort will be focused on a relatively new mechanism created by the present government. This is the BISP and it is named after Ms Bhutto. Under this programme, the government is providing direct cash transfers to the poor. This is in keeping with the approach developed in institutions such as the World Bank that favour cash payments rather than subsidies directed to the poor. Development institutions have learnt through experience 5

I have developed this theme at some length in my most recent book on Pakistan. See Shahid Javed Burki, Changing Perceptions, Altered Reality: Pakistan’s Economy under Musharraf, 1999-2006, Karachi: Oxford University Press, 2007. See, for instance, The World Bank, World Development Report: Poverty, New York, Oxford University Press, 2000.

that subsidies, more often than not, do not reach the intended beneficiaries. In countries such as Pakistan where the state is weak, there are enormous leakages in such programmes. Cash transfers can be better monitored. The component of “conditional cash transfers” is being added to the BISP, I suspect, at the urging of the World Bank that has tried this approach in several countries in the Middle East that have fallen behind the rest of the developing world in terms of human development. The idea is to provide cash to the families in return for taking actions such as sending girls to school; keeping children in school for periods that are long enough not only to learn to read and write but to make them responsible citizens; immunise children against communicable diseases; and provide health-preserving and healthimproving services to all citizens. There is one additional advantage to adopting this approach. It encourages the people to use the private sector to obtain some of the services on which cash flows are conditioned. In this, the burden is not placed on the public sector which is very weak in countries such as Pakistan. The government is making a very large commitment to the BISP. “During fiscal year 2008/09, Rs 22 billion was distributed to 1.8 million families”, said Ms Khar in the budget speech. “During fiscal year 2009/10, it is proposed to increase the allocation to the BISP to Rs 70 billion...this would constitute more than a 200 percent increase…and five million families would benefit.” Each eligible family would receive, on average, Rs 14,000 cash in 2009-10. This is 14.5 percent more than the Rs 12,222 provided in the previous year. As was the experience in other parts of the world where such programmes have been tried – they are popular in Latin America and the Middle East – care needs to be taken to ensure that money reaches the right pockets. A number of targeting mechanisms have been tried and some of them have worked. Those that have succeeded are based on good information about the poor. This is done by building what are called “poverty maps” based on censuses and household surveys. The government seems to be moving in that direction. According to Ms Khar, “a census would be completed within three months in 16 districts of Pakistan as a pilot to benchmark incomes. This would be extended to the entire country within the calendar year. The Benazir Income Support cards would serve as vehicles of transparent management and addressing the needs of the vulnerable.” The fourth and fifth elements of the government’s programme, as revealed in the budget, are aimed at reviving the economy by focusing on the sectors that suffered from neglect in the past. A serious effort will be made to increase the productivity and output of the agricultural sector. This is still an important part of the economy. In 2008-09, it contributed 21.8 percent to the GDP as against 24.3 percent by industry and 53.8 percent by services. Some 60 percent of the population live in the countryside and about 45 percent of the total workforce is engaged in the agricultural sector. In spite of the considerable potential of agriculture – Pakistan has the world’s largest contiguous irrigated area – several generations of policymakers in the country’s history have ignored this sector. It has neither played the role of being a major determinant of economic growth nor contributed much to alleviating poverty. This is unfortunate since a large majority of the country’s poor reside in towns and villages. Agriculture did well in 2008-09 – its output increased by 4.7 percent as against an increase of only 1.1 percent in the previous year. However, the increase was not because of any muchneeded structural changes. It was largely due to good weather and the price incentives given to the producers of cash crops. The price policy measures “undertaken by the government have led to an estimated transfer of resources of about Rs 294 billion (US$3.7 billion) to the rural economy”, Ms Khar told the national assembly. That transfer had helped in increasing

incomes in the countryside. That this has happened is corroborated by some independent evidence such as a large increase in the sale of bicycles and motorbikes in towns and villages. Wheat and rice support policies help but if they are determined by government action and not by market forces, it would create a sector that would not be able to compete in the global market place. This is what Pakistan’s agricultural sector needs to do. Given its extraordinary resource endowment, Pakistan should not be concentrating on the production of cash crops but on high value-added crops for export. In the 2009-10 budget, the government is making large outlays for two activities critical to increasing agricultural productivity. These are water management and technological improvements. One example of the latter is the belated permission given to Monsanto, an American firm, to produce and market biologically transformed cotton seeds. Monsanto is widely credited for the very large increases in cotton output in India in recent years. As a result of the introduction of what is generally referred to as the BT cotton, India has gone from being a cotton importing to a cotton-exporting country while Pakistan has moved in the opposite direction. Energy is another sector that has received attention in the budget. This is appropriate since for the last couple of years, Pakistan has experienced a severe shortage of electricity. This has resulted in long periods of brownouts and mandated load shedding. These have caused an enormous amount of discomfort to the people affected by it, which is most of the country’s population. The rich have protected themselves by investing in small generators, switched on when power goes out. All this has taken a heavy toll on the economy. In its annual report for 2009, the Institute of Public Policy estimated the loss to the economy at two percent of the the GDP. “Costs could be even higher if (the) impact on other sectors like energy and agriculture are allowed for, which account for almost the same share in power consumption as industry.” 7 The reason for this crisis is the hard-to-explain failure of the administration of President Pervez Musharraf (1999-2008) to invest in electricity generation. The government assumed that the country had a surplus capacity in the power sector which would be tapped to meet the growing demand. It also miscalculated demand elasticity for electricity assuming that it was less than one, meaning that the demand for power would increase at a rate less than that of the GDP growth. This was contrary to the experience of countries at Pakistan’s level of development. For these countries, growth in the demand for electricity was 20 to 25 percent more than the increase in GDP. In other words, electricity supply should have increased by at least 8.5 percent per annum during the closing years of the Musharraf period when the GDP increased at an average rate of seven percent a year. Historically, Pakistan has developed the energy sector by responding to periodic crises that produced large demand-supply gaps rather than by following a well designed strategy. This time around, the government has gone half the distance in using a long-term strategy rather than only emergency measures adopted to address the immediate crisis. The budget for 200910 promises to meet the persistent energy crisis in two ways. It hopes to divert the source of electricity generation away from imported fuels and take it towards the resources in which there is abundant domestic supply. These include water, wind, coal and the sun. At the same time, the government will seek to rent production facilities by bringing in power-generating barges to places such as Karachi. 7

Institute of Public Policy, Pakistan’s Economy: op. cit.

It is not clear how the shift towards the new sources of generating electric power would be accomplished. Would it be done by using public funds to invest in the projects that use the sources of power which will not put pressure on balance of payments? Or would the government use subsidies to encourage the private sector to invest in the right kind of projects? These questions have been left unanswered. There is only a slight hint in the direction of the sixth element in the strategy the government is evolving to address the present crisis. The reference here is the need to devolve more economic and financial responsibility and authority to the governments at the sub-national levels. The budget promises to reactivate the National Finance Commission which, during the Musharraf period, was unable to develop a consensus among the provinces and between the provinces and the federal government on the division of the federal financial pool. The budget promises to increase the provincesâ&#x20AC;&#x2122; share from the present 47 percent to 49 percent. The share should be higher if the provinces are to have greater financial authority to manage their development. Also, the provinces should be allowed to tax the sources of income that are currently in the federal domain. In return for this concession, the better-off provinces should allow the less developed provinces a larger share in the federal divisible pool. In conclusion, it is important to underscore one additional point. Some of the economic growth projections in the budget, albeit relatively modest given the high rates of growth in the early 2000s, are still ambitious in light of the severe economic downturn of 2008-09. Also, a number of public sector interventions in critical areas such as providing relief to the victims of domestic terrorism, including the internally displaced persons; meeting the grave shortages in energy; ensuring food security; and reviving economic growth will need more resources than would become available even with a 6.7 percent increase in the tax-to-GDP ratio from nine percent to 9.6 percent of the GDP. The budget has placed great faith in the flow of foreign funds â&#x20AC;&#x201C; in the continuation of the increase in remittances, the revival of foreign direct investment and the generosity of the countryâ&#x20AC;&#x2122;s friends. In case these turn out to be excessively optimistic assumptions, Pakistan may be faced with tough economic times in the foreseeable future.

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ISA S Insights No. 75 – Date: 7 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

Does the type of Private Capital Flow matter for Financial Stability in Emerging Economies? 1 Ramkishen S. Rajan 2 Introduction The painful structural changes that much of emerging Asia went through since the 1997-98 crisis, as well as the relatively more cautious approach towards capital account liberalisation and foreign bank entry in a number of the Asian economies appear to have helped to reduce the extent of damage that these economies faced in the recent global financial crisis. The region has clearly suffered relatively less than many other emerging economies, particularly those in Europe. Indeed, with the exception of Pakistan, the vast majority of the emerging economies that have recently obtained crisis-related loans from the International Monetary Fund (IMF) have been from emerging Europe and the Commonwealth of Independent States (CIS), broadly termed Eastern Europe hereafter. 3 Among the Eastern European borrowers that have already negotiated Stand-by Arrangement loans are Romania, Ukraine, Hungary, Belarus and Latvia (see Figure 1). Unlike emerging Asia, many Eastern European economies were running fairly large current account deficits and the predominant source of financing was “other net private capital flows”, primarily short-term bank lending (see Table 1). The sharp reversal in these capital flows led to large declines in exchange rates and depression in domestic asset prices, not unlike the experience of emerging Asia in 1997-98. As in Asia then, much of the external debt was unhedged in foreign currency (US$ in Asia and Euros in Eastern Europe). Thus, the currency depreciations led to a massive rise in the domestic currency value of foreign currency liabilities, causing large-scale insolvencies of many companies and individuals. The deterioration in domestic economic activity further worsened the balance sheets of foreign institutions that had exposure to these economies, leading to a further retrenchment in loans and forced adjustment of the current account via import-compressions. While this vicious cycle of capital outflows of capital losses in banks and further lending retrenchments 1 2

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. The IMF categorises Central and Eastern Europe as Albania, Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania, Macedonia, Former Yugoslav Republic of, Poland, Romania and Turkey, It has a separate category of the Commonwealth of Independent States (CIS) composed of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

occurred between Japanese banks and emerging East Asia in 1997-98, the same dynamic has been taking place in the case of Western European banks and Eastern Europe. To be sure, while countries with the weakest fundamentals such as Hungary, Ukraine and the Baltic states like Latvia in Eastern Europe in 2007-08, and Thailand and Indonesia in Asia in 199798 were initially most impacted and in need of support from the IMF, there were inevitable spillovers to other countries with otherwise fairly strong fundamentals (Poland, Czech Republic in Eastern Europe and Singapore and Hong Kong in Asia in 1997-98). Financial Contagion There are many channels of cross-border transmissions of crises. While trade linkages are no doubt important, as in Asia in 1997-98, of particular significant relevance in the case of Eastern Europe were the financial linkages, especially the so-called “common creditor channel”. Growing non-performing loans by commercial banks in the crisis-hit economies led to a withdrawal of funds from other markets like Poland, thus transmitting a credit crunch regionally. This so-called “forced portfolio adjustment” behaviour or “liquidity constrained” effect, which is a perfectly rational behaviour, may occur for a number of reasons. These include an anticipation of higher-frequency redemptions, the need to cover capital losses in other crisis-hit markets (“cash-in” effects), in order to reduce portfolio risks and to improve liquidity positions (“flight to safety” effects). In addition to the direct linkages and liquidity constraints, there is the possibility of “panic herding” or “bandwagon” effects, as international creditors and investors choose to reduce exposures to all emerging economies (particularly those in the region) if they are spooked by the crisis in one or more of the regional economies, leading to an international bank panic. One can never be sure as to what causes these investor panics/sudden shifts in market expectations and an indiscriminate withdrawal from many markets. A weakness or attack on one currency could lead to a reassessment of the region’s “fundamentals” and the probability of a similar fate befalling regional economies with broadly similar macroeconomic stances (whether actual or perceived). This is popularly termed the “wake-up call” effect. This phenomenon could also refer to the sudden realisation of how little market participants truly understood the regional economies, leading to a region-wide downgrading/sell-off. In some senses, the crisis in Eastern Europe has been worse than in East Asia in 1997-98, due to the relatively greater concentration of trade, finance and investment of the former with Western Europe, which has been badly impacted by the crisis. Asia’s linkages were somewhat more evenly divided between Japan, the United States and Western Europe, and the latter two (especially the United States) were in far better shape than Japan, helping the region to export its way out of the recession. The need for diversification of trade, financial and investment linkages is an important policy lesson going forward for all countries. Mobile Capital versus Foreign Direct Investment and Crisis 4 While the boom and bust cycles in emerging markets in the recent past have been due to the reversals in so-called “mobile capital” or “hot money” which refer to bank flows plus portfolio flows, foreign direct investment (FDI) has been remarkably stable during the Asian crisis and the current global financial crisis. An examination of simple coefficient of variances (CVs) over a longer period (1990 to 2008) further confirms this relative stability of 4

This section draws on and builds upon Bird and Rajan (2002).

FDI whether we look at all emerging economies or only those in developing Asia which include South Asia (see Table 2). 5 Received wisdom linking the composition of international capital flows to economic instability and financial crises is quite straightforward. It argues that short-term inflows (or “hot money”) can be easily reversed, while longer-term flows (in the form of long-maturity bonds and loans and especially FDI) cannot. Movements of “hot money” are seen as being dominated by interest rate differentials and by expected exchange rate changes which can alter rapidly leading to capital volatility, while FDI is determined by long-term fundamental economic characteristics which are more stable. Indeed, FDI is often presented as being relatively irreversible in the short-run. Since it enhances the productive capacity of the host country, it produces the revenue stream necessary to cover future capital outflows. As the World Bank (1999a) has noted, “recent rapid increases in FDI flows might be construed as being the ‘jet-airplane’ variety, bringing benefits with fewer risk” (p.128). However, does the evidence confirm the greater stability of FDI over other capital flows? Chuhan et al. (1996), Sarno and Taylor (1999) and the World Bank (1999a) argue in the affirmative. Other empirical analyses also suggest that emerging economies most prone to currency crises tend to have a relatively smaller share of FDI in total capital inflows and a relatively higher share of short-term external debt (Frankel and Rose, 1996). 6 It would be interesting to extend this empirical exercise to include the more recent periods. There are models that conveniently explain the volatility of short-term capital flows, covering both bank lending and portfolio flows. The essence of these models is that a relatively small initial loss of confidence can translate quickly into panic and a mass exodus of funds, especially when international reserves fall below a threshold where they become insufficient to cover short-term liabilities. It is easy to see how the above theory combined with the empirical evidence for developing countries has resulted in the conventional wisdom that switching from short-term to long-term capital flows may reduce the probability of currency crises. But is the conventional wisdom unassailable? Is there any empirical evidence that runs contrary to it, and if there is, can this be explained? This question may be answered in two ways. First, recent empirical investigations into the causes of currency crises in emerging economies have raised doubts about the existence of a direct link between FDI and the probability of a crisis. For instance, in a study involving 26 emerging economies during the crises periods (1994 and 1997), Nitithanprapas and Willett (2000) found that low FDI is a robust indicator of a country’s vulnerability to contagion only if combined with the current account deficit and real exchange rate. Thus, they concluded that “the composite indicator of current account, FDI, and real exchange rate is a useful indicator of external vulnerability to financial contagion” but FDI by itself may not be (p.35).

While choice of years may change the relative rankings of portfolio versus debt flows, FDI has a consistently lower CV than the other two components. Hausmann and Fernández-Arias (2000) confirm the Frankel-Rose result but show that it is not robust when extended to industrial countries. The authors note that these results may be because industrial countries have a much larger stock of non-FDI liabilities than do developing countries and have a lower frequency of crisis. While the Frankel and Rose study does not find overall indebtedness or the share of short-term debt to have any statistical effects on the probability of crisis, other studies have suggested that short-term indebtedness is a robust predictor of financial crises (Dadush, et al., 1999, Rodrik and Velasco, 1999, World Bank, 1999a, 2000). The World Bank (1999b) surveys some of the literature on short-term debt.

Similarly, Bussiere and Mulder (1999) tested for the significance of FDI (to gross domestic product ratio) in emerging economies during the financial crisis in 1997 and 1998. They found that the variable was not statistically significant, although it had the correct sign, suggesting to them that there was “only a limited reduction in vulnerability as a result of FDI financing of the deficit” (p.17). Second, a potential criticism of the conventional view regarding differing degrees of stability of various capital flows is that it fails to take into account the complex interactions between FDI and other flows. Examining each flow individually, particularly during short periods of time (such as year-to-year variations), may at best be an unreliable indicator of the degree of risk of various classes of flow, and at worst could be highly misleading. 7 Capital that flows in under the guise of FDI, may flow out under another guise. 8 Hausmann and Fernández-Arias (2000) have found that the standard deviation of FDI is not very different from that of total net flows, especially in the case of Latin America, and that the volatility of FDI itself has been on the rise. Furthermore, while the overall share of FDI in capital flows has been rising in many developing countries during the 1990s, this has failed to make the overall capital account more stable. Even though FDI has become the single largest component of capital flows for developing countries, this has not been discernibly matched by declining international capital market volatility and a reduced incidence of financial crises. This is consistent with Dooley et al. (1994), who have found that a high level of FDI may be associated with greater and not lower variability in capital flows. What can explain this contrarian view? Contrary to popular belief, FDI is not “bolted down”, although the physical assets it finances are. Foreign investors can use the physical assets as collateral to obtain a loan from banks and can then place the funds abroad. In other words, the foreign direct investor may hedge the firm’s FDI exposure by borrowing domestically and taking short-term capital out of the country. Hence, a firm may be doing one thing with its assets and a completely different thing with the manner in which it finances them. The World Bank (1999b) has also cautioned against the presumption that FDI necessarily implies greater financial stability by pointing out that: During a crisis, ‘direct investors’ may contribute...to capital withdrawals by accelerating profit remittances or reducing the liabilities of affiliates toward their mother companies. While these are non-FDI flows, they result from decisions by foreign investors. It is difficult to determine the extent to which foreigners involved in direct investment took out capital through non-FDI flows during the financial crisis because the data are available only with considerable delay. In addition to long-term determinants, FDI is affected by many short-run factors.., such as movements in host countries’ exchange rates and asset prices and growth prospects, as well as the economic environment in FDI source countries” (p.54).

Claessens et al. (1995) computed statistical measures of volatility for a group of 10 developed and developing countries (France, Germany, Japan, Great Britain, the United States, Argentina, Brazil, Indonesia, Korea, and Mexico) and failed to unearth any systematic pattern in the volatilities of the various types of capital flows. As may have happened in Malaysia in 1997-99 (see Bird and Rajan, 2009).

The IMF (1998) has similarly drawn attention to the fact that the distinction between portfolio and FDI flows in the balance of payments can be somewhat arbitrary and that the proportion of FDI flows in aggregate capital flows may be overstated. Small differences in equity ownership, which may serve to reclassify financial flows, are unlikely to represent substantially different investment horizons. This is especially relevant in view of the fact that, in recent years, an increasing share of FDI globally has been in the form of mergers and acquisitions (M&As) (that is, ownership stake of over 10 percent) (see Figure 2). Surges in M&A activity is the main reason for the increase in FDI immediately after a crisis as foreign investors purchase assets on fire sales in emerging Asia and elsewhere. Despite the importance of this mode of external financing, research on it has been fairly sparse. 9 Conclusion Short-term capital volatility has been seen as lying at the heart of recent financial instability and crises. The policy debate has focused on reducing the instability of short-term capital flows by controls or by taxation and regulation, and on switching the composition of capital flows to the longer-term end, particularly in the form of FDI. The conventional wisdom seems to be that a country can reduce its vulnerability to crisis by increasing the share of FDI in capital inflows. Although at a highly aggregated level there appears to be some empirical justification for this view, a more detailed examination of the evidence and of the underlying analytics counsels caution. Indeed, increasing FDI may itself be associated with and causally connected to increased instability in portfolio flows, implying that the apparent stability of FDI may be of spurious importance. A potential danger then, is that policy measures designed to encourage FDI may involve a distortionary cost but offer little gain in terms of enhanced financial stability. At the very least, the analysis in this paper challenges the casual presumption that the switch towards FDI alone will automatically imply that extreme capital instability will become a thing of the past, particularly in view of the fact that a growing share of FDI globally as well as in regional countries like India has been in the form of M&As.

See for instance, â&#x20AC;&#x153;The Global Financial Crisis and Cross-border Mergers and Acquisitions in Developing Asiaâ&#x20AC;?, ISAS Brief No.110, 11 June 2009, on this issue.

Figure 1: IMF Loans During the 2008-9 Crisis (as of March 2009) (percent of GDP)

Source : The Economist (2009). “The IMF - Mission: Possible,” 8 April 2009. Figure 2: Global Cross-border M&A Deals, Value and Growth, 1988-2006

Source: UNCTAD (2007).

Table 1: Net Capital Flows to Selected Emerging Economies, 1990-2009 (US$ billion)

Notes: 1) Net capital flows comprise net direct investment, net portfolio investment, and other long- and short-term net investment flows, including official and private borrowing. In this table, Hong Kong SAR, Israel, Korea, Singapore and Taiwan Province of China are included. 2) Because of data limitations, flows listed under private capital flows, net, may include some official flows. 3) Excludes grants and includes overseas investments of official investment agencies. 4) A minus sign indicates an increase. 5) The sum of the current account balance, net private capital flows, net official flows, and the change in reserves equals, with the opposite sign, the sum of the capital account and errors and omissions. 6) Consists of developing Asia and the newly industrialised Asian economies. Source: IMF, World Economic Outlook Database. http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/weoselagr.aspx. The source also provides the country coverage.

Table 2: Relative Stability of Various Components of Private Capital Flows, 1990-2009

Absolute Value of Coefficient of Variances

All Emerging and Developing Economies

Developing Asia

Total net private capital flows

0.84

0.95

Net Direct Investment flows

0.69

0.73

Net Portfolio flows

5.57

16.38

Net Other Private capital flows 4.71 7.95 Source: Computed by author from IMF, World Economic Outlook Database. http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/weoselagr.aspx. The source also provides the country coverage.

References Bird, G. and R.S. Rajan (2002). “Does FDI Guarantee the Stability of International Capital Flows?” Development Policy Review, 20, pp.191 – 202. Bussiere, M and C. Mulder (1999). “External Vulnerability in Emerging Market Economies How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion?” Working Paper No.99/88, IMF. Chuhan, P., G. Perez-Quiros, and H. Popper (1996). “International Capital Flows: Do Shortterm Investment and Direct Investment Differ?” Policy Research Working Paper No.1507, The World Bank. Claessens S., M. Dooley and A. Warner (1995). “Portfolio Capital Flows: Hot or Cold?” The World Economic Review, 9, pp.153-174. Dooley, M., E. Fernández-Arias and K. Kletzer (1994). “Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?” Working Paper No.4792, NBER. Frankel, J. and A. Rose (1996). “Currency Crisis in Emerging Markets: Empirical Indicators,” Journal of International Economics, 41, pp.351-368. Hausmann, R. and E. Fernández-Arias (2000). “Is FDI a Safer Form of Financing?” Working Paper No.416, Inter-American Development Bank. International Monetary Fund (1998). World Economic Outlook 1998, Washington, DC: IMF, May. International Monetary Fund IMF (2009). Regional Economic Outlook -- Asia and Pacific Global Crisis: The Asian Context, Washington, DC: IMF. Sarno, L. and M. Taylor (1997). “Money, Accounting Labels and the Permanence of Capital Flows to Developing Countries: An Empirical Investigation,” Journal of Development Economics, 59, pp.337-364. UNCTAD (2007). World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, New York UNCTAD. World Bank (1998). Global Development Finance 1998, New York: Oxford University Press. World Bank (1999a). Global Economic Prospects and the Developing Countries, New York: Oxford University Press. World Bank (1999b). Global Development Finance 1999, New York: Oxford University Press. World Bank (2000). Global Development Finance 2000, New York: Oxford University Press.

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ISA S Insights No. 76 – Date: 13 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

Asia and the Global Financial Crisis: A Broad Overview 1 Ramkishen S. Rajan 2 Introduction Until the mid-1990s, emerging Asian economies were among the most dynamic in the world. In addition to the sustained growth of the newly industrialising economies (NIEs) – Hong Kong, Korea, Singapore and Taiwan – and the near-NIEs in Southeast Asia (notably the economies of Malaysia, Indonesia and Thailand), the Asian giants of China and (later) India were rapidly integrating into the global economy. The Asian crisis of 1997-98 brought the growth in the NIEs and Southeast Asia to a screeching halt. The region experienced a period of painful but much needed deleveraging and corporate and financial restructuring (including consolidation, loan loss recognition and restructuring of bad loans) as well as some institutional and governance reforms. The region faced setbacks with a series of negative shocks in 2000-03, including the collapse of the NASDAQ bubble, the spread of SARS, the Avian flu and some natural disasters, all of which helped delay a full-fledged recovery in both growth and asset prices. Although some doubts were expressed about whether the region could regain its lustre at all, Asia re-emerged quite strongly, with growth returning to precrisis levels and asset prices, in most cases, even surpassing their pre-crisis levels. Asia and Pre-Lehman Brothers The sub-prime mortgage crisis and the housing downturn in the United States in 2006-07 was initially only viewed with passing interest by the media and policymakers in Asia. The belief – not without merit – was that the sub-prime market was too small to have any significant impact on the larger United States economy. In addition, Asian financial institutions were relatively unexposed directly to the United States’ sub-prime market. As of May 2008, total reported write-downs for emerging Asian banks were less than three percent of global losses, compared to the capital and asset size of Asian banks (see Table 1). In addition, for its part, Asia had not created such a (sub-prime) market, as securitisation had not advanced nearly as quickly as in the United States and Europe, and tighter credit regulations remained in place for the granting of loans.

This paper develops on the remarks first prepared for “New Ideas in Development after the Financial Crisis Conference”, Johns Hopkins-SAIS, 22-23 April 2009. 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.

Indeed, in 2007-08, there were a number of conferences and workshops to mark the decade since the Asian crisis took place. The general takeaway from these gatherings was that Asia was much stronger now; its economies were more resilient and flexible and much less vulnerable to a currency crisis in view of the rapid build-up in foreign exchange reserves and less dependence on short-term external debt (see Figure 1). 3 Asian banks were wellcapitalised with lower nonperforming loan ratios and the corporate balance sheets had been strengthened significantly as well (see Table 2). 4 Although there were political concerns in some parts of the region, such as Thailand, there was a noticeable sense of optimism, with the buoyant Chinese and Indian economies leading the way. As the crisis started affecting the overall United States property market with negative repercussions on many over-leveraged and over-exposed United States and some European financial institutions, many confident Asian (and mid-eastern) sovereign wealth funds (SWFs) and government holdings companies viewed the depressed share prices of these institutions as a once-in-a-lifetime buying opportunity (see Table 3). While there were increasing fears about the impact of the crisis on the overall United States economy, the catchword in Asia in 2007-08 was “decoupling”. As long as the slowdown in the United States was not “too sharp”, the belief was that the rapid growth in China and India as well as the revitalisation of the Japanese economy would at least cushion the region, if not completely offset the slowdown in the United States and ensure that the region’s growth momentum was not completely derailed. In fact, in 2009, the Asian Development Bank (ADB) in its flagship publication, Asian Development Outlook, referred to “Asia’s relative immunity” (p.28) from the crisis due to “only limited exposure to sub-prime and related products…” (p.28). Asian Vulnerabilities, Crisis and Policy Responses This relative optimism was also mirrored in the initial International Monetary Fund (IMF) forecasts in mid-2008 for regional growth in 2009-10 (see Table 4). Regional equity prices, too, remained reasonably steady until early 2008 (see Figure 2). While a slowdown from the 2008 levels was widely anticipated, it was expected to be relatively mild and things appeared relatively manageable for the region as a whole until the summer of 2008. The Lehman Brothers bankruptcy in mid-September 2008 was a “game-changer” for Asia, as it was for the rest of the world, as risk aversion skyrocketed, global credit markets withered dramatically and emerging market spreads widened markedly. The extent of deterioration in Asia is also apparent from the sharp downward revisions in growth prospects for the region for 2009 and 2010 in August 2008, as compared to the initial forecasts of mid-2008. However, which were the Asian economies that were most vulnerable and why? We consider a few of the following vulnerabilities: Trade exposure: Smaller and more open economies heavily dependent on global exports were obviously extremely susceptible. While China has emerged as the largest export market to many Asian economies, the bulk of Asian exports to China are intermediate goods, with final processing done in China and re-exported to the United States and Europe. On this count, we should note that many of the NIEs and Southeast Asian economies, especially Singapore, Hong Kong and Malaysia, had large export-to-gross domestic product ratios (see Figure 3). 3

Only Korea showed some vulnerability on this measure, with the short-term external debt-to-reserves ratio still close to 100 percent (though much lower than 1997-98 levels). IMF (2009) explores the resiliency of the Asian corporate sector.

Dependence of foreign capital as a source of financing of the current account deficit: Figure 4 reveals the decline in external financing to emerging Asia from the first quarter of 2008. 5 A slowdown or reversal in foreign capital flows would lead to a negative balance of payments shock in the form of exchange rate depreciation, sharp decline in foreign exchange reserves and/or interest rate hikes with deleterious effects on the domestic economy. Most regional economies ran current account surpluses and were, therefore, not very vulnerable in this regard, with the notable exceptions of Korea in particular but also of India and Indonesia (see Figure 5). It is not surprising, therefore, that these economies experienced some of the sharpest declines in reserves and exchange rates (see Figures 6 and 7). Dependence on foreign capital as a source of domestic financing: Even countries that do not require foreign capital to finance current account imbalances but experienced massive capital inflows that fuelled domestic economic activity and asset markets are exposed to a sudden stop in foreign capital and curtailment of credit. India and Indonesia experienced the most robust credit growth leading up to the crisis and, therefore, potentially faced the most risk (see Figure 8). Many corporates in India were borrowing overseas in the wholsesale funding markets mainly in United States dollars. When foreign capital dried up, these entities had to replace it with domestic financing via banks, redemptions from mutual funds, etc., thus leading to a credit shortage domestically. While monetary stimulus in general might help to cushion the negative shock, the key here is that a conventional monetary policy is a macro tool when what is required is targeting credit to entities that have experienced the boom and bust in foreign capital. Taking the above three together, countries in Asia were particularly badly impacted because of the sharp decline in trade financing, much of which involved United States dollars (as regional trade is largely invoiced in United States dollars). While there was a worldwide economic slump, in countries such as Japan, production and exports contracted rather sharply in the fourth quarter of 2008, due mainly to the decline in global demand for automobiles, information technology and capital goods. The impact of this shock on Asia is apparent from the sudden drop in Chinese exports in late 2008 and the resulting decline in exports from the rest of Asia to China and other parts of the world (see Figures 9 and 10). There was a spike in inventory to shipping ratios, as firms in Asia were not able to get the financing necessary to buy or sell their goods. The collapse in Asian exports was much worse than during the Asian crisis a decade ago (see Figure 11). 6 Degree of internationalisation of the financial system: In addition to the foregoing, as the crisis hit various United States financial institutions, regional financial centres such as Hong Kong and Singapore became obvious concerns, as were countries with significantly liberalised financial sectors such as Korea. This is clear from Table 5 which reveals that these three economies had relatively higher shares of foreign liabilities to domestic deposits than 5 6

The issue of booms and busts in capital flows in Asia is an area of ongoing research by the author at ISAS. The IMF (2009) elaborates on contagion to Asia from the global crisis due to the trade channel. As it notes: Asiaâ&#x20AC;&#x2122;s tightly integrated supply chain propagated the external demand shock rapidly across the region. The collapse in demand from advanced economies has been transmitted through the integrated supply chain, with dramatic effects on intraregional trade. Between September 2008 and February 2009, merchandise exports fell at an annualized rate of about 70 percent in emerging Asia â&#x20AC;&#x201C; about one and a half times more than during the information technology sector bust in the early 2000s and almost three times more than during the Asian crisis in the late 1990s (p.3). The same report offers some evidence of the extent to which trade finance in Asia was impacted in the last quarter of 2008 (pp.9-10).

the other regional economies. In relation to this, in countries where the domestic banking system is relatively over-leveraged, there is likely to be a greater pull-back in credit, reducing the potential effectiveness of domestic monetary stimulus. Households in higher and middle income economies (NIEs and Malaysia) had somewhat higher debt burdens than other Asian countries (see Table 6), although they were lower than in most other high income economies such as Japan, the United States and the United Kingdom. The policy responses in Asia involved a combination of monetary and fiscal stimuli as well as the granting/widening of deposit insurance (see Tables 7, 8 and 9 respectively). The fiscal stimuli packages in many Asian economies such as China have been very sizeable. Some Asian governments, notably in India, also supported specific entities like mutual funds companies and non-bank financial institutions and generally worked to extend credit to businesses and households and support the well-functioning of financial markets where possible. 7 Although often insufficient, particular attention was paid in some economies to the plight of small and medium-sized enterprises (SMEs) which were especially hard-hit by the credit crunch. Given the lack of availability of the United States dollar in some economies, while some economies such as Singapore and Korea agreed to swap agreements with the United States, others such as Korea and India sold their United States dollar reserves for local currencies to help meet the demand for United States dollars by their corporates. While there was some discussion about enhancing regional monetary and financial cooperation, not much of any substance was done in this regard (see Rajan, 2009). The policy responses were somewhat ad hoc and mostly uncoordinated. An example of this was apparent from the decisions taken by regional central banks to expand deposit insurance. Taiwan first announced its extension of deposit guarantees on 6 and 7 October 2008. Fearing deposit outflows from their economies, Hong Kong announced similar policies on 14 October 2008, followed by Singapore and Malaysia on 16 October 2008 and some other countries in the region thereafter. Countries which have been running large fiscal deficits had relatively less room to stimulate their economies in response to the slowdown in external and private domestic economic activity. Large government debt could also make the stimulative effects of fiscal policy somewhat less effective. While emerging Asian economies have generally been fairly fiscally disciplined, India and the Philippines had relatively high government debt burdens due to past periods of relative profligacy. 8 Lessons Going Forward After the sharp downturn in the latter part of 2008 and early 2009, the global and Asian economies appear to have stabilised. Much of Asia seems to be in a recovery phase, largely due to the thawing of credit markets as well as the impact of the large fiscal stimuli in countries such as China. 9 As the global risk appetite has improved substantially, larger 7

The issue of monetary policy and bank lending in India is the specific focus of a forthcoming ISAS Working Paper by M. Shahidul Islam and Ramkishen S. Rajan. Two important caveats. India’s consolidated fiscal deficit was much worse than the central government’s deficit due to large state-level deficits. Notwithstanding the fiscal stimulus resulting from the crisis, the fiscal position of the Philippines has been gradually improving since 2004. The IMF (2009) discusses the fiscal stimuli programmes and extent of fiscal space in Asian economies. Contrary to the IMF (2009) which noted “Asia’s growth path will continue to run parallel to the global economy” (p. x), Asian growth appears to have run ahead of the global economy.

countries such as India which were impacted primarily due to the sudden stop in international capital flows as opposed to high dependence on export markets have seen the fastest to recover compared to smaller export-dependent economies such as Singapore and Taiwan where recovery is likely to be more tepid. 10 The largely liquidity-induced surges in the global stock markets, albeit from a low base, have also no doubt added to the recovery momentum (though the sustainability of the market run-up remains to be seen), as have the relative easing of commodity prices. 11 Going forward, however, the quick economic turnaround – fragile as it is – should not divert Asian policymakers from learning more valuable lessons from the global financial crisis. Following the Asian crisis, and having witnessed the prolonged slowdown in Japan and the buoyancy of the United States economy since the 1990s, many policy makers and thinkers in Asia started to believe in the supremacy of the United States’ approach to growth. In some cases, the belief was more externally-imposed as part of the IMF rescue packages in Indonesia, Thailand and Korea. Certainly, some elements of change such as the strengthening of financial and corporate sector balance sheets were good, as was the introduction of greater wage and exchange rate flexibility. The significant strides in corporate governance and transparency are also to be welcomed. Much, however, remains to be done. We consider a few of the following tasks and concerns: Development Philosophy: An important ingredient of the development success of many Asian economies up to the mid-1990s was that governments eschewed ideology in favour of pragmatism in policy-making and policy experimentation, that is, trying different things and learning from their mistakes, as well as those of the regional economies. However, after the Asian crisis (1997-98), there appeared to be a wholesale embracement of the United States’ approach to capitalism. The role of the government was rolled back in many cases and stateowned financial and industrial enterprises were divested quite aggressively. Paradoxically, the United States’ policy response to the ongoing crisis has the traits of the pre-Asian crisis growth model, including policy experimentation and not allowing the policy to be straightjacketed by free market ideologies. The United States government is/policy-makers are trying whatever works and are learning from mistakes. Asia could probably learn a lesson from all this. In addition, relatively equitable growth, which was a hallmark of East Asian development, appeared to be replaced by the United States’ approach of growth-only focus with less attention paid by governments to the quality of growth. Monetary and Financial Issues: Many economies, notably Korea, continued to liberalise the financial sector rather aggressively, including the introduction of foreign competition. The Greenspan-inspired view of a relatively light, market-based approach to financial regulations was all too readily accepted in many Asian economies. Market discipline and self-regulation proved to be grossly inadequate. Prudential regulations need to be comprehensive, countercyclical and well-enforced and there is an urgent need to strengthen the abilities of supervisors to enforce regulations. Particular attention needs to be paid to systemic risks posed by large institutions that are considered too large or too interconnected-to-fail. In a recent speech, the Chairman and a member of the United States Board of Governors of the

The recently-conducted election and the formation of the new and likely quite stable government in India has also been a pull factor of capital inflows back into India. The recent upsurge in oil prices since February 2009 (about 40 percent since February and June 2009) does not portend well for much of Asia which depends heavily on oil imports. It remains unclear whether this rise in oil prices is sustainable.

Federal Reserve System, Ben Bernanke (2009), made the following observations regarding financial sector reforms in the United States, which seem equally pertinent to emerging Asia: First, we must address the problem of financial institutions that are deemed too big – or perhaps too interconnected – to fail. Second, we must strengthen what I will call the financial infrastructure – the systems, rules, and conventions that govern trading, payment, clearing and settlement in financial markets – to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality – that is, do not overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing...The elements of such an authority's mission could include, for example, (1) monitoring large or rapidly increasing exposures – such as to subprime mortgages – across firms and markets, rather than only at the level of individual firms or sectors; (2) assessing the potential for deficiencies in evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products to increase systemic risks; (3) analysing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms; and (4) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole. The concerns noted by Bernanke above, including those pertaining to institutions that are supposedly “too-big-to-fail”, have been addressed somewhat in the new financial blueprint recently released by the Barack Obama Administration entitled “Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation”. 12 There needs to be a similar fundamental re-evaluation of the role of government in regulating financial sectors by Asian countries to mitigate the chances, extent and impact of future financial busts and meltdowns. While the aim of regulatory overhaul should be to build a more stable and less crisis-prone financial system, crises will almost inevitably re-occur. Policymakers must also, therefore, consciously work towards redesigning central bank liquidity frameworks in order to facilitate more effective crisis-management as part of reorganising the post-crisis regulatory architecture. Economic Diversification: Going forward, greater attention should be paid to diversifying growth engines. Beyond focusing on electronics-based exports, they should consider alternative engines. For instance, Singapore has been actively promoting the development of integrated resorts to promote the local service industry to act as a buffer to electronics cycles. Concerted efforts must also be made to promote domestic demand in a sustainable manner (that is, preventing household and corporate stress), especially in larger economies such as China, Japan, Indonesia and Korea (India’s domestic demand, in contrast, is fairly robust). 13 Even smaller economies such as Singapore, Malaysia and Hong Kong can do so by attempting to reduce domestic household and corporate savings. One way of reducing corporate savings (retained earnings) is by altering tax incentives so as to transfer corporate 12 13

http://www.financialstability.gov/docs/regs/FinalReport_web.pdf. The ADB (2009) discusses this issue in more detail.

profits from retained earnings to greater dividend payouts to shareholders. While the ongoing fiscal stimulus is important in helping to alleviate the effects of the downturn, the mediumand long-term focus should be on rebalancing growth more towards domestic demand by focusing more on the provision of social services like heathcare, pensions, education, and social safety nets. An ease in uncertainties regarding the availability of or access to these social services should, in turn, reduce the need for precautionary savings and consequently assist in boosting domestic consumption. Improvements in infrastructure should help improve the investment climate as well. Governments in the region can certainly do more to assist in the financing and nurturing of domestic entrepreneurship and SMEs. Regional Cooperation: 14 Apart from the fact that the ongoing crisis has illustrated clearly the risks of depending too heavily on external demand, emerging Asia needs to pay particular attention to boosting regional demand as there are serious questions about whether export-led growth has reached its limit with medium-term trend growth in the United States and the European Union likely to be slower than the leveraged-induced pre-2007 growth. While intra-regional trade in Asia has appreciated markedly (about 50 percent of total trade), the bulk of the trade is in intermediate products with final demand still being the United States and Europe. In this regard, the region should redouble its efforts to pursue the various free trade agreements, particularly with China and India. Schemes to assist cross-border infrastructural development, the development of regional tourism, SMEs and other such initiatives should all be pursued with renewed vigour. Some of the regional SWFs could work in concert with the ADB to deploy resources domestically and regionally for these purposes. The collapse of regional trade partly due to the lack of trade financing indicates that there is considerable scope for boosting regional cooperation at the micro-financial level. Greater focus should also be paid to reducing the extent of trade invoicing of regional trade in United State dollars which was adversely affected by the crisis due to a severe dollar shortage. Other areas to focus on include continued development of regional bond markets and coordination of policies during future international financial strains, including policies towards deposit insurance schemes. Steps towards building a robust financial system should also help accelerate domestic demand by reducing the credit constraints of households and firms, although care must be taken to ensure that the credit expansion does not create â&#x20AC;&#x153;overleverageâ&#x20AC;? and consequent boom and bust cycles (as has been experienced by Korea since the Asian crisis).

The emphasis here is on trade and micro-financial issues. Macro-financial issues such as the Chiang Mai Initiative have been discussed in some detail in Rajan (2009).

Bibliography Asian Development Bank (2009). Asian Development Outlook: Rebalancing Asia’s Growth, ADB: Manila. Bernanke, B.S. (2009). “Financial Reform to Address Systemic Risk,” speech at the Council on Foreign Relations, Washington, D.C., 10 March. International Monetary Fund (IMF) (2009). Regional Economic Outlook: Asia and Pacific 2008, IMF: Washington, DC, November. International Monetary Fund (IMF) (2009). Regional Economic Outlook: Asia and Pacific 2009, IMF: Washington, DC, May. International Monetary Fund (IMF). World Economic Outlook, IMF: Washington, DC, various issues. Rajan, R.S. (2009). “Monetary and Financial Cooperation in Asia: Making Sense Out of the CMI, CMIM, ABF, ABMI and ACU Alphabet Soup,” ISAS Working Paper No. 69, June. This paper also benefitted enormously from various research reports on Asia from many commercial entities, including DBS, Deutschebank, Goldman Sachs, Macquarie, Morgan Stanley and Nomura.

Table 1: Asiaâ&#x20AC;&#x2122;s Sub-prime Losses

Source: Asian Development Bank.

Table 2: Financial Soundness Indicators (%)

Source: Asian Development Bank.

Table 3: Per formance of SWF Investments in Financial Fir ms

Source: Deutschebank.

Table 4: IMF Revised Projections Post-Lehman Brothers

Table 5: Bank Ratios, 2008: Q4 (%)

Source: Asian Development Bank.

Table 6: Household Indebtedness (% of GDP)

Note: Data on China and India unavailable. Source: Asian Development Bank.

Table 7: Policy Interest Rate Moves in Asia

Source: Nomura.

Table 8: Fiscal Stimulus Packages

Source: DBS.

Table 9: Deposit Guarantees

Source: International Monetary Fund.

Figure 1: Short-term Debt (%)

Source: Goldman Sachs.

Figure 2: Stock Market Indices (Index)

Source: Asian Development Bank.

Figure 3 : Export Orientation (%)

Source: Morgan Stanley.

Figure 4: Asian External Financing: Bond, Equity, and Loan (US $ billions)

Source: International Monetary Fund.

Figure 5: Global Deleveraging and Risk

Source: Morgan Stanley.

Figure 6: Effective Exchange Rates since September 2008-March 2009 (%)

Source: Goldman Sachs.

Figure 7: Change in Foreign Exchange Reserves, July 2008-Feb 2009 (%)

Source: Goldman Sachs.

Figure 8: Credit Growth Pre Lehman Brothers (Three Year % CAGR)

Source: Morgan Stanley.

Figure 9: Chinaâ&#x20AC;&#x2122;s Merchandise Trade (US$ billion)

Source: DBS.

Figure 10: Asian Exports to the United States and China (Index)

Source: DBS.

Figure 11: Asian Merchandise Exports during Various Crises (Index)

Source: Nomura.

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ISA S Insights No. 77 â&#x20AC;&#x201C; Date: 20 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

How Flexible have Asian Exchange Rate Regimes become in the Post-crisis Era? Tony Cavoli and Ramkishen S. Rajan1 Abstract This paper presents an analysis of the degree of flexibility in the exchange rate regimes of seven emerging Asian economies, viz. India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand, by comparing de jure and de facto regimes. We conclude that there are signs of a gradual movement towards somewhat greater de jure exchange rate flexibility in many Asian countries. However, the propensity for foreign exchange intervention and exchange rate management (as captured by de facto measures) among regional central banks remains fairly high in many instances. 1.

Introduction

A decade after the Asian financial crisis of 1997-98, Asia has once again been hurt by the global financial crisis that emanated in the financial sectors of the United States and Western Europe. The high degree of openness of Asia to trade, investment and capital flows inevitably meant that the regional economies would be impacted, although they had coped admirably until September 2008, even leading many analysts to talk about the possible â&#x20AC;&#x153;decouplingâ&#x20AC;? of the region from the West. Such talk quickly vanished with the bankruptcy of Lehman Brothers, which led to the skyrocketing of emerging market spreads and extreme tightening of credit markets worldwide. The sharp curtailment in export demand, freezing of credit markets, including trade financing and wholesale funding, as well as the abrupt reversal in capital flows to emerging markets, worked in tandem to curtail near-term growth in Asia quite heavily (Rajan, 2009 and Figure 1). While the spillovers from the global financial crisis to Asia were sudden and rather dramatic, once credit markets started thawing by March 2009, Asia looked poised to emerge most rapidly from the global economic contraction compared to many other regions.2

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. Tony Cavoli is a Senior Lecturer at the School of Commerce in the University of South Australia. He can be contacted at tony.cavoli@unisa.edu.au This is not to suggest that risks to the outlook of the region do not exist.

Without a doubt, the painful deleveraging and restructuring of the corporate and financial sectors that the region went through placed the regional economies in good stead. Many have also argued that more transparent monetary policy frameworks and the introduction of relatively greater degree of exchange rate flexibility also played an important role in helping the region manage, if not bounce back from, the sharp downturn experienced in late 2008early 2009. This relative exchange rate flexibility is apparent from Figure 2 which reveals that, with the exception of the month of intense volatility and selling pressure in midSeptember to mid-October 2008, many of the emerging Asian economies did not appear to intervene very much in the foreign exchange market, allowing most of the adjustments to take place via the exchange rate. Thus, the region largely rebuilt their reserves lost in late 2008 by early 2009.3 This paper concentrates on the specific issue of exchange rate flexibility in selected Asian economies between the two crises periods (that is, 2000 and 2008). The remainder of the paper is organised as follows. The next section compiles and discusses the de jure or official exchange rate regimes in seven emerging Asian economies, viz. India, Indonesia, Malaysia, Philippines, Thailand, Singapore and South Korea. Recognising that countries do not always follow their policy pronouncements, Section 3 presents some simple de facto exchange rate regime measures for selected Asian countries. Since different measures inevitably capture different characteristics of any regime, it is critical to use alternative methodologies to check the robustness of the results. Section 4 concludes the paper. 2.

Official Exchange Rate Regimes in Asia

Until 1998 it was fairly easy to obtain de jure exchange rate classifications as this data was compiled from national sources by the International Monetary Fund (IMF). Specifically, between 1975 and 1998 the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions was based on the self-reporting of national policies by various governments with revisions in 1977 and 1982. Since 1998 – and in response to criticisms that there can be significant divergences between de facto and de jure policies – the IMF’s exchange rate classification methodology has shifted to compiling unofficial policies of countries as determined by Fund staff.4 While the change in IMF exchange rate coding is welcome for many reasons (including the fact that the new set of categories is more detailed than the older one), the IMF is no longer compiling the de jure regimes. The only way this can be done is to refer to the website of each central bank or other national sources individually and wading through relevant materials. The results of this ‘detective work’ are summarised in Table 1.5 From Table 1, it can be seen that three countries possess the stated aim of some degree of sustained exchange rate management. India’s regime seems to be a managed float. Malaysia implements a basket peg, as does Singapore, where the basket peg is supported by an implicit band and prescribed rate of growth (crawl) – the so-called Band-Basket-Crawl. Each of the remaining countries; Indonesia, Korea, the Philippines and Thailand claim to have adopted an inflation targeting regime. From Table 1, we can see that most central banks have also declared an intention to intervene in the exchange rate markets in some way where the central banks deem appropriate in the interests of smoothing out periods of excessive volatility in 3 4 5

We do not specifically discuss the issue of reserve build-up here but will return to this issue in the concluding section. The data has since been applied retroactively to 1990. The descriptions in Table 1 are mostly direct quotes from the official sources and not paraphrased by the authors and draws on Cavoli and Rajan (2009, Chapter 1) based on information as of mid 2008.

those markets. This is an important facet of the inflation targeting arrangement that is instituted in these countries. Typically, we would associate inflation targeting with floating exchange rates as the possession of fixed exchange rates may dilute monetary policy due to the existence of two targets and only one instrument – usually the short-term nominal interest rate. Too much emphasis on exchange rate stability for its own sake suggests a possible “fear of floating”, something that is more readily detected in the de facto regimes as depicted in the sections that follow. 3.

De Facto Exchange Rate Regimes in Crisis-hit Asia

We attempt to capture de facto exchange rate regimes in this paper using exchange rate flexibility indices. There are a variety of indices based on the idea of exchange market pressure (EMP).6 The theoretical foundation for EMP stems from a basic monetary model incorporating the demand for money, its supply and relative purchasing power parity (Tanner, 2001 and Pentecost et al., 2001). 3.1

Exchange Rate Flexibility Index

The first measure of exchange rate flexibility is the following: Index 1 = Δe /(Δe + Δf)

(1)

where Δe is as calculated in the previous section and Δf is the change in net foreign assets (IFS line 11 – line 16c) scaled by a lagged money base (line 14).7 The index is deliberately constructed in this manner so that it returns a value between zero and one.8 This offers a scaling device for the relative exchange rate volatility; the closer the index is to one (Δf → 0), the more flexible the exchange rate regime, and while the closer the index is to zero (Δe → 0), the more fixed the regime. In contrast to other papers using this method where annualised mean absolute deviations or standard deviations are used to smooth Index 1, here we take the Hodrick-Prescott (HP) filtered trend of the index as it allows us to take a longer term view over the regime choices for our selection of countries. The HP trends are calculated using a sample of data between 1985 and 2008, but only the post-crisis time period is reported. Figures 3 and 4 report the results of the exchange rate flexibility index for India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand for the period 2000 to 2008 (monthly data). The index is computed for the nominal effective exchange rate (NEER) (Figure 3) and for the local currency per US$ (Figure 4). Generally, we can see that there are

6 7

For instance, see the seminal contribution from Girton and Roper (1977). Also see Li, Rajan and Willett (2006) and Guimãeres and Karagdag (2004). Reserve differences (from trend) are scaled by a lagged domestic monetary base in order to compare the magnitude of the reserve change in relation to the stock of money base in the system. The result is an index that is more easily interpretable than if absolute values are taken. Note that 1- Δe /(Δe + Δf) = Δf /(Δe + Δf) which is defined as a measure of exchange rate intervention. An index such as Index 1 can also be constructed using standard deviations, for example, σΔe / σΔe + σΔf. Baig (2001) and Calvo and Reinhart (2002) use variances. The index values using standard deviations are broadly similar to those for index 1 and are not reported here but available on request. The nominal interest rate is often included in EMP measures but is excluded here due to the unavailability of market interest rates for all countries. It should be noted that part of the exchange rate change (and, indeed, interest rates) could be valuation effects rather than adjustment because of foreign exchange intervention.

some similarities between Figures 3 and 4.9 This would indicate that the US$ likely occupies a significant weight in the basket that makes up the NEER in each country. What is noticeable is that Singapore seems to have the least flexible regime in terms of the NEER, consistent with the stated basket pegging. Not surprisingly, the Malaysian ringgit was the least flexible in terms of the US$ until 2005 when it forsaked the US$ peg. The Indonesian rupiah appears to be the most variable vis-à-vis both the NEER and the US$ until the most recent part of the sample, where the Korean won and the Philippine peso became more flexible especially since 2005. While the Indian rupee has been relatively flexible compared to its East Asian counterparts, it appears to have been relatively more managed in the last two years (2006-08), as is true for the Thai baht. 3.2

Augmented Exchange Rate Flexibility Indices using the Frankel-Wei method

While the foregoing results are indicative, they do not offer any degree of precision. To this end this section presents a measure that has been recently used in Frankel and Wei (2007) as a way of incorporating exchange rate regime flexibility (or fixity) into the original FrankelWei (Frankel and Wei, 1994) method for inferring implicit basket weights for majors on our local currencies. Consider the following: Index 2 = Δe + Δf

(2)

where, Δf is defined as in the previous section. In order to facilitate the estimation of exchange rate regimes using Frankel-Wei, Δe, is defined as the local currency per some independent numeraire – here we use the Special Drawing Rights (SDR).10 To see how it relates to exchange rate regime choice, we need to use Index 2 to augment the Frankel-Wei method as follows: Δet = α0 + α1 ΔUSt + α2 ΔJPt + α3 ΔUKt + α4 ΔDMt + α5 ΔEUt + γ Index 2 + μt

(3)

The α coefficients in equation (3) are the usual Frankel and Wei (1994) implicit currency weights. The US$, yen, euro and pound (all per the SDR) are chosen as they would represent world currencies deemed to exert sufficient influence on the local currencies such that they are worthy of consideration in our estimates. While it is tempting to interpret these coefficients as potential basket weights, it is probably more prudent for them to be interpreted as degrees of influence. The reason for this is that it is very difficult to tell whether a high and significant coefficient value implies a basket currency, or merely market driven correlations.11 Under equation (3), as γ → 1, the exchange rate per local currency becomes more flexible as index 1 converges to the dependent variable, Δe. As γ → 0, the exchange rate becomes more fixed as the situation where reserve movements overshadow exchange

Correlations of Index 1 between the local currencies per US dollar and its respective NEER are for the most part, positive and high (0.8-0.9). Malaysia is the exception. Also, for Indonesia, the rupiah per the SDR is used instead of the NEER due to the unavailability of NEER data for Indonesia at this time. The idea behind using the SDR revolves around finding a currency that is not excessively related to any of the currencies used in this study. A common choice in this literature has often been the Swiss franc, but there are concerns that its strong correlation with the euro may bias parameter estimates. It is also for this reason that we did not impose the restriction that all the currency weights should add up to one.

rate movements is reflective of sustained exchange rate intervention. The extent of fixity to various currencies is captured by the coefficients. Table 2 presents the regression results for equation (3). Some interesting results stand out. With the exception of Indonesia, the US$ remains the currency that has the greatest degree of influence on the local currency, particularly in the case of Malaysia (not surprisingly given that it only depegged in mid 2005), the Philippines, and India (which is somewhat unexpected). The other currencies possess a generally low degree of influence and are, for the most part, statistically insignificant except the yen in Singapore’s case.12 Clearly the weight of the US$ may be capturing other currencies such as the Chinese renminbi which itself is pegged heavily to the US$. With the exceptions of Korea and Malaysia, the EMP index is highly significant. The values are all under 0.1 in the cases of the Philippines, Singapore and Thailand, suggesting there exists a great deal of fixity in the local currencies. The EMP has a slightly stronger economic weight in Indonesia and India, implying that these two economies allowed relatively greater exchange rate flexibility than the others. As mentioned above, to what extent are these weights market-driven versus policy targets? We can attempt to answer this by summarising the interaction between the currency weights and the EMPs. The currency weights for Indonesia suggest it is market-driven. The US$ is significant, but none of the other currencies are. The EMP for Indonesia represents some degree of flexibility. The Indian rupee and the Korean won are somewhat influenced by the US$. The EMP is relatively high and significant for the Indian rupee, indicating a level of flexibility in the exchange rate with a possible loose US$ peg. The EMP for the Korean won is statistically and economically insignificant. There is insufficient evidence from the EMP coefficient to suggest the existence of any systematic exchange rate fixity of the won over the sample period under examination. The high degree of influence of the US$, the non-existent influence of the other currencies, and the low EMP for Malaysia all suggest a US$ peg which we know to have been the case in actuality. The Philippines and Thailand present a similar scenario – albeit with a lower US$ weight (particularly for Thailand) and a higher EMP – suggesting a degree of flexibility. The special case is Singapore where the US$ and the yen are significant weights (the euro is very nearly significant) and the EMP level is quite low. There is evidence here of an attempt to control a basket of currencies, which is consistent with official proclamations by the central bank. Figure 5 presents the recursive least squares estimates for the US$ coefficient, α1.13 This is instructive as a mechanism which allows a comparison between these results and the EMPs per US$ in the previous section. With the exception of Indonesia – where the results are inconclusive – there appears to be a general trend downwards in the recursive series. This is suggestive of a lowering of the degree of influence of the US$ on each local currency and is consistent with the findings in the previous section of somewhat greater flexibility of the local currencies per US$. 12

The other exceptions are the pound and euro in the case of the Korean won, but this result should be viewed cautiously given that the coefficients almost offset each other (that is, a possible high correlation between the pound and euro). The recursive estimates are generated by running the regression for equation (3) iteratively – beginning with a few observations, and recording the coefficient values until we reach the full sample. Due to insufficient degrees of freedom, we discard the first 18 coefficient values. Recursive least squares is a special case of the Kalman Filter modeling strategy with time-varying coefficients. These results are typically consistent with the rolling fixed window regressions where one would drop the oldest observation before incorporating the most recent.

Conclusion

This paper has examined the de jure and de facto exchange rate regimes in Asia. The evidence points to a somewhat greater degree of exchange rate flexibility in the regional economies. This flexibility likely helped to somewhat cushion the domestic economies from the sharp global financial crisis of 2008-09. What we have not specifically tested for but appears to be the case is the existence of a degree of asymmetry. Asian countries seem somewhat more willing to allow for exchange rate depreciations in times of stress than they are to allow exchange rate appreciations during periods of capital surges. This possible “fear of appreciation” as opposed to a broader “fear of floating” is formally explored in Pontines and Rajan (2008) and may explain how Asia has been able to continuously accumulate reserves while still moving to somewhat greater currency flexibility. At a broader level, it is always useful to keep in mind that the choice of exchange rate regime cannot be done in isolation. It must be seen as part of a coherent macroeconomic and development strategy. No exchange rate regime will deliver stability if governance is poor, institutions are weak, and domestic macroeconomic policy is unsound. Paraphrasing Max Corden (2003), one should not be “too sensational” about the choice of exchange rate regime. References Baig T. (2001). “Characterizing Exchange Rate Regimes Post-Crisis East Asia,” Working Paper No.01/152, IMF. Calvo, G. and C. Reinhart (2002). “Fear of Floating,” Quarterly Journal of Economics, 117, pp. 379-408. Cavoli, T. and R. S. Rajan (2009). Exchange Rate Regimes and Macroeconomic Management in Asia. Hong Kong University Press. Corden W. M. (2003). Too Sensational on the Choice of Exchange Rate Regimes, MIT Press. Frankel, J and S. J. Wei (1994). “Yen Bloc or Dollar Bloc? Exchange Rate in the East Asian Economies”, in T. Ito and A. Krueger (eds.), Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, Chicago: University of Chicago Press. Frankel, J. and S. J. Wei (2007). “Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights,” IMF Annual Research Conference, International Monetary Fund, Washington DC (November 16). Girton, L. and D. Roper (1977). “A Monetary Model of Exchange Market Pressure Applied to Postwar Canadian Experience”. American Economic Review, 67, pp. 537-548. International Monetary Fund IMF (2009a). World Economic Outlook – Crisis and Recovery, Washington, DC: IMF. International Monetary Fund (2009b). Regional Economic Outlook – Asia and Pacific Global Crisis: The Asian Context, Washington, DC: IMF.

Li, J., R. S. Rajan and T.D. Willett (2006). “Measuring Currency Crises using Exchange Market Pressure Indices: The Imprecision of Precision Weights,” mimeo (October). Pentecost, E. J., C. Van Hooydonk and A. Van Poeck (2001). “Measuring and Estimating Exchange Market Pressure in the EU,” Journal of International Money and Finance, 20, pp. 401-418. Pontines, V. and R. S. Rajan (2008). “Fear of Appreciation” Not “Fear of Floating? Foreign Exchange Market Intervention in Emerging Asia,” mimeo, October. Rajan, R. S. (2009). “Asia and the Global Financial Crisis: A Broad Overview,” mimeo, June. Tanner, E. (2001). “Exchange Market Pressure and Monetary Policy: Asia and Latin America in the 1990s,” IMF Staff Papers, 47, pp. 311-333.

Table 1: De Jure Exchange Rate Classifications Country India

Official Policy Pronouncements (direct quotes) The exchange rate policy in recent years has been guided by the broad principles of careful monitoring and management of exchange rates with flexibility, without a fixed target or a pre-announced target or a band, coupled with the ability to intervene if and when necessary.

Indonesia

In July 2005, Bank Indonesia launched a new monetary policy framework known as the Inflation Targeting Framework, which has four basic elements as follows: (1) use of the BI rate as a reference rate in monetary control in replacement of the base money operational target, (2) forward looking monetary policymaking process, (3) more transparent communications strategy, and (4) strengthening of policy coordination with the Government. The rupiah exchange rate is determined wholly by market supply and demand. However, Bank Indonesia is able to take some actions to keep the rupiah from undergoing excessive fluctuation.

Korea

Inflation targeting is an operating framework of monetary policy in which the central bank announces an explicit inflation target and achieves its target directly. This is based on the recognition that to achieve sustainable economic growth, it is important, above all else, that inflation expectations which have a great effect on wage and price decisions should be stabilised. In this regard, inflation targeting places great emphasis on inducing inflation expectations to converge on the central bank’s inflation target level by the prior public announcement and successful attainment of that target level. The exchange rate is, in principle, decided by the interplay of supply and demand in the foreign exchange markets. However, the Bank of Korea implements smoothing operations to deal with abrupt swings in the exchange rate caused by temporary imbalances between supply and demand, or radical changes in market sentiment.

Malaysia

On 21 July 2005, Malaysia shifted from a fixed exchange rate regime of US$1 = RM3.80 to a managed float against a basket of currencies. Under the managed float system, the ringgit exchange rate is largely determined by ringgit demand and supply in the foreign exchange market. The Central Bank does not actively manage or maintain the exchange rate at any particular level – economic fundamentals and market conditions are the primary determinants of the level of the ringgit exchange rate. In this regard, the Central Bank intervenes only to minimise volatility, and to ensure that the exchange rate does not become fundamentally misaligned.

Philippines

The primary objective of the ‘Bangko Sentral ng Pilipinas’ monetary policy is to promote a low and stable inflation conducive to a balanced and sustainable economic growth. The adoption of inflation targeting framework for monetary policy in January 2002 is aimed at achieving this objective. The Monetary Board determines the exchange rate policy of the country, determines the rates at which the Bangko Sentral buys and sells spot exchange, and establishes deviation limits from the effective exchange rate or rates as it deems proper.

Country Singapore

Official Policy Pronouncements (direct quotes) Since 1981, monetary policy in Singapore has been centered on the management of the exchange rate. (1) The Singapore dollar is managed against a basket of currencies of its major trading partners and competitors. (2) The Monetary Authority of Singapore operates a managed float regime for the Singapore dollar. The trade-weighted exchange rate is allowed to fluctuate within an undisclosed policy band, rather than kept to a fixed value. (3) The exchange rate policy band is periodically reviewed to ensure that it remains consistent with the underlying fundamentals of the economy. (4) The choice of the exchange rate as the intermediate target of monetary policy implies that MAS gives up control over domestic interest rates (and money supply).

Thailand

Since 2 July 1997, Thailand has adopted the managed-float exchange rate regime, in which the value of the baht is determined by market forces, namely, demand and supply in both on-shore and off-shore foreign exchange markets, to let the currency move in line with economic fundamentals. The Bank of Thailand will intervene in the market only when necessary, in order to prevent excessive volatilities and achieve economic policy targets. Under the inflation targeting framework, the Bank of Thailand implements its monetary policy by influencing short-term money market rates via the selected key policy rate, currently set at the 14-day repurchase rate.

Source: Cavoli and Rajan (2009).

Table 2: Frankel-Wei-EMP Estimates. Dependent Variable: Local currency per SDR Indonesia

India

Korea

-0.52 (0.01) 0.12 (0.50) -0.04 (0.77) -0.12 (0.49) -0.08 (0.70) 0.35 (0.00) 0.73

-0.27 (0.02) 0.69 (0.00) 0.09 (0.28) 0.09 (0.28) 0.13 (0.14) 0.17 (0.00) 0.68

-0.22 (0.09) 0.44 (0.01) 0.25 (0.12) -0.29 (0.07) 0.23 (0.05) 0.02 (0.13) 0.28

-0.14 (0.04) 0.87 (0.00) -0.03 (0.56) 0.04 (0.35) -0.05 (0.58) -0.00 (0.90) 0.77

-0.14 (0.39) 0.76 (0.00) 0.04 (0.87) 0.03 (0.75) -0.01 (0.91) 0.07 (0.00) 0.40

-0.24 (0.00) 0.41 (0.00) 0.11 (0.05) 0.12 (0.11) -0.02 (0.74) 0.03 (0.00) 0.35

-0.32 (0.00) 0.29 (0.02) 0.13 (0.24) 0.07 (0.49) 0.02 (0.89) 0.07 (0.01) 0.31

2.18

1.62

1.77

1.39

1.90

2.06

1.79

Observations

112

110

111

Constant Dollar Yen Euro Pound EMP Adj R2

Note:

Malaysia Philippines Singapore Thailand

Includes lagged dependent variable. Figures in parentheses are p-values and those parameters significant at 10 percent or better are in bold. Sample 1999m1 to 2008m6.

Figure 1: Impact of the Global Financial Crisis on Emerging Asia

Notes: 1) Newly industrialised Asian economies (NIEs) comprise Hong Kong SAR, Korea, Singapore, and Taiwan Province of China. ASEAN-4 countries comprise Indonesia, Malaysia, Philippines, and Thailand. ASEAN-5 countries comprise ASEAN-4 countries and Vietnam. Emerging Asia comprises China, India, Indonesia, Malaysia, Philippines, and Thailand. 2) Annualised percent change of three-month moving average over previous three-month average. 3) Excluding Taiwan Province of China. Source: IMF (2009a).

Figure 2: Emerging Asia: Changes in Foreign Exchange Reserves (In US$ billion)

Notes: Emerging Asia defined as China, India, Hong Kong SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines, Thailand and Vietnam. Source: IMF (2009b).

Figure 3: Exchange Rate Regime Index using NEERs

.0 2001

2002

2003

2004

2005

Indonesia Korea Philippines Thailand

2006

India Malaysia Singapore

Source: Cavoli and Rajan (2009).

2007

2008

Figure 4: Exchange Rate Regime Index (ccy per US$)

Exchange Rate Regime Index (ccy per USD) .5 .4 .3

.2 .1 .0

-.1 2001

2002

2003

2004

Indonesia Korea Philippines Thailand Source: Cavoli and Rajan (2009)

2005

2006

India Malaysia Singapore

2007

2008

Figure 5: Recrusive Estimates for US$ Weight Source: Cavoli and Rajan (2009).

Recursive Estimates for USD Weight

1.6

1.2

oooOOOooo

0.8

0.4

0.0

-0.4

-0.8 2001

2002

2003

2004

Indonesia Korea Philippines Thailand

Source: Cavoli and Rajan (2009)

2005

2006

India Malaysia Singapore

2007

2008

ISA S Insights No. 78 – Date: 20 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’s Nuclear Navy: Catching up with China 1 C. Raja Mohan 2 Abstract The launch of India’s indigenous nuclear-powered submarine on 26 July 2009 marks a major breakthrough in the nation’s efforts to build a nuclear navy and close the gap with China’s growing underwater deterrent capability. New Delhi, like Beijing, had to struggle for decades to advance on its maritime nuclear project, involving the technologies of nuclear propulsion, underwater launch of ballistic missiles and the art of operating nuclear submarines. Although China is well ahead of India in the deployment of a credible sea-based deterrent, the time has come for Beijing and New Delhi to start a substantive dialogue on nuclear and maritime confidence building measures. Introduction Many decades ago, Chairman Mao Zedong reportedly told his naval commanders that they “must build a nuclear submarine in China even if it took ten thousand years”. Indian leaders, not generally known for such earthy expressions of national political will, would have readily agreed with Mao. As India prepares to launch its first indigenously built nuclear-powered submarine at the end of July 2009, 3 it is not difficult to see the parallel with China. The nuclear submarine, now christened INS Arihant, had been in the works for nearly three decades. Widely known as the Advanced Technology Vessel (ATV), the project suffered repeated technological, engineering and organisational setbacks. It is persistent political support and the navy’s dogged pursuit that has now brought the project to its culmination. To be sure, there is a considerable distance to go before INS Arihant is declared operational. However, there is no denying that unveiling the vessel marks a breakthrough for India on naval nuclear propulsion. It also sets the stage for India’s eventual deployment of some nuclear weapons at sea. Until now, only the five nuclear weapon states have operational nuclear submarines. While the 1

This paper has been 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. C. Raja Mohan is a Professor of South Asian Studies at the S. Rajaratnam School of International Studies at Nanyang Technological University, Singapore. He can be contacted at crmohan53@gmail.com. Amitav Ranjan and Shishir Gupta, “All set for a quiet launch of India’s first indigenous N-Sub”, The Indian Express (New Delhi), 8 July 2009, p. 1; see also, Rajat Pandit, “N-Sub’s here in 10 days”, Times of India (New Delhi), 17 July 2009, p. 11.

achievement is significant, India is fully aware that it is well behind China in the building of conventional submarines, developing marine nuclear reactors and mastering the technology of submarine-launched nuclear tipped ballistic missiles (SLBMs). Meanwhile, China itself is decades behind the United States and Russia in operating a credible nuclear navy. This paper reviews the recent significant naval nuclear developments in India, puts them in a comparative perspective in relation to China, and speculates on their future evolution. The paper also offers a preliminary assessment of how India’s emerging maritime nuclear capabilities might impact the Sino-Indian naval dynamic as well as the nuclear calculus of other great powers, especially the United States. The Doctrinal Context The India government’s interest in imparting a nuclear capability to its navy emerged out of the broader nuclear debate in the late 1970s amidst credible reports that Pakistan was close to acquiring nuclear weapons. Although it was China’s first nuclear test in 1964 that set off the Indian nuclear debate and resulted in India’s first nuclear test in May 1974, it was not until the late 1970s and early 1980s that Delhi devoted serious attention to its nuclear strategy and policy. 4 As part of the many decisions that called for an intensified investment in a range of technologies related to the weaponisation of India’s nuclear option, Delhi also decided to build an indigenous nuclear propelled submarine as well as lease a nuclear submarine from the Soviet Union for training Indian naval personnel. At around the same time, in 1983, India also launched the Integrated Guided Missile Development Programme (IGMDP). 5 Sea-based missiles were, of course, way down the priority list of the IGMDP, which concentrated on the development of surface-to-surface ballistic missiles. Together, the three decisions were critical for developing the Indian navy’s nuclear dimension. When India announced its first draft nuclear doctrine in 1999, it emphasised two seemingly contradictory principles. One was that India would limit itself to a credible minimum deterrent and had no wish to embark on an arms race with any other country. At the same time, the doctrine also declared that it would develop a classical ‘triad’ of delivery systems. The triad refers to the deployment of nuclear weapons on bomber aircraft, land-based missiles and submarine launched missiles. Most western analysts argued that building a triad is not compatible with the notion of minimum deterrence and expressed disdain for the prospect of India building an underwater deterrent capability, the most difficult of the triad systems. Yet, India’s draft nuclear doctrine was quite clear that “India’s nuclear forces will be effective, enduring, diverse, flexible, and responsive to the requirements in accordance with the concept of credible minimum deterrence. These forces will be based on a triad of aircraft, mobile land-based missiles and sea-based assets”. 6 Whatever the limitation on its extant capabilities, India was quite clear that its nuclear arsenal would be balanced and not be trimmed in order to accommodate the international criticisms. In underlining its commitment to the development of sea-based nuclear delivery systems within the framework of a credible minimum deterrent, India was very much following the footsteps of China’s nuclear evolution. As the weakest of the nuclear weapon powers that had to operate in an environment that was constrained by resources, managing the contradiction between the imperatives of credibility 4

For a history of India’s nuclear weapons programme, see George Perkovich, India’s Nuclear Bomb: The Impact on Nuclear Proliferation (Berkeley, CA: University of California Press, 2002). For a recent review of India’s missile and space programme, see Harsh V Pant and Bharath Gopalaswamy, “India’s Emerging Profile in Space”, The RUSI Journal, Vol. 153, No. 5, pp. 66-71. The Draft Report National Security Advisory Board on Indian Nuclear Doctrine, August 17, 1999 available at http://www.pugwash.org/reports/nw/nw7a.htm accessed on 12 July 2009.

and minimalism was central to the conception and organisation of the Chinese nuclear deterrent. Despite its conflicts with both Soviet Russia and the United States, China deliberately chose not to imitate the nuclear doctrine of the superpowers and chose instead to maintain a modest arsenal. 7 Some argue that the nuclear logic has begun to change in Beijing and that we might see a significant expansion of its nuclear arsenal and a shift from the doctrine of ‘minimum deterrence’ to one that is now called ‘limited deterrence’. Others however question the evidence and argument that the Chinese arsenal is on the verge of a rapid expansion. 8 Well before this presumed shift or otherwise, the Chinese leadership was quite clear in its mind that while it will maintain a small nuclear arsenal, it must definitely be a balanced one. In other words, a sea-based arsenal, despite all its technological challenges, must be built to make the Chinese deterrent credible and put it on equal footing – if only symbolically and psychologically – with the other nuclear weapon powers. Put simply, minimum deterrence did not mean that China would forgo certain elements of the nuclear triad. The Chinese political and military leaders were fully aware that a submarine carrying nuclear tipped missiles was not just a symbol of technological advancement, but would make Beijing invulnerable to any nuclear threats or blackmail. 9 For both China and India, sea-based nuclear weapons offered a secure second strike capability. This was the context in which Mao exhorted Beijing to do whatever it takes to build a nuclear submarine. The same logic had equal appeal in New Delhi, which was “convinced that acquisition of a nuclear submarine will provide the most reliable deterrence and also give its navy a true blue water status” and that “no country having a nuclear capability should be without a nuclear submarine”. 10 India’s Maritime Nuclear Development Not too soon after its first atomic test, India embarked on the development of three essential technologies needed for a nuclear submarine programme – a marine reactor that can be integrated with a submarine platform, nuclear-tipped missiles that can be launched from underwater, and the operational skills to run a nuclear submarine. The programme to build the platform, called the ATV, has been underway since the mid 1970s. The construction of a prototype has already taken more than three decades, highlighting the gap between India’s nuclear strategic ambition and its industrial and technological capabilities. The difficult challenge in developing a nuclear reactor for the submarine lies in its small size. This involves a lot more than simply scaling down the design of a traditional land-based reactor. Producing a small reactor involves sophisticated engineering skills. Although India’s Department of Atomic Energy has been building power and research reactors since the 1960s, designing and building the reactor for the ATV was an entirely different ball game. For one, the design of the reactor must cope with very high power densities in a limited space. Reducing the size of the reactor core requires that it be run on enriched uranium. The higher the level of enrichment, the smaller the potential size. Unlike in the traditional reactors, the fuel for naval reactors is not made of uranium oxide, but a uranium-zirconium metal alloy. The design aims at a long life for the reactor without any need for a fuel recharge. The long core life produces its own problems, when the fuel itself and the various materials at the heart 7

For a review of China’s minimum deterrent posture, see Jeffrey G. Lewis, The Minimum Means of Reprisal: China’s Search for Security in the Nuclear Age (Cambridge, MA: MIT Press, 2007). For a recent discussion of some of these issues, see Paul J. Bolt and Albert S. Willner, eds., China’s Nuclear Future (Boulder, CO: Lynne Reinner, 2006). For the history of China’s development of underwater nuclear deterrent, see John W. Lewis and Xue Litai, China’s Strategic Sea Power: The Politics of Force Modernization in the Nuclear Age (Stanford, CA: Stanford University Press, 1994). Vijay Sakhuja, “Sea-based deterrence and Indian security”, Strategic Analysis, Vol. 25, No. 1, (April 2001), p. 31.

of the reactor suffer radiation damage and become vulnerable to cracks. Accidents in naval nuclear reactors tend to be higher than in normal reactors. Therefore, building a small, mobile, safe and easy to use nuclear reactor has tested even the advanced countries. That India is about to launch the ATV implies that the Department of Atomic Energy (DAE) and its partners have overcome many of the troubles of designing the reactor and have become confident about their designs. There is no doubt that India’s mastery of naval nuclear propulsion is some distance away. However, it is likely to improve as it tests and eventually operates the ATV. Thanks to the extraordinary secrecy surrounding the project, there has been little official information available on the programme. As it inched towards completion in recent years, the veil over the ATV programme has been lifted a little. In early 2009, the Indian Defence Minister A. K. Antony announced that most bottlenecks to the ATV project have been overcome and that the vessel would be launched this year. 11 According to a variety of unconfirmed reports, the Indian navy has the authorisation to build at least five nuclear submarines based on the ATV. 12 Based on media reports, the ATV will be powered by a 100 MW reactor, built by the DAE in collaboration with the Defence Research and Development Organisation and the navy. Reports claim that the ATV could be 124 metres long and have a displacement of 4,000 tonnes. The test bed reactor, apparently being built at the Kalpakkam Indira Gandhi Centre for Atomic Research in the DAE complex at Kalpakkam outside Chennai, went critical in 2004 and since then has been undergoing tests on mating it with the hull of the ATV. The enriched uranium fuel for the reactor has apparently been produced at the Rare Materials Project at Ratnahalli near Mysore in Karnataka. The delay in the supply of enriched uranium has reportedly been one of the many reasons that caused such long delays in the launch of the first ATV, now christened INS Arihant. The cost of the programme until mid-2009 has been estimated at around US$3 billion. 13 For India, it was probably never a question of cost but of mastering an important strategic technology. For New Delhi, it was also about the determination to catch up with China on the development of a sea-based deterrent. 14 While India has every reason to be pleased at the progress of the ATV project, there will be special satisfaction at the kind of organisational and technological innovations that facilitated forward movement. The ATV project not only brought together a number of governmental agencies, but also the private sector. Larsen & Toubro, which has emerged as a major player in India’s domestic private sector shipbuilding industry, has been associated with the Indian nuclear and space programmes, and appears to have contributed significantly to the success of the ATV. 15 While much of the work on ATV has been indigenous, it is quite clear that cooperation with Russia has played a rather critical role. The Russian decision to lease a 11

Manu Pubby, “India’s First Nuke Sub Soon”, The Indian Express (New Delhi), 12 February 2009; available at <http://www.indianexpress.com/news/indias-first-nuke-sub-soon-antony/422389/> accessed on 16 July 2009. For a comprehensive survey of public sources, see The Federation of American Scientists, “The Indian SSN Project: An Open Literature Analysis”, available at <http://www.fas.org/nuke/guide/india/sub/ssn/part01. htm> accessed on 10 July 2009. Varun Sood and James Lamont, “India set to launch nuclear submarine”, Financial Times (London), 9 July 2009, available at <http://www.ft.com/cms/s/0/c4d49e94-6c1e-11de-9320-00144feabdc0.html> accessed on 15 July 2009. Rajat Pandit, “India worried about china’s growing N-sub prowess”, Times of India (New Delhi), 6 May 2008, p. 1. Among the more informative reports is, Rahul Bedi, “India’s Nuclear Powered Submarine Project Moves Ahead”, The Tribune (New Delhi), 19 May 2007, p. 9.

Charlie I Class (named INS Chakra by India) nuclear submarine to India during 1988-91 was an important catalyst in the evolution of the ATV. Russian crew reportedly operated the reactor and gave the Indian naval and scientific personnel valuable training in the management of a nuclear submarine. 16 Besides the training function, the Chakra became a valuable test bed for developing indigenous capabilities in the design, maintenance and operation of naval reactors. Cooperation with Russia has been revived with the Indian decision to lease one or two Akula II class submarines from Russia. The deal first announced in the early years of this decade involved Indian financing of the building of the boats to be leased. According to one report, the total cost of building two Akula class submarines for India and the training of the crew was to cost up to US$2 billion. 17 Since then there were many difficulties in implementing the deal, 18 and the vessel that was to be sent out to India had a major accident in November 2008. Amidst a general political controversy in New Delhi over the reliability of Russia as an arms supplier, Moscow and Delhi have now agreed to speed up the implementation of the deal, that is reported to have been scaled down to the lease of just one boat. Displacing 12,000 tonnes, the Akula II class submarine is believed to be quieter and deadlier than any other nuclear attack submarine in the Russian fleet. 19 Unlike the previous time, after the initial training in Russia, the Indian crew is expected to fully man the operations of the leased submarine. Until now the external cooperation on the nuclear submarine project has been limited to Russia. There are indications that India is also exploring the possibilities of such cooperation with France, which is building Scorpene advanced diesel submarines in India. 20 The third element of India’s maritime nuclear project is the development of an appropriate nuclear tipped missile system for the ATV and its eventual nuclear submarine fleet. Some analysts suggest that India might originally have conceived the nuclear submarine as an attack boat rather than a platform to carry nuclear armed missiles. All reports now indicate that India is developing two naval nuclear systems for its sea-based deterrent. 21 One is the Dhanush, a ship-based surface to surface missile. A variant of the Indian Prithvi missile, the Dhanush, with its short range of 300 kilometres may not be of strategic value to the navy. It later has turned out that the Dhanush was a test bed for the development of other technologies, rather than the vehicle for the sea-borne deterrent. India’s current hopes for underwater delivery of nuclear weapons rest on the Sagarika system that is also often referred to as the K-15 missile. In the media reports there has been considerable confusion on the name and the nature of the technology. While some have called it a ballistic missile, others have referred to it as a cruise missile. But the successful underwater test of a ballistic missile in 2008, with an estimated range of about 700 kilomteres seemed to give the basic test bed for 16

This Western claim is apparently based on Russian sources. See, NTI, “Submarine Proliferation: India, Current Capabilities”, December 2008; available at <http://www.nti.org/db/submarines/india/index.html> accessed on 10 July 2009. “Project 971 Shuka-B Akula class”, available at http://www.globalsecurity.org/military/world/india/sakula.htm accessed on July 16, 2009. Vera Ponomaryova, “Nuclear subs on lease from Russia to India,” 16 August 2005, Bellona Foundation website – <http://www.bellona.no/en/international/russia/nuke-weapons/nonproliferation/39412.html> – accessed on 16 July 2009. RIA Novosti, “India-bound Russian Nuke Sub Repaired, Resumes Sea trials”, 10 July 2009, available on <http://sify.com/news/fullstory.php?a=jhkp4bebdeb&title=India_bound_Russian_nuke_sub_repaired_resum es_sea_trials> accessed on 16 July 2009. Siddharth Srivatsava, “India’s nuclear submarine plan surfaces”, Asia Times Online, 20 February 2009; available at < http://www.atimes.com/atimes/South_Asia/KB20Df02.html> accessed on 16 July 2009. Robert S. Norris and Hans M. Kristensen, “Nuclear Notebook: Indian nuclear forces, 2008”, The Bulletin of the Atomic Scientists, Vol. 64, No. 5, pp. 38-40.

a long sought secure deterrent capability for India. 22 India is also reported to be developing a cruise missile, called Nirbhay, similar to the United States’ Tomahawk SLCM. According to reports, Nirbhay might be capable of delivering nuclear warheads up to a range of 1,000 kilometres from a variety of platforms including submarines. 23 Catching up with China While the launch of the ATV marks India’s arrival on the nuclear maritime domain, its seaborne nuclear capability is a long distance away from becoming a credible force. As a prototype, the ATV itself needs many years of sea trials which will in turn allow the Indian naval and nuclear establishments to tweak the design and make it an effective delivery system for underwater nuclear weapons. The launch certainly stirs up nuclear nationalism, and mobilises stronger political and financial support in favour of catching up with the nuclear naval capacities of Beijing. Meanwhile, it must be borne in mind that China itself is in the process of closing its long gap with the United States on underwater technologies. India will have to overcome many of the same difficulties China had to in the last few decades on the path to a credible underwater deterrent. Given its international isolation immediately after the proclamation of the People’s Republic, its conflict with the United States in the 1950s, the overwhelming superiority of the United States and Japanese navies in the Western pacific, and the variety of maritime territorial disputes with its neighbours in East Asia and Southeast Asia, China has always emphasised the importance of submarines. Even in the current phase of its naval modernisation, building advanced conventional submarines in large numbers has remained an important priority for China. As it declared itself a nuclear weapon power after the first test in 1964, China has given considerable emphasis to building both nuclear attack submarines (the SSNs) as well as ballistic missile carrying nuclear powered delivery systems (the SSBNs). The Chinese political leaders, naval commanders and the nuclear scientific establishment fully understood the significance of the twin development of SSNs and SSBNs. From 1965 to 1968, the People’s Liberation Army Navy (PLAN) focused on the development of the experimental Type-091 Han class SSN. Although the turbulence of the Cultural Revolution had its impact on the programme, the first Han class vessel was launched at the end of 1971. The same design was used to develop a separate SSBN (Type 092) of the Xia class. It is believed that not more than two operational Xia class SSBNs were built, given the serious difficulties with developing a safe and reliable reactor. The first of them was deployed in the early 1980s. On 15 October 1985, China launched its JL-1 submarine launched missile from the Xia class platform, but it was considered a failure. 24 With the Xia class falling below expectations, the Chinese intensified their efforts during the 1980s and 1990s to develop a credible SSBN equipped with a powerful SLBM. China was fortunate to have a strong naval commander, Admiral Liu Huaqing, who was determined to build a powerful nuclear force at sea. Admiral Liu, who is often called China’s Mahan, was the head of the PLAN during 1992-98 and the powerful Vice Chairman of the Central Military Commission (1989-97). During his stewardship, Liu succeeded in laying the foundation for a new generation of the SSN as well

22 23

Ibid. See “Sagarika/K-15/Shourya/Nirbhay: Weapons of Mass Destruction”, Global Security, available at <http://www.globalsecurity.org/wmd/world/india/sagarika.htm> accessed on 16 July 2009. Ta-Chen Cheng, “The Evolution of China’s Strategic Weapons”, Defense and Security Analysis, Vol. 22, No. 3, pp. 248-49.

as the SSBN. The Chinese political leaders fully backed this effort. 25 As a result of these efforts, China launched its second generation SSN called the Shang class, also called Type 093. Two Shang class vessels were launched in 2002 and 2003. The first pictures of this submarine came into public view in 2008. Faster, stealthier and exponentially lethal, the Shang class submarines have the capability to operate in the Indian Ocean. If the Shang class submarines give China a significantly improved capability to attack other naval vessels, it is the Jin class (Type 094) SSBNs that promise to showcase China’s rise as a nuclear weapon power. Western analysts assess that China may build five or six Jin class submarines in the coming years. Each of these will be equipped with 12 powerful long-range SLBMs. The JL-2 missiles have an estimated range of at least 7,200 kilometres and its warheads are believed to have sophisticated penetration aids. When inducting these into service, China would more than match Britain and France in terms of the technological sophistication of its nuclear arsenal and its credibility as a survivable second strike force. 26 The Sino-Indian Nuclear Dynamic The Indian navy has been closely monitoring the extraordinary scale and scope of the modernisation of China’s naval nuclear capabilities and their increased operational patrols. India is conscious of the huge nuclear gap that separates it from China. But after the launching of the indigenous nuclear submarine INS Arihant in July 2009 and the acquisition of the Russian Akula II class submarine, as well as INS Chakra by the end of 2009, the Indian maritime strategic community will be confident of its ambitious goal to narrow the nuclear gap with China. As Beijing and New Delhi take their nuclear weapons to sea, they begin to impact on the strategic calculus of the other great powers. The recent advances in the modernisation of China’s naval forces have begun to ring alarm bells in the United States. Many United States analysts have begun to question the wisdom of America’s naval force reductions at a time when China is improving its underwater war-fighting capabilities. Some argue that China might be able, in the not too distant future, to constrict the current absolute freedom of movement that the United States navy enjoys in the Western Pacific. In any case, the somewhat benign and condescending approach to Chinese naval and nuclear capabilities may be coming to an end in Washington. 27 The lower level of India’s emerging maritime nuclear capabilities is clearly not seen as a threat to the United States or the West. To be sure, those who view India’s nuclear arsenal from the perspective of non-proliferation will have anxieties about its emerging maritime dimension. In terms of official policy, the United States civil nuclear initiative towards India, unveiled by George W. Bush in July 2005, is premised on two very different propositions. One is that India does not pose a nuclear or political threat to the United States. The other is that while the United States will not help advance India’s military nuclear capabilities, it will facilitate civilian nuclear cooperation with India and step up conventional defence cooperation. 28 Despite many reservations among the Democrats, the Obama Administration 25

Andrew S. Erickson and Lyle J. Goldstein, “China’s Future Nuclear Submarine Force: Insights from Chinese Writings”, United States Naval War College Review, Winter 2007, Vol. 60, No. 1, pp. 56-60. Andrew Erickson and Michael Chase, “An Undersea Deterrent?”, United States Naval Institute Proceedings, Vol. 135, No. 6, pp. 36-41. For a comprehensive overview of the new American debate on Chinese maritime nuclear capabilities, see Andrew S. Erickson, Lyle J. Goldstein, William S. Murray and Andrew R. Wilson, eds., China’s Future Nuclear Submarine Force (Annapolis, MD: The China Maritime Studies Institute and the United States Naval Institute Press, 2007). For a review of the origins of the India-United States nuclear deal, see, C. Raja Mohan, Impossible Allies: Nuclear India, United States and the Global Order (New Delhi: India Research Press, 2006).

has chosen to persist with the Bush logic of the civilian nuclear deal. What we do not know at this stage, is whether the rapid expansion of the Chinese nuclear capability will eventually result in United States assistance towards India’s maritime nuclear project. Although the current global non-proliferation regime bars the United States from assisting the nuclear weapons programmes of other countries, it does not prohibit cooperation on military nuclear propulsion. 29 That is indeed the basis on which Russia has been cooperating with India on the non-explosive military uses of nuclear energy. There are no signs of this debate in Washington at this stage and nor is India seeking such cooperation. But as the Indian and American navies draw closer together in the Indian and Western Pacific oceans, the China factor is indeed an important driver. 30 It will be interesting to watch whether naval nuclear propulsion will emerge as a potential area of India’s cooperation with the United States and other Western powers. Meanwhile, the maturation of the Chinese maritime nuclear arsenal and successful inauguration of the India’s naval nuclear project demand that Beijing and New Delhi begin a serious conversation of nuclear weapons issues. While China and India do discuss a range of contentious bilateral issues, the nuclear question is not one of them. China has tended to take a formalistic view that India is not a recognised nuclear weapon power and therefore Beijing has nothing to discuss except non-proliferation. India has been deeply concerned about Chinese nuclear cooperation with Pakistan in the past and Beijing’s opposition to the United States-India civil nuclear initiative. China, on the other hand, has seen the United States-India nuclear rapprochement as driven by a shared agenda of limiting, if not containing Chinese power in Asia. Given the danger of letting these negative perceptions fester, Beijing and New Delhi must launch a comprehensive nuclear dialogue that will touch on all relevant issues, including the developments on the maritime domain.

oooOOOooo

James Clay Moltz, “Closing the NPT loophole on exports of naval propulsion reactors”, The Nonproliferation Review, Vol. 6, No.1, pp. 108-114. See for example, Lisa Curtis, “United States-India Relations: The China Factor”, Heritage Foundation Backgrounder, No. 2209 (Washington, DC: November 25, 2008); Harsh V. Pant, “India in the Asia Pacific: Rising Ambitions with an eye on China”, Asia Pacific Review, Vol. 14, No. 1, 2007, pp. 54-71; James R. Holmes and Toshi Yoshihara, “China and the United States in the Indian Ocean: An Emerging Strategic Triangle”, United States Naval War College Review, Vol. 61, No.3, 2008, pp. 41-60.

ISA S Insights No. 79 – Date: 28 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’s Foreign Direct Investment Flows: Trying to Make Sense of the Numbers 1 Sasidaran Gopalan and Ramkishen S. Rajan 2 One of the noteworthy dimensions of India’s increasing integration with the world economy has been the increase in both gross foreign direct investment (FDI) inflows into and outflows from the country over the last decade. The simultaneous spurt in both FDI inflows and outflows has meant that FDI has not been a significant source of balance of payments financing on a net basis, at least until 2006 (Figure 1). The rise of India as a source and host of FDI has begun to generate a sizeable literature on the determinants and characteristics of such flows at an aggregate level. However, much less work has been devoted to the analysis of FDI inflows and outflows at the bilateral level, primarily due to the paucity of data. 1.

Data Concerns

To be more specific, the data on bilateral FDI outflows is rather sketchy; the Ministry of Finance reports the value of aggregate FDI outflows from India and the value of approvals of FDI outflows at a bilateral level. 3 However, a consistent time series of the actual value of outflows with a country-wise breakdown does not seem to be available in the public domain. 4 While data on actual FDI inflows is reported by the Department of Industrial Policy and Promotion (DIPP) at a disaggregated country level, 5 there are serious concerns about the usefulness of the bilateral FDI inflows data that is available in the public domain.

This paper builds upon initial work in R. S. Rajan, “Outward Foreign Direct Investment from India: Trends, Determinants and Implications”, Institute of South Asian Studies, Working Paper No. 66, June 2009. Assistance with the merger and acquisition data by Rabin Hattari is gratefully acknowledged. Sasidaran Gopalan is a Research Associate at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore. He can be contacted at isassg@nus.edu.sg. Ramkishen S. Rajan is a Visiting Senior Research Fellow at ISAS and an Associate Professor at George Mason University, Virginia, United States. He can be contacted at isasrsr@nus.edu.sg or rrajan1@gmu.edu. This information is available from the Department of Economic Affairs, Ministry of Finance, India, accessible at http://finmin.nic.in/the_ministry/dept_eco_affairs/dea.html. Only since April 2008 has the Reserve Bank of India started publishing this information (actual value of FDI outflows from India with a country-wise breakdown) in an article titled, “Indian Investment Abroad in Joint Ventures and Wholly Owned Subsidiaries” in its monthly bulletin. Accessible at http://rbidocs.rbi. org.in/rdocs/Bulletin/PDFs/83887.pdf. This information is available in the various issues of the Secretariat for Industrial Assistance newsletters compiled by the DIPP, Ministry of Commerce & Industry, India, accessible at http://siadipp.nic. in/publicat/pub_mn.htm.

As an example, the data on FDI inflows into India almost always reveals Mauritius as the largest source of foreign investment flows into the country. But Mauritius is widely regarded as an offshore financial centre (OFC) that is used by most foreign investors as an intermediary to reach India, predominantly to capitalise on the tax rebates that the country offers so as to minimise their overall tax burden. Conversely, as Indian companies have become more globalised, many have chosen to either use their overseas locally-incorporated subsidiaries to invest overseas, or have established holding companies and/or special purpose vehicles in OFCs, or other regional financial centres such as Singapore or Netherlands to raise funds and invest in third countries. Apart from this so-called transhipping, some parts of these inflows, from Mauritius in particular and also other OFCs, could also be round-tripping back to India to escape capital gains or other taxes or for other reasons, not unlike the investments dynamics between China and Hong Kong, although on a much smaller scale. 6 Thus, the bilateral FDI data – which only captures the actual flow of funds rather than ultimate ownership – may offer a rather distorted picture of the extent of the linkages between India and the rest of the world. Consequently, the usefulness of such data for research and policy analysis needs to be questioned. Any inference from this sort of data tends to give a misleading picture of reality. In order to understand the actual or de facto real linkages between India and the rest of the world, one would need to examine the data on actual ownership of the foreign investment flows. While data on individual firms that have invested in India may be available via firmlevel surveys, for a more complete picture of FDI inflows into the entire economy one would need to examine an aggregation of all such firms investing in India from different parts of the world. This, needless to say, would be a prohibitively costly exercise. A more feasible alternative would be to examine the data on mergers and acquisitions (M&A) made by global firms in India and Indian firms globally. The M&A data, which tracks the actual ownership of purchases and sales, are maintained by several private commercial entities such as the Bloomberg, Capital IQ, Dealogic, Thomson Financial, Zephyr, etc., (unlike the data on FDI flows, which is compiled by the national sources). 2.

Inward and Outward Direct Investments to and From India

Figures 2a and 2b respectively capture the data available on FDI inflows (reported by the Indian government) and the M&A purchases (reported by private commercial entities) that have taken place in India (by source of origin) for the period of 2000-07. A comparison of the two sets of data clearly reveals the previously discussed inconsistencies. 7 It is interesting to note that most of the OFCs such as Mauritius (mainly), Cyprus, Cayman Island and Bermuda, which comprise a nearly 50 percent share of the total FDI inflows (as reported by the government sources) do not even appear in the data on inbound M&A to India. Focussing on the FDI data, only 18 percent of inflows to India have been by the United States and the United Kingdom combined, while about 15 percent is by the non-United Kingdom European countries (mainly Netherlands, France and Germany) and about ten percent by East Asia (mainly Singapore and Japan). In contrast, the M&A data on foreign acquisitions in India tells quite a different story. The United States is the single largest 6

For a discussion on China-Hong Kong flows within the larger context of intra-Asian FDI flows, see Hattari and Rajan (2009). “Understanding Bilateral FDI Flows in Developing Asia,” Asian Pacific Economic Literature, forthcoming. To ensure a degree of comparability with the FDI data we have only included M&A with over 10 percent equity stake in our direct comparisons (Figures 2a, b and 4a, b).

acquirer of Indian companies (35 percent), followed by the United Kingdom (16 percent) and the rest of Europe including Netherlands (27 percent) and East Asia (18 percent) (distributed between Japan, Singapore, Malaysia and Hong Kong). Therefore, almost all of the inbound acquisitions to India have been made by the United States, Europe and Asia. This appears to offer a far more informative geographical breakdown of sources of direct investment equity flows to India compared to the FDI data noted in Figure 2a. It would appear, therefore, that a great deal of the acquisitions by the United States and United Kingdom in particular have been channelled via Mauritius. As noted, similar bilateral data on India’s actual FDI outflows are not publicly available on a systematic time series basis. While approvals may not provide a fully realistic picture as not all approvals are realised, available data at least for aggregate actual outflows suggests that there is a reasonable degree of correlation between approved and actual outward FDI flows from India. 8 Accordingly, the outward FDI approvals data should offer some useful insight when compared to data on India’s M&A purchases overseas. It is well-known that Indian businesses have been very active in overseas investments in the last few years, particularly since 2006 (Figure 3). Anecdotal evidence and examples point to the fact that many of these investments have been in developed countries such as the United States, the United Kingdom and the rest of Europe. Notable instances would be Tata Steel’s purchase of Corus and Tata Motors purchase of Jaguar and Land Rover in the United Kingdom and Hindalco’s acquisition of the Canadian aluminium giant Novelis (Table 1). 9 Referring to Figure 4a, one notices that developed countries such as the United Kingdom and the United States have surprisingly small shares of India’s approved outward FDI (six percent each) for recent periods for which detailed data are available (2002-08) compared to Singapore (22 percent), Netherlands (15 percent) and Mauritius and other OFCs in total (25 percent). Hence, over 50 percent of India’s approved FDI appears to have been flowing towards the financial centres (regional and offshore). Examination of M&A purchases for more or less the same period (2000-07), however, reveals quite a different picture (Figure 4b). Canada emerges as the top host country for India’s outbound acquisitions with a 34 percent share, followed by the United States with a 24 percent share. While Indian companies have undertaken a number of varied purchases in the United States, the acquisitions in Canada have been concentrated in resources, including Novelis mentioned previously. Apart from these, around 16 percent of India’s acquisitions have been aimed at resource-rich countries (Russia, Egypt, Australia and South Africa) and the rest to the United Kingdom and Europe (17 percent). The Tata Motors acquisition of Jaguar and Land Rover Brands from the United Kingdom do not show up in our data as they were concluded in early 2008. It is likely that an extension of the data to 2008 would see a jump up in the United Kingdom as a source of Indian outbound M&A, as would Europe in general, given recent sizeable purchases by India’s Suzlon Energy of Indian firms and the German wind-power company, REpower, in 2009 (Table 1).

This trend is visible when one compares Tables 6 and 7 in the chapter on “Indian Investment Abroad in Joint Ventures and Wholly Owned Subsidiaries: 2008-09 (April-March)”, RBI Monthly bulletin (July 2009). It is also likely that this association between approval and actual is much tighter in the case of India’s outflows compared to inflows. Unlike the pie charts (Figures 2a,b and 4a,b), since we are drawing on secondary sources, the other Tables and Figures are not restricted to purchases over ten percent equity stake, but it is likely that most are.

Singapore’s Unique Position

The data in Figures 3a and 3b suggests that Indian companies have been using Singapore, Netherlands and OFCs as intermediaries to purchase assets overseas, primarily in the developed world and resource-rich countries. For instance, Tata Steel is said to have financed the Corus acquisition partly via a debt arranged by a consortium of banks at Tata Steel (United Kingdom) as well as in the form of bridge finance by its subsidiary Tata Steel Asia Singapore. Therefore, the deal may not even have shown up in India’s FDI statistics or could have shown up as being concluded via Singapore. While the use of OFCs as tax havens is well understood, both Singapore and the Netherlands are attractive hosts for holding companies from India and elsewhere in view of the low and simple tax rates, the large number of double tax treaties between the two countries and rest of the world, working knowledge of English, human capital, excellent logistics and air and sea connections. This explains their attraction to Indian businesses that are eager to internationalise their operations. Indian businesses have been particularly aggressive in investing in Singapore since the coming into force of the Comprehensive Economic Comprehensive Agreement (CECA) in August 2005. The India-Singapore CECA, which covers agreements relating to trade in goods, services and investments, was the first bilateral arrangement that Singapore entered into with a South Asian country, and likewise has India's first such agreement with a developed country. Amongst the several features of the agreement, one key provision which has assumed significance from the investment perspective is the renewed Double Taxation Avoidance Agreement (DTAA). The India-Singapore DTAA is broadly modelled along the lines of the existing Indian treaty with Mauritius, with exemptions for capital gains tax on profits from the sale of shares. Owing to the round-tripping concerns between India and Mauritius noted previously, the DTAA between India and Singapore has included some key provisions to minimise this problem. 10 It may well be that over time, there may be a greater a shift of FDI from Mauritius to Singapore by both Indian companies needing a springboard to investing globally, and vice versa for Singaporean and other foreign companies looking to enter the Indian market. Already, there has been a spurt in the establishment of Indian companies in Singapore (from 1,200 in 2002 to over 3000 or so by 2008), 11 and while the FDI data clearly overstates the significance of Singapore as a destination for Indian investments for reasons discussed before, the city state still constitutes a substantial portion of India’s overall outbound M&A (seven percent compared to 22 percent of FDI outflows from India). Apart from Natsteel’s acquisition by Tata Steel in 2005, Indian educational institutions and IT companies have been prominent investors from India into Singapore, while many other Indian companies use Singapore as a regional and even international headquarters. On Singapore’s part, the Economic Development Board has consciously tried to woo companies from India and elsewhere to use the city state as a base by offering attractive tax incentives or grants under the Regional Headquarters Award or International Headquarters Awards. 4.

Conclusion

To conclude, one clearly has to be cautious when comparing the two sets of data (FDI versus M&A), as the M&A data excludes Greenfield investments. While M&A are growing as the 10

For more details on the key provisions of the India-Singapore CECA, see http://app-stg.mti.gov.sg/data/ article/116/doc/FTA_CECA_Information%20Kit.pdf. See http://in.rediff.com/money/2008/mar/19india.htm.

preferred mode of foreign entry, the M&A data are not from national sources. As discussed, they are sourced from commercial entities and there are questions about consistency in terms of company coverage and definitions, among other factors. In addition, tracking transactions based on ownership is always tricky, particularly given the increasing complexity of global businesses. For instance, is Novelis considered a company from the United States or Canada, since it is headquartered in Atlanta, Georgia, but registered as a Canadian corporation? This said, the important point is that Indiaâ&#x20AC;&#x2122;s FDI data at a bilateral level may offer quite a misleading indication of the extent of real linkages and should be interpreted with extreme caution, a point that researchers and analysts have failed to appreciate adequately.

Figure 1: Capital Inflows to and Outflows from India (2000-08) USD Billion 35 30 25 20

FDI Inflows

FDI Outflows

10 5 0 2000-

2001-

2002-

2003-

2004-

2005-

2006-

2007-

Years

Source: Based on Reserve Bank of India Monthly Bulletin (July 10, 2009).

Figure 2a: Share of Total FDI Inflows to India (Per Cent) by Country of Origin 2000-07 1 (Top Ten Source Countries) OFCs

4% 3

Europe Japan

UAE

Others

Mauritius 45%

5% Netherlands 6% Singapore

USA 10%

Source: Ministry of Commerce and Industry, Department of Industrial Policy and Promotion India, http://siadipp.nic.in/publicat/newslttr/apr2008/index.htm (Accessed on 24 July 2009).

Figure 2b: Share of Total Inbound Acquisitions in India (Per cent) 2000-07 1,4 (Top Ten Source Countries) Netherlands

Hong Kong 2%

Japan

South Africa 1%

Others

Malaysia

United States

35% Singapore United Kingdom

16%

Europe 23%

Notes: 1) FDI data are reported for the financial year; M&A data are reported for the calendar year. 2) OFCs – Aggregation of shares of Cyprus, Channel Island, Cayman Island and Bermuda excluding Mauritius. 3) Europe – Aggregation of shares of all of Europe except Netherlands, the United Kingdom and Russia. 4) Based on data with over 10% equity to be consistent with definition of FDI. Source: Authors’ compilations from Zephyr Database.

Figure 3: Indian Outbound Mergers and Acquisitions 187

249

20 Value (US$ billions)

15 10 5

No. of Deals

136

2004

2005

0 2003 *Year to Date

2006

2007

2008

2009*

Years

Source: Reproduced from The Economist, May 28th, 2009 based on data from Dealogic. http://www.economist.com/businessfinance/displaystory.cfm?story_id=13751556, (Accessed on 24 July, 2009).

Figure 4a: Share of Total Outward FDI Approvals by India (Per Cent) 2002-08 1 (Top Ten Destination Countries) Sudan 2%

UAE

Others

13%

Singapore 22%

United States 6% United Kingdom

OFCs

18%

Mauritius

Netherlands

Europe

15%

Source: Ministry of Finance, Department of Economic Affairs http://finmin.nic.in/ the_ministry/dept_eco_affairs/dea.html (Accessed on 24 July, 2009).

Figure 4b: Share of Total Outbound Acquisitions by India (Per Cent) 2000-07 1 South Africa 1%

(Top Ten Destination Countries) Australia

Others

Europe3

12% UK

Canada

34%

Egypt 6%

Singapore

Russia

USA

24%

Notes: 1) FDI data are reported for the financial year; M&A data are reported for the calendar year. 2) OFCs – Aggregation of shares of Cyprus, Channel Island, Cayman Island and Bermuda excluding Mauritius. 3) Europe – Aggregation of shares of all of Europe except Netherlands, United Kingdom and Russia. 4) Based on data with over 10% equity to be consistent with definition of FDI. Source: Authors’ compilations from Zephyr database.

Table 1: Selected Outbound M&A Transactions of over US$100 million (as of mid-2008) Acquirer

Foreign target

Target industry

Target country

Approximate deal value (US$)

Tata Steel Ltd. Hindalco Industries Ltd. Sterlite Industries India Ltd. Tata Motors Ltd.

Corus Group PLC Novelis Inc.

Steel Aluminum

U.K. Canada

14.85 billion 6 billion

Aserco Inc.

Mining

U.S.

2.6 billion

Ford Motors Co.’s Jaguar Limited and Land Rover Holdings Algoma Steel Inc. Whyte and Mackay Ltd. 30% stake each in PT Kaltim Prima Coal and PT Artumin Indonesia General Chemical Industrial Products Inc. 30% stake in Energy Brands Inc. Betapharm Arzneimittel GmbH Infocrossing Inc.

Automotive

U.K.

2.3 billion

Steel Food and Beverages Energy

Canada U.K.

1.57 billion 1.18 billion

Indonesia

1.1 billion

Chemicals

U.S.

1.0 billion

Food and Beverages Pharmaceuticals

U.S.

677 million

Germany

571 million

Technology

U.S

568 million

Hansen Transmissions International NV

Industrial Machinery

Belgium

521 million

Terapia S.A

Pharmaceuticals

Romania

324 million

Thomson Multimedia cathode ray tube business Draxis Health Inc.

Technology

France

292 million

Pharmaceuticals

Canada

258 million

The Eight O’ Clock Coffee Co. Minacs Worldwide Inc.

Food and Beverages Technology

U.S.

220 million

Canada

172 million

Cerexagri S.A.

Chemicals

France

142 million

Azure Solutions Ltd. Advanta Netherlands Holdings BV

Technology Food and Beverages

U.K. Netherlands

140 million 119 million

Essar Steel Ltd. United Spirits Ltd Tata Power Company Ltd. Tata Chemicals Tata Sons Ltd. Tata Tea Ltd. Dr. Reddy’s Laboratories Ltd. Wipro Technologies Ltd. Suzlon Energy Ltd. through its subsidiary AE-Rotor Holding BV Ranbaxy Laboratories Ltd. Videocon Appliances Ltd. Jubilant Organosys Ltd. Tata Coffee Ltd. Aditya Birla Nuvo Ltd United Phosphorous Ltd. Subex Systems Ltd. United Phosphorous Ltd.

Source: Rajpal, D. and S. Parekh, “India Looks Outward: Cross-Border M&A by Indian Corporations – Canadian Considerations,” Stikeman, October 2008. Based on data from Capital IQ.

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ISA S Insights No. 80 – Date: 6 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 Rise of China: How it will Impact the World Shahid Javed Burki1 Abstract China is rising again, and this time, the change is taking place in response to Beijing’s policy responses to an external economic crisis. China has handled domestic economic crises before but this time around the structural impact on the country’s economy and its relationship with the outside world will be very different and considerably more profound. How China will change and how that change will influence the world – not just the global economy but also the international political order – are subjects that have begun to receive some attention in academic and policy circles. This paper attempts to bring out some of the issues that should inform the debate. China’s “Second Rise” There is now a consensus among policy analysts all over the world that China is well on its way to becoming a global economic powerhouse. Even if it does not become the world’s largest economy in three to four decades – as some believe that it might – it will certainly be the second largest behind the United States. The fact that the country’s economy has begun to recover at a faster pace than was expected in the spring of 2009 is a testimony to its strength. At that time, the global economy was in a deep recession and the Chinese dependence on markets in developed countries was expected to hurt it badly. However, that does not seem to have happened. The World Bank has now forecasted China’s growth rate at 7.2 percent in 2009. This is a long way down from the 11.9 percent in 2007 but it is still remarkable, given the sluggishness in other parts of the world. China is likely to achieve this impressive rate of growth in spite of a fall in the rate of real export growth from 20 percent in 2007 to eight percent in 2008 and to a forecast of minus 10 percent in 2009. According to one assessment, “China may have accounted for as much as two percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009”.2 This was possible since the country is no longer as dependent on exports for growth as was believed before the present crisis hit the globe. It may lead the emerging economies towards “decoupling”, a concept

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. Stephen Roach, “I’ve been an optimist on China. But I’m starting to worry”, Financial Times, 29 July 2009, p. 20.

according to which, these economies are no longer linked with the world’s rich nations but move in tandem with them. China’s rapid recovery from the setback caused to its economy by the deep recession in the West, in particular the United States, its largest trading partner, is owed to two facts – the aggressive response by the state to the decline in the rate of economic growth, and the rapid, but still not fully understood, restructuring of its economy. In 2008, Beijing moved decisively to prevent a sharp decline in the gross domestic product by injecting large sums of public funds into the economy. A stimulus package of 4,000 billion Renminbi (US$585 billion) was launched largely to further develop physical infrastructure – roads, railways, airports, ports, bridges and tunnels. The money would flow from the federal budget to the state-owned agencies responsible for building and maintaining the infrastructure. It would be spent quickly by bringing forward the projects that were already included in the current five-year plan or at the planning stages. Beijing’s main concern was with rising unemployment. Some 20 million workers – mostly migrants from the countryside – were laid off by the industries in the private sector that depended almost entirely on exports to the West. Under the Chinese system of human resource management, the unemployed workers were required to return to their villages. The Chinese were fearful that this return would make the countryside restive. Given the country’s history, Beijing is always alert to the possibility of “peasant rebellions”. One consequence of this large stimulus to the economy would be a significant increase in the share of the public sector in the Chinese economic system. This would reverse the trend of the last two decades when the authorities encouraged the state sector to shrink in size in the expectation that people who lost their jobs in the state-owned enterprises would find employment in the rapidly-expanding private sector. This approach differed markedly from the one adopted by the countries that once made up the Soviet Union and those in Eastern Europe as they switched their ideologies. Communist Europe adopted capitalism by following the “big bang” approach. The Chinese, ever pragmatic, opted for the gradualist approach. One consequence of the way the Chinese have handled the current economic downturn was the interruption of the process of transferring workers from the public to the private sectors of the economy by creating space for them in the state sector. Another unintended outcome of this would be the strengthening of the state’s role in the economy, which would be used to handle the opportunities created and problems posed by its unique urbanisation experience. China’s urban future will be shaped by the highly dense development all along the country’s east coast, from Dalian in the northeast to Guangzhou in the southeast. Within the next few decades, we will probably see 500 million people living in this narrow strip of land with a combined income of US$10 trillion and income per capita of US$20,000 in today’s dollars. What would turn into a ribbon of the national economy could later become multinational as the strip extends itself north to Korea and south to Vietnam and other countries in Southeast Asia. With this development will come a massive structural change in the Chinese economy. It will not be possible for the country to maintain land-intensive economic activities. Agriculture will become a smaller part of the economy as will the part of the manufacturing sector that needs a great deal of space. In a relatively new sub-discipline of economics – economic geography – focus has begun to be placed on the impact of density and distance on economic structures.3 Some of the hypotheses being developed by those who have begun to 3

See The World Bank, World Development Report, 2009: Reshaping Economic Geography, Washington DC, 2009.

practice this discipline will be tested in China, one of which is that with high density, distance also begins to matter. This would mean China’s increased reliance on the countries that have the physical space to conduct the activities that would be expensive and difficult in China, and that are physically close to it. This should bring South Asia economically closer to China. Impact on the Global System of China’s Second Rise How will this new China affect the global economy and its political system? It is possible to contemplate three possible futures for the global economy and how these might shape the international economic and political systems. All three will have considerable outcomes for South Asia and less obviously for Singapore. We can argue that the world is moving away from unipolarism when the United States was the undisputed leader, and going towards bipolarism. That this may happen has led to some talk about the G7 or G8 being replaced by the G2 – the United States and China. This would mean slowing the move towards the creation of a multilateral system that receives direction from a much broader grouping than the G7 or G8. In this context the role played by the G20 was seen to expand. This group includes, in addition to the G8, the 12 largest emerging economies from all parts of the world. It has met twice since November 2008 and was supposed to come up with a new structure for managing the global economy. This would have led to the development of a new form of multilateralism. This has not occurred and may not happen for the simple reason that the G20 was being built on top of a system that had an unstable foundation. The focus remained on the United States and Western Europe. The latter, in particular – and for the reasons that we will later mention briefly – is no longer the most vibrant part of the global economy. There may not, after all, be such a widening of influence and reshaping of the global economy as was believed would be the case only a few months ago. The G2 may emerge as the most important player in the new system. The slow move towards multipolarism may be preempted by the continuing strength of the economy of the United States and what I have called the “second rise of China”. That this may be happening was demonstrated by the inaugural session of the Strategic and Economic Dialogue between Washington and Beijing held in Washington in the closing days of July 2009. Both sides fielded large delegations and the discussions covered a large number of issues of interest to both countries. In his opening address, United States President Barack Obama said that the United States-China relationship will “shape the 21st century”. With that, he launched the G2 without giving it that name. It can also be argued that what we are seeing is the emergence of a multipolar world. Such global configuration will reshape not only the global economy but also the international political system. Systems with many poles are inherently less stable compared to those dominated by one or two powers, as was the case in the post-Second World War period. We could see a global system with as many as seven centres of economic activity – the United States, Japan, China, India, Brazil, South Africa and the European Union. The first six of these will try and create their own spheres of influence, while the European Union is still in a formative phase with a considerable dispersal of power among the nation states that belong to it. For as long as it does not find a way of working as one entity able to pull its weight in unison, it will not be able to create much of an impression on other parts of the world. Europe and Japan are also two parts of the post-industrial world that have as yet to find a way out of the demographic cul-de-sac in which they find themselves today. Declining population and

an aversion to compensate it through immigration will inevitably produce less economic dynamism. India may not be able to match China’s economic success any time soon.4 The remaining six economic centres could, if circumstances permit, create their own spheres with a greater prospect of clashes than is likely in a bipolar world. These clashes will occur in the areas where the different spheres come into contact. The most likely places where this may occur are in Central Asia , South Asia and the Middle East. Not only will this result in competition for geographic space – which was the reason in the past for clashes between centres of power, there will, in addition, be economic reasons for conflict. In a global system increasingly short of scarce resources vital for sustaining development, there will be immense competition for energy and water and possibly some minerals vital for development. A third scenario is also possible. If the United States and China become the two dominant powers, the global system will have three and not two tiers – the two global powers, four or five regional powers and the rest. In the former case each major power will seek to circumscribe the other by creating economic and political alliances close to the other power. This will create some tension of the type that characterised the “Cold War” period in which the United States and the Soviet Union challenged each other. The United States then built a chain of alliances around the Soviet Union and China – this was when it regarded China as an extension of the Soviet Union – while Moscow tried to recruit Cuba and a number of small Central American states as partners. Moscow also encouraged a number of developing countries to remain unaligned. The Non-Aligned Movement in which India played the role of leader had a consequence of limiting the reach of the United States. However, America and China may not confront each other the way America and the Soviet Union did during the Cold War. This is for two reasons, of which the first was that the United States and China are economically much more dependent on each other than the Soviet Union and the United States ever were. China needs the United States’ markets and technology, while the United States requires Chinese surplus capital. Furthermore, neither China nor the United States has expansionary territorial ambitions. That was not the case with the Soviet Union, which was constantly trying to expand its sphere of influence, if need be by the use of military force. This was what it did when it invaded Afghanistan in 1979. A G2 system, therefore, may be more stable. The current thinking in the United States emanating from a number of policy institutions on both coasts of the country sees the coming global arrangement from the bipolar perspective, in part because such a system is familiar to the policymakers as well as policy analysts. This is one reason why the administration of President George W. Bush paid so much attention to cultivating a new relationship with India. There is a simple idea behind this. Developing India as a counter-weight to China will further the United States’ interests, particularly in Asia. It is difficult at such a fluid period in the world history to predict with some confidence as to which of these three directions the global system will go. That said, a somewhat higher probability can be attached to the third of these three scenarios. Nonetheless, it would be useful to study all three with greater analytical depth.

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This point is well developed in a recent article by an Indian economist. See Shankar Acharya, “Rising India labors in the shadow of Asia’s real giant”, Financial Times, 29 July 2009, p. 7.

ISA S Insights No. 81 – 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

Understanding Bilateral Foreign Direct Investment Flows in Emerging Asia 1 Ramkishen S. Rajan and Rabin Hattari 2 Abstract This paper investigates trends, patterns and drivers of intra-Asian foreign direct investment (FDI) flows by analysing bilateral FDI flows involving 14 emerging Asian countries for the period 1990 to 2005. The data indicates that about 35 percent of FDI flows to emerging Asia between 1990 and 2005 have come from within the region. The paper finds that an augmented gravity model fits the data fairly well. As in the case of international trade, distance stands out as an important determinant of bilateral FDI flows, suggesting that transport costs and informational asymmetries are factors that could hinder intra-Asian FDI flows. Introduction Many Asian companies have become significant foreign direct investors abroad. According to some rough estimates, intra-Asian FDI flows accounted for about 40 percent of Asia’s total FDI inflows in 2004. If correct, this share is broadly comparable to the extent of intra-Asian trade flows. However, unlike trade flows, there has been little to no detailed examination of FDI flows between Asian economies at a bilateral level. This paper uses bilateral FDI flows data to investigate the trends and drivers of intra-Asian FDI flows in the period 1997 to 200405 based on data from the United Nations Conference on Trade and Development (UNCTAD). For developing economies, the two most comprehensive databases on FDI inflows and outflows are the International Monetary Fund-Balance of Payment (IMF-BOP) Manual and UNCTAD. Neither source divides FDI into mergers and acquisitions versus Greenfield investments. UNCTAD by far has the most complete FDI database, and unlike the IMF-BOP data, it compiles data on bilateral FDI flows – both inflows and outflows.

This brief draws on a longer forthcoming research paper by the authors in the Asia Pacific Economic Literature, 2009. 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 The World Bank Group South Asia PREM, Washington, D. C., United States. He can be contacted at rhattari@worldbank.org.

Our focus is on selected South Asian, Southeast Asian and East Asian developing economies. The economies included in our sample are Bangladesh, Cambodia, China, Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, Taiwan, Thailand, South Korea and Vietnam. Thus, apart from excluding West Asia and some smaller Asian economies in South Asia, Southeast Asia and East Asia, we exclude Japan but follow UNCTAD in defining the newly industrialised economies such as Hong Kong, Singapore, South Korea and Taiwan as “developing”. The Extent of Intra-Asian FDI Flows: Trends and Patterns The analysis of bilateral FDI between Asian economies is an exercise that is far from straightforward. UNCTAD data on inflows and outflows do not match exactly. It is apparent that UNCTAD FDI outflows data from source countries are incomplete for many of these economies. While some source countries have relatively complete data on outflows, others either have incomplete data or no data all. Different reporting practices of FDI data create bilateral discrepancies between FDI flows reported by source and host countries, and the differences can be quite large. For example, data on FDI flows to China as reported by the Chinese authorities and by the investing countries’ authorities differ by roughly US$30 billion in 2000, US$8 billion in 2001, and US$2 billion in 2002. Faced with these concerns, we draw inferences on FDI flows by examining FDI inflow data reported in the host economies as they are more complete and are available for all emerging Asian economies under consideration. In other words, we focus on the sources of inflows rather than destination of outflows. To keep the analysis manageable we examine data for the averages of 1997 to 2000, and 2001 to 2005 rather than on an annual basis. As apparent from Table 1, FDI inflows between Asian countries account for about one-third of all FDI inflows to the region, and is particularly pronounced between and within East Asian and Southeast Asian economies. According to Table 2, the average of FDI flows from Hong Kong to China and vice versa from 1997 to 2005 has been around US$24 billion and accounts for almost 48 percent of intra-Asia FDI. Apart from Hong Kong-China-Taiwan flows, bilateral flows between East and Southeast Asia are also significant. Almost threefifths of flows from East Asia to Southeast Asia have been destined for the relatively higherincome Southeast Asian economies, viz. Singapore, Malaysia, Philippines and Thailand. Singapore has attracted about half of all East Asian FDI destined for Southeast Asia. The city state has also been a major investor in China. Malaysia and Thailand have invested in China as well. Consideration of intra-Asian bilateral flows highlights a few other important characteristics of intra-Asian FDI flows. First, the leading investors from the region have stayed the same between 1997 to 2006, with Hong Kong as the top investor, followed by Singapore, Taiwan, Korea, China and Malaysia, in that order. The importance of China as a source of capital is noteworthy in that there has been a great deal of debate on whether China has diverted extraregional FDI from the rest of Southeast and East Asia. While Hong Kong’s FDI to China has remained stable between the two sub-periods, that from China to Hong Kong has declined. Second, intra-Southeast Asia investment accounted for 6.7 percent of cumulative FDI flows in Asia between 1997 and 2005. Comparing the two sample periods, intra-Southeast Asia’s investment share of cumulative FDI flows in Asia increased between the two periods from 3.6 percent to 7.4 percent, with Singapore as the leading investor in both periods. Singapore’s investments to its ASEAN neighbours, Malaysia and Thailand, have increased in the second

sub-period, while the city state’s investments to China and especially Hong Kong have declined. Third, FDI flows between East Asia and South Asia remain low and stagnant. It is important to note that the data analysed above exclude the offshore financial centers (OFCs) such as the British Virgin islands (BVI), Bermuda, Cayman islands, Mauritius and Western Samoa as sources of FDI. Insofar as at least some part of inflows from the OFCs involve FDI that originated from other Asian economies, and the inflows are not destined to return to their originating country (that is, trans-shipping as opposed to round-tripping), we may be undercounting the size of intra-Asian FDI flows. For instance, the BVI has consistently been the second largest source of FDI into China, surpassed only by Hong Kong, with the Cayman Islands and Western Samoa also being among the top ten in 2006. Similarly, investments from other sources may have been re-routed to India via Mauritius which has consistently been the top source of FDI to India. 3 Determinants of FDI Flows to Emerging Asia The previous section has highlighted the extent of FDI outflows from developing countries and more specifically, the intensification of intraregional FDI flows. But what explains the rise of intraregional FDI flows in Asia? This section undertakes a simple empirical investigation of some of the possible determinants of FDI flows from Emerging Asia to the rest of the region over the period 1990 to 2005. Can a gravity model framework that is commonly used to rationalise outward FDI flows from OECD economies be used to understand intra-Asian FDI flows? The aim of this section is to develop a relatively parsimonious model which includes commonly-used determinants as well as focus on specific bilateral variables. To this end we follow the basic gravity-type framework which argues that market size and distance are important determinants in the choice of location of direct investment’s source countries. The set of explanatory variables used are: real GDP per capita differentials of the host and source countries, the lag of real export of goods from the source country to the host country; change in bilateral real exchange rate of the source country with respect to the host country; the ratio of stock market capitalisation to GDP of the host country’s stock market, average corporate tax rates in the host country, a political risk index in the host country, a binary variable equal to 1 if the countries’ legal system is originated from the British common law system, a binary variable equal to 1 if the source and host countries have an operational free trade agreement (FTA); and a financial openness index in the host country. Our sample is based on an unbalanced panel of annual data of 14 source countries and ten host countries between 1990 and 2005. The data contains a large number of missing variables – approximately 48 percent – and a very small number of disinvestment figures – approximately 48 observations (shown in the data as negative). A missing variable for bilateral FDI may indicate either “unreported FDI” reflecting the fact that the two countries have chosen to report low FDI values as zero, or “no FDI”, indicating no FDI flows between the two. After a thorough observation of our data we feel that most of the missing variables in our dataset were due to the fact that there was “no FDI”. As for the negative disinvestment figures, we treated them as zero observations since they represent no investment in the destination countries. In all of our estimations we deal with the issue of censored data. 3

See S. Gopalan and Ramkishen S. Rajan, “India’s Foreign Direct Investment Flows: Trying to Make Sense of the Numbers”, ISAS Insights No. 79, 28 July 2009.

As summarised in Table 3, we considered four initial specifications, each building on the previous one. First, we start with a basic gravity model without additional explanatory variables in regression (1). We then add some real sector explanatory variables in regression (2), some financial variables in regression (3) and some institutional quality variables and other variables (corporate tax rates and bilateral FTA) in regression (4). In the four specifications the distance variable remains statistically and economically significant. Greater distance between the host and source country tends to lower bilateral FDI. As expected, larger countries receive (and send) higher volumes of FDI. A common language is also positively associated with more FDI inflows, though not statistically significant. This may at least partly be reflective of the fact that English dominates economic transactions within Asia. Regression (2) highlights that the difference in GDP per capita between host and source countries is positive and statistically significant, implying that the greater the degree of income divergence between the countries, the more likely there is to be bilateral FDI flows between the countries. While this may be indicative of FDI inflows being more horizontal rather than vertical in nature, the estimated coefficient is effectively zero, suggesting little economic significance of this variable. A one percent rise in lagged exports from the source to host economy is associated with 0.3 to 0.4 percent rise in FDI flows, suggesting a degree of complementarity between exports and FDI flows. This may indicate that exporting to a country first leads to greater market familiarity which in turn facilitates greater FDI flows to that country. A one percent real exchange rate appreciation of the source country vis-Ă -vis the host country by one unit is associated with an approximate 3.6 to 4.0 percent rise in FDI flows from source to host country. Both results are robust across the regressions. Regression (3) includes the financial market variables. The effect of stock market capitalisation in the host country is positive and statistically significant. A one percent increase in the ratio of market capitalisation to GDP in the host country is associated with a 0.4 percent rise in FDI inflows. We also tested for the impact of financial openness by including the well-known Chinn-Ito index. We found that a more financially open host country would seem to attract more regional FDI flows. However, this result should be interpreted with some caution, once again because of the limitation of the proxy used. In particular, the index may be too aggregated (that is, an economy may be financially closed to capital flows in general but what matters is its openness to FDI). In addition the index only captures de jure as opposed to de facto controls, and as is well known, controls tend to be weakened when there are sufficient incentives for agents to circumvent them. Regression (4) adds the institutional quality variables, the corporate tax rates of the host country, and bilateral FTA between the two countries. The political risk index has the correct sign, that is, lower political risk (proxied by a higher International Country Risk Guide rating) in the source country leads to more FDI inflows. The effects are economically and statistically significant; lower political risk of the host country is associated with greater FDI inflows. When the host country adapts a similar legal system to the British common law system, it appears to facilitate more FDI inflows. The finding concurs with a growing body of literature which suggests that Anglo-American law (that is, common law) improves the quantity of finance and the efficiency with which it is utilised. The presence of an operational FTA also facilitates FDI flows between the source and host countries. We find that if two countries have an operational FTA, then bilateral FDI flows between them will be increased by approximately 68 percent. This result is also robust. The corporate tax rate has a negative

sign and is statistically significant, implying that a lowering of corporate tax rates in the host country is associated with a rise in FDI inflows. However, this result must be interpreted with some cautious since we have not controlled for double tax agreements, tax sparing agreements, tax incentives and transfer pricing, among other factors, all of which may muddy the results. We performed a number of sensitivity analyses to ascertain the robustness of these foregoing results, including controlling for flows between China and Hong Kong. By and large, it appears that our results are highly robust to various checks. Concluding Remarks This paper has investigated the trends, patterns and drivers of intra-Asian FDI flows by analysing bilateral FDI flows involving 14 emerging Asian countries for the period 1990 to 2005. In other words, the primary contribution of this paper is that it is one of the first to examine the magnitudes and determinants of FDI flows from emerging Asian sources to other emerging Asian hosts. The data indicates that around 35 percent of FDI flows to emerging Asia between 1990 and 2005 have come from within the region, with over 90 percent of the flows originating from Hong Kong, China, Singapore and Taiwan. Clearly, some of these flows are overstated as they involve recycling or round-tripping of funds (especially between China and Hong Kong). Against this, trans-shipping from offshore financial centers have not been included, implying a degree of understating. While the intraAsian flows are substantial, two issues stand out. One, a large part of these flows pertains to bilateral flows between Hong Kong and China. Two, the data does not indicate that intraAsian flows are necessarily intensifying. Given that emerging Asia is investing aggressively overseas, what this suggests is that relatively more investments are being made outside emerging Asia. The paper finds that an augmented gravity model fits the data fairly well. The baseline regression is able to capture much of the variations in existing intra-Asian FDI flows. Most of the estimated coefficients are the correct signs and are statistically and economically significant. Intra-regional FDI activity between emerging Asian economies is driven by economic factors such as market sizes (especially in the host country), export intensity, real exchange rate changes, measures of financial depth, institutional factors (such as political risk and legal origin), an operational FTA and level of financial openness of the host country. As in the case of international trade, distance stands out as an important determinant of bilateral FDI flows even after the inclusion of a bilateral FTA, suggesting that transport costs and informational asymmetries are factors that could hinder FDI flows.

Table 1: Average of Intra-Asian Bilateral FDI Outward Flows

Table 2: Top Fifty Intra-Asian Bilateral FDI Outward Flows

Table 3: Gravity Model Results1, 2, 3

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ISA S Insights No. 82 – Date: 26 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

Myanmar: Effecting Positive Changes Iftekhar Ahmed Chowdhury 1 Introduction For a long time now, there has been no good news coming out of Myanmar. On the contrary, the bad publicity associated with Myanmar has made the world even more wary of the ironfisted sombre generals who govern the country. The artist, Andy Warhol, has said that everyone has ‘his fifteen minutes’ of fame. The generals in Myanmar are having theirs as well, but for the wrong reasons. The Lady and the Generals The latest in the series has been the conviction of Aung San Suu Kyi, the Nobel laureate in what has been called an ‘Alice in Wonderland’ trial with a ‘sentence first, verdict afterwards’ principle. The Court awarded her a three-year prison term, commuted immediately thereafter by an executive order of the strongman, Senior General Than Shwe to 18 months under ‘house arrest’, just long enough to prevent her from running in the election of 2010. She was accused of harbouring an allegedly unbalanced American John Yettaw, who, having had a vision that she may be assassinated, swam across a lake to her residence of incarceration. Ironically, Yettaw, who started it all and who was jailed for seven years, was allowed to go scot-free after an intercession on his behalf by the visiting United States Senator, James Webb. Knack for Nukes? Even earlier, there was another piece of sensational news last month reported by a reputed Australian strategic analyst, Professor Desmond Ball. Two Myanmar defectors code-named ‘Moe Joe’ and ‘Tin Min’ reported to him that North Korea was helping Myanmar build a secret nuclear reactor and plutonium extraction plant that would enable the production of an atomic bomb within five years. The nuclear complex was said to be hidden inside a mountain at Naung Laing in the country’s north. It runs parallel to a civil reactor being built at another site by Russia, in accordance with an agreement signed in 2007.

‘Moe Joe’ claimed that Myanmar was planning to send about 1,000 experts for further study and training at Russian nuclear facilities. The apprehensions in some western quarters is that, under a civilian legal cover, the junta was acquiring the capability to develop a nuclear programme. The defector also informed Professor Ball that North Korean experts were working to enrich uranium at Thabeik Kyin and, in return, Myanmar was providing ‘yellowcake’ – uranium in its raw form – to North Korea and Iran. ‘Tin Min’ reportedly stated that Tay Za, a close associate of General Than Shwe, told him that the authorities knew they could not compete with neighbouring Thailand on conventional weapons but desired “power play” superiority like North Korea. The defector had been a senior official in a company known as Htoo Trading, considered a conduit of Yangon for cooperation with Russia and North Korea. He was quoted in the media as saying that the Myanmar government’s explanation that it was engaged in a civilian nuclear programme was “rubbish”. Recently, David Albright, head of the Institute for Science and International Security in Washington, which tracks worldwide nuclear proliferation, said senior officials of the North Korean company, Namchongang Trading Corporation, have been under western sanctions for suspicions of assisting clandestine proliferation. However, many governments are skeptical about the reliability of the defectors’ reports. According to an Israeli analyst, Yossi Melman, the reports include Tel Aviv, which find no supporting evidence to prove the allegations. The same is the case with the Vienna-based International Atomic Energy Agency (IAEA), which oversees Myanmar’s nuclear programme. Myanmar has signed the Nuclear Non-Proliferation Treaty, and has Safeguard Agreements with the Agency. In its Report of May 2009, the IAEA, which checked 70 countries, including Myanmar, stated that there was no evidence that Myanmar had violated its declared intent to use its nuclear programme solely for civilian purposes. However, after a meeting with Prime Minister Abhisit Vejjajiva of Thailand, United States Secretary of State, Hillary Clinton said, “We know that there are growing concerns about military cooperation between North Korea and Burma, which we take very seriously”. It is noteworthy that she eschews any direct mention of any nuclear weapon programme. The Episode of the Armoured Personnel Carriers There is a story making rounds that, six years ago, Myanmar concluded a massive deal with Ukraine involving the purchase of 1,000 Armoured Personnel Carriers (APCs) of an estimated value of US$500 million. The procurement would vastly enhance Myanmar’s current numbers which stand at 325, and give it a hefty leg-up on its two neigbours on the east and the west, Thailand and Bangladesh, whose inventories are 950 and 180 APCs respectively. Initial reports of the transaction appeared in two reports in April 2004; one in ‘Irrawaddy’ published in Thailand which focuses on Myanmar and the other in the Russian media. The first was written by reputable ‘Myanmar-watchers’, William Ashton and Bruce Hawke. The credibility of the second was owed to Russian connections with Ukraine. The articles stated that the agreement was signed in May 2003 with deliveries spread over a 10-year period. The Ukrainian partner was said to be Malyshev HMB plant in Kharkov, with the sales arranged by the Ukranian company, UkrSpetsExport. It appears that the secrecy that tends to shroud these transactions fuels this kind of alarmist and distressing stories. The United Nations (UN) Register of Conventional Arms, a voluntary

mechanism aimed at promoting transparency, makes no mention of this deal. Neither does ‘The Military Balance’, the authoritative reference work produced by the International Institute for Strategic Studies in London. Dr Andrew Selth, a scholar who watches Myanmar at the Griffith Asia Institute in Australia, puts the issue in its proper perspective when he said, “As usual, we are left wondering what is going on inside Myanmar and what the generals are really thinking. The information gap is filled with rumours and speculation, encouraged by the activities of political lobbyists and those looking for a sensational story”. Ban Ki-moon’s Visit: A Missed Opportunity? Following the devastating Cyclone Nargis in May 2008 that killed over 22,500 people and rendered hundreds and thousands homeless, Myanmar initially resisted foreign help. There was much anger and frustration, particularly in the West, and the French Foreign Minister, Bernard Kouchner, even spoke of the need for the implementation of the principle of ‘Responsibility to Protect’, hinting at ‘forced intervention’ but that did not find any traction. The Association of Southeast Asian Nations (ASEAN) stepped in and UN Secretary General Ban Ki-moon’s Special Envoy for Myanmar, Ambassador Ibrahim Gambari, renewed his efforts. Finally, Ki-moon was able to convince Than Shwe to allow for outside humanitarian assistance into the country. This infused some optimism into Ki-moon and he undertook a visit to Myanmar in early July 2009, seeking to obtain the release of Aung San and nearly 2,000 political prisoners, as well as positive changes, or at least promise thereof, in that country. However, even prior to the visit, UN officials described it as ‘risky’ with the potential of failure. During his two days in Myanmar, Ki-moon had two rare and lengthy meetings with Than Shwe. However, his requests for a meeting with Aung San were rejected and his pleas for the release of political prisoners were ignored. Upon his return at the Bangkok Airport, Ki-moon said, “I believe the government in Myanmar failed to take a unique opportunity to show its commitment to a new era of openness”. Later, in his post-visit briefing to the UN Security Council in New York, Ki-moon called Myanmar’s refusal to grant him a meeting with Aung San not only a deep disappointment but also a lost opportunity. However, Ban argued that the success or failure of his mission should not be judged solely on the benchmark of this meeting, or the lack of it. He said the visit served the purpose of allowing him to convey directly to the country’s rulers what the UN and the international community expected from the regime, such as progress towards democracy. He added that he did that “as strongly as possible, as hard as I could press”. He further stated that he believed – and this is important – that Than Shwe would “seriously consider” his proposals for making the national elections scheduled for 2010 “credible, inclusive and legitimate”. Western Council members regretted that Ki-moon was unable to meet Aung San, which undercut the mission’s impact. Others, such as China, said they understood why it was not possible for Myanmar’s authorities to allow a meeting as she was under trial. However, significantly, and this has ramifications for future steps, all were unanimous in their support for Ki-moon’s ‘good offices’ and advocacy. The Verdict and the Aftermath The international reactions to the verdict of 18 months of house arrest for Aung San ranged from outrage to caution. The United Kingdom’s Prime Minister Gordon Brown wrote in newspaper articles on 12 August, “This was the moment for the generals to embrace the

growing clamour for change and choose the path of reform demanded by the region and the global community. They comprehensively shunned it. The charges were baseless, the verdict outrageous”. The French President, Nicolas Sarkozy, whose country had advocated tough action following Cyclone Nargis, described the verdict as “brutal and unjust”. United States President Barack Obama, whose administration had been mulling nuanced changes in its Myanmar policy, called for the “immediate and unconditional release” of Aung San and other political prisoners, and accused Myanmar’s regime of continuing to disregard the UN Security Council statements (though the Security Council as we shall see, was deeply divided on the issue). Australia called for tougher sanctions and the European Union said it would impose newer ones. Indeed, in reaction to the verdict, the European Union extended its sanctions by slapping on a visa ban and asset freeze on, interestingly, members of Myanmar’s judiciary. Amnesty International’s Secretary General, Irene Khan called the trial and verdict “political theatre”. In a statement, the head of this reputable non-governmental human rights watch body said, “The Myanmar authorities will hope that a sentence that is shorter than the maximum will be seen by the international community as an act of leniency, but it is not , and must not be seen as such, especially by ASEAN and the UN. Aung San Suu Kyi…should never have been arrested in the first place”. The Chinese reaction was all caution and circumspection. In Beijing, Foreign Ministry spokesman, Jiang Yu, did not join the chorus of condemnation. Instead, she said that the judgment should be respected and that China hoped “all sides in Myanmar can push ethnic reconciliation through talks, and gradually realise stability, democracy and development. This not only accords with Myanmar’s interests, but it is also beneficial to regional stability”. Noticeably, implicit in this reaction was also the gentle but unequivocal reminder to Myanmar that reconciliation was good for Myanmar and the region. The ASEAN Assertions The immediate reaction to the verdict from Thailand, the current Chair of the 10-member ASEAN, which includes Myanmar, was an expression of “deep disappointment”. Thailand reiterated earlier ASEAN statements, urging the release of all those under detention, including Aung San, to enable their participation in the elections next year. The statement said, “releasing them would contribute to national reconciliation among the people of Myanmar, meaningful dialogue and facilitate the democratisation of Myanmar. Only free, fair and inclusive election will pave the way for Myanmar’s full integration into the international community”. Malaysia called for an emergency meeting of ASEAN Foreign Ministers and Indonesia expressed concern. The strongest statement came from the Philippines which termed the verdict “incomprehensible and deplorable”. The measured Singapore reaction merits analysis, and indeed parsing. It is reflective of very careful balancing. At one level, there was the expression of disappointment. A statement from the Ministry of Foreign Affairs, not associated with any official such as the Foreign Minister directly, read, “We are disappointed to learn that Daw Aung San Suu Kyi was found guilty and sentenced to three years hard labour”. Then it goes on to explain the reason for the disappointment, “Daw Aung San Suu Kyi did not plan to violate the terms of her house arrest, and the intrusion into her house was by a person who appears to be of unsound mind”.

Then came an appreciation of Yangon’s action in according partial amnesty, and of the relaxed terms of house-arrest, underscoring the fact of the latter having been noticed (and, therefore, Myanmar being expected to follow them scrupulously). Also hinting at the total commutation of her sentence, it further stated, “We are, however, happy that the Myanmar government has exercised its sovereign prerogative to grant amnesty for half her sentence and that she will be placed under house-arrest rather than imprisonment. We are heartened that (the Home Minister) had announced that (she) will be allowed to see doctors and nurses, communicate with her party, watch local television channels, read local newspapers and journals, and can receive visitors with the government’s permission and that there is a possibility that she could receive amnesty for the remainder of her sentence. [Emphasis added] Finally, acknowledging these positive points, there is pressure on Myanmar for future course of action. The message continues, “These are significant gestures by (Myanmar).We hope that (Myanmar) will allow (her) to participate in the political process as soon as possible. A meaningful dialogue between the Myanmar government, Daw Aung San Suu Kyi and all other political groups in an open and inclusive process of national reconciliations is the only hope for a long term political stability in the country”. [Emphasis added] The Singapore statement was carefully designed and meticulously worded to resonate with all sides, and this could provide Singapore and its leadership to play a constructive role in the near future to cut this complex Gordian knot. President Barack Obama’s Overtures As on several other global issues, the Obama Administration had been signalling some nuanced changes in the United States policy towards Myanmar, from that of George Bush who had advocated a very hard-line approach. Indeed, Washington maintains, as it must by law, strict sanctions on Myanmar, covering senior Myanmar officials and their families, and on imports from, and investments and exports to, that country. However there have been some signs that the policies may be under review. In March this year, Stephen Blake, Director of Southeast Asian Affairs at the State Department, visited Myanmar and met with Foreign Minister, Nyan Win. In July this year, Secretary of State, Hillary Clinton, appeared to hold out an olive branch when she offered potential investment opportunities to the junta, if Aung San was released and reforms effected. There was a very important development from the United States side after the verdict in the visit of Senator Webb, a Democrat from Virginia, known to be close to President Obama. Senator Webb is a Vietnam veteran who chairs the Senate Foreign Relations subcommittee on East Asia and Pacific Affairs, which also includes Myanmar. In April 2009, Webb had argued for an ‘affirmative engagement” with Myanmar with the aim of lifting sanctions though he also held that the Aung San trial would render this task more difficult. He visited Myanmar in mid-August 2009 and he was the first senior United States official to meet the reclusive Than Shwe and was allowed to see Aung San. He was able to secure the release of Yettaw though it was immediately unclear what other positive assurances of change he had received. The visit drew criticism from activists who said it conferred “legitimacy on a brutal regime”. Earlier, they had asked him to be wary of the regime using the visit for propaganda purposes and later criticised the Yangon statement that the visit “was satisfactory to both sides”. However, Senator Webb is said to have had the blessings of the Obama administration, which

is important for future developments. He himself stated, “I am grateful to the Myanmar government for honouring [my] requests. It is my hope that we can take advantage of these gestures as a way to begin laying a foundation of goodwill and confidence-building in the future”. It is too soon to tell how this visit will play out in the United States and how much it will influence the Congress and the Obama Administration. The UN Security Council: A House Divided As was to be expected, the UN Security Council was deeply divided over whether to “condemn” Aung San’s conviction. After two days of intense debate, the President of the Security Council, the United Kingdom’s Permanent Representative, Ambassador John Sawyers, read out an agreed ‘Presidential Statement’, the most ‘toothless’ form of outcome in the pecking order of the Security Council’s decisions. In it, he stated the “serious concern” of the Security Council was very different from the “condemnation” that the earlier draft presented by the United States contained, which was opposed by the veto-wielding powers, China and Russia. The statement rather passively “reiterated the importance of the release of all political prisoners” but did not specifically “call upon” Myanmar to do so. It was a very watered-down version of what the Western members of the Security Council had hoped for, and the reasons were not far to seek. With regards to Myanmar, the Security Council was ‘a house divided’. There are two groups with very different views on how to deal with Myanmar. The Western permanent members, that is, the United States, the United Kingdom and France, together with Austria, Mexico and Costa Rica, favour strong collective action against Myanmar. The other group, comprising mainly China, Russia, and Myanmar’s fellow ASEAN member, Vietnam, see the decisions within Myanmar as internal matters that did not threaten international peace and security and did not warrant immediate and vigorous Security Council action. Japan, the other nonpermanent Asian member at the Security Council, advocated a firm approach but one based more on bilateral pressure than public denunciation. Japan, which is an aspirant for permanent Security Council membership, requires to be particularly careful so as not to rub any significant group the wrong way too much. China is, of course, key in all this. China has many strategic interests in the stability of Myanmar. As recently as on 15 June 2009, China announced a plan to begin constructing a 1,100 kilometre crude oil pipeline starting from the port of Kyaukryu in Myanmar and ending in Kunming in Yunnan, China. The line responds to the “Malacca Dilemma” of China which is that the other option of procurement would be through the Malacca Straits, which would call for Chinese naval protection and, in turn would provoke blue-water projection there by other Southeast Asian states. Second, China would want to sufficiently ingratiate Myanmar to counter any potential influence by India over the country. According to Dr Sinderpal Singh of the Institute of South Asian Studies, Singapore, India has maintained a “golden silence” on recent developments in Myanmar for it also does not want to lose Myanmar to China. Third, if the Security Council could interfere in Myanmar, what guarantee was there it may not in future on Tibet or Urumqi, ‘red-line core issues’ for Beijing? However, Chinese diplomacy is said to be imposing gentle pressure on Myanmar privately. The fact that China allowed the subject to feature on the Security Council’s agenda is a signal to Yangon. Also, publicly, its Foreign Minister, Yang Jiechi, has voiced support for the Secretary General’s ‘good offices’ and indicated favouring, like Vietnam, quiet diplomacy to encourage Myanmar to engage in reform, resisting, at the same time, the idea that Myanmar’s

issues can be resolved through western-style problem solving. Russia, too, continues to be supportive of Ki-moon’s ‘good offices’ and stresses, like China , that this is a ‘process’ that would require ‘patience’. China, Russia and Vietnam remain in favour of giving Myanmar time to make decisions and are concerned that forcing Yangon into a corner would be counterproductive. Next Steps? Therefore, it seems unlikely that any serious action that could impose a mandatory behaviour on Myanmar will emanate from the Security Council. The UN-imposed sanctions on Myanmar, therefore, can be ruled out to a certain degree. Those imposed by the United States and the European Union are unlikely to have any impact on Myanmar so long as China, ASEAN, Russia and India continue to relate to Myanmar and trade with it. In an article in ‘The Straits Times’ on 27 July 2009, Ambassador K. Kesavapany, Director of the Institute of Southeast Asian Studies, Singapore, wrote, “ In the final analysis, change will come about in Myanmar as a result of internal pressures. Force-feeding democracy in Myanmar may lead to undesirable consequences. One only has to see the damage done to Iraq by the ill-conceived attempt by the Bush Administration to spread democracy in the region”. Nonetheless, how can others help generate the internal pressures that could effect the desired positive changes in Myanmar? Another Myanmar-watcher, Professor Tin Maung Maung Than, has detected a penchant for Myanmar to embrace what he describes as ‘constructivism’ in an article entitled “Myanmar: A Matter of Face not Grace” in March 2005, which involves joining regional organisations such as ASEAN in 1997. Currently, Myanmar is an aspirant towards full membership of the South Asian Association for Regional Cooperation (SAARC). Could the SAARC make such membership contingent upon ‘good behaviour’ on the part of Myanmar? Unlikely, for the SAARC members – India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives are unlikely to demand more of Myanmar than ASEAN has done, just to pander to Western wishes. A positive sign is that ASEAN is considering initiatives. Thailand’s Foreign Minister, Kasit Piromya, is trying to build a regional consensus in ASEAN around a letter to be jointly addressed to Myanmar by other members of the regional body. The letter is to make four broad points – First, express respect for the now completed judicial process; second, seek commuting the rest of Aung San’s sentence under provision of the amnesty; third, to allow her and others to participate in the forthcoming elections in 2010; and forth, urge national reconciliation between the ruling generals and the opposition. Malaysia and Indonesia are said to be supportive of the initiative. A very enthusiastic support has come from Foreign Minister George Yeo of Singapore. He said, “(By this), we hope to soften the hearts of the government in Myanmar in reviewing its decision and allowing a process which will in the end reaffirm ASEAN unity and strengthen the ASEAN family”. It must be recalled that all key players have backed Ki-moon’s ‘good offices’ and efforts. These should continue. There already exists in New York a ‘Group of Friends’ for Myanmar. This includes the five permanent members of the Security Council, Indonesia, Singapore, Thailand, Vietnam from ASEAN, the European Union, India, Japan, South Korea, Australia and Norway. The Secretary General could add to it the other members of ASEAN and

SAARC and hold a ‘Big Tent’ meeting, not in New York, but in the region, perhaps in Bangkok. Out of this could be created a much smaller ‘contact-group’ of ‘wise persons’, headed by someone of the stature of Singapore’s Senior Minister, Goh Chok Tong, who is widely respected in the region and who may maintain a continuous liaison with Myanmar and monitor the forthcoming elections. Mr Goh’s association has already been talked about in some circles in this connection, including in New York. Conclusion The main challenge with Myanmar is to find the right balance between the carrot and the stick. The balance needs to tilt in favour of the carrot. The resolution of the problems in Myanmar lies not so much in the threatened or use of force as in peer pressure and persuasion. Thant Myint-U, grandson of the Burmese Secretary General of the UN, the late U Thant, in his book, “The River of Lost Footsteps”, has powerfully argued for engagement as a tool of change. The global community must keep emphasising on the need for a free, fair and credible election next year. Recently, a prestigious Brussels-based think tank called the International Crisis Group pointed out that the elections next year could alter the political landscape in Myanmar, even if it were not free and fair. The report stated that the current ageing leadership, Than Shwe, and his deputy, Maung Aye, may “step down or move to ceremonial roles” after the polls, “making way for a younger military generation”. It went on to state that, “All stake-holders should be alert to opportunities that may arise to push the new government towards reform and reconciliation”. Most importantly, it warned against a boycott of any kind of the elections, for that could play into the hands of the military. This is, of course, not to say that there would be a transfer from military to civilian leadership. Yet, any incremental change can and should be channelled in the right direction. The military may fear the possibilities of retribution through war-crimes trials or Truth Commissions if they were to lose power. This is all the more reason why they should begin the process of reconciliation through dialogue, particularly with Aung San’s National League for Democracy. The Greek philosopher, Heraclitus, said that the world is in constant flux and we never step into the same river twice. Myanmar will also change. All the concerned parties must calibrate endeavours to make changes for the better.

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ISA S Insights No. 83 – Date: 29 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

Remittances as a Source of External Financing in South Asia1 Sasidaran Gopalan and Ramkishen S. Rajan 2 Abstract The decline in Official Development Assistance (ODA) extended to many developing countries in recent years has made it necessary for them to look beyond official sources of financing and tap the various sources of private external financing, including workers’ remittances. This paper discusses the relative magnitudes and stability of the various sources of external finance available to developing countries, with a specific focus on individual South Asian countries. Particular attention is paid to workers’ remittances which is an important and stable source of financing for the developing countries, especially those in South Asia. Introduction Despite the notable improvements in the economic climates and growth prospects of many developing economies in Asia, poverty remains a complex and persistent issue confronting policymakers even today. Poverty estimates published by the World Bank reveal that nearly 1.4 billion people in the developing world were living on less than US$1.25 a day in 2005. 3 While acknowledging that there has been considerable progress in reducing poverty levels – the corresponding numbers in absolute poverty were about 1.9 billion in 1981 – a lot more remains to be done in order to ensure that the benefits of economic growth are more evenly distributed, so as to make faster and deeper inroads into the goal of eradicating poverty worldwide. Despite rapid growth in India and other regional economies, the World Bank data reveals that South Asia alone housed some 600 million people living on less than US$1.25 a day in 2005, in comparison to 550 million people in 1981. In India, using the same yardstick, the poverty

1 2

This paper partly builds on Rajan (2005) and is based on a forthcoming working paper by the authors. Sasidaran Gopalan is a Research Associate at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore. He can be contacted at isassg@nus.edu.sg. Ramkishen S. Rajan is a Visiting Senior Research Fellow at ISAS and an Associate Professor at George Mason University, Virginia, United States. He can be contacted at rrajan1@gmu.edu. See World Bank (2008), available at http://go.worldbank.org/T0TEVOV4E0. Also see Chen and Ravallion (2008).

levels actually increased from 420 million people in 1981 to 455 million in 2005 (though seen as declining when taken as a share of the population). 4 Recognising the importance of undertaking effective and immediate policy action to reduce poverty in developing countries, several concerted steps have been taken at the multilateral, regional and country levels to achieve poverty reduction, of which the United Nations Millennium Development Goals (MDGs) has been a key initiative. 5 An area that requires more attention, however, is that of resource constraints that have constantly plagued this and other similar poverty-alleviation efforts. Sources of Development Finance While there are clearly many possible sources of internal finance that could and should be tapped (via streamlining government finances, improving domestic financial intermediation, possible use of foreign exchange reserves, and the like), developing countries will inevitably have to supplement these with external sources of finance to achieve their anti-poverty and pro-development goals. This paper focuses solely on the external sources of financing. It is necessary to keep in mind that there could be both official and private sources of external financing. Most developing countries depend heavily on official sources of external financing such as grants and concessionary loans which are often referred to as Official Development Assistance (ODA). ODA includes debt relief as one of its vital components and is especially important for many of the poorest countries burdened by heavy debt service payments. However, in light of decreasing net ODA disbursements (ODA including debt relief) from donor countries in recent years, it has become essential to consider private sources of external financing that could help these developing countries realise their development goals. It is useful to recall that the so-called Monterrey Consensus that took place in 2002 was an attempt to address the very concern of the sources of private external financing for development, particularly in light of ODA being lacklustre. 6 In fact, one of the key highlights of the conference was the pledge undertaken by all the major donor countries to provide the 4

An important point needs to be noted here. Indiaâ&#x20AC;&#x2122;s national poverty line is pegged at US$1.02 per day and according to this benchmark, the number of people living below this poverty line has actually reduced from 296 million in 1981 to 267 million people in 2005. However, the number of poor below US$1.25 a day has increased from 421 million in 1981 to 456 million in 2005. This difference arises from the use of different poverty lines, when considering absolute numbers. But when taken as a percentage of the population, we see that, between 1981 and 2005, India has seen 60 percent of its population living on less than US$1.25 a day reduce to 42 percent. The number of people living below US$1.25 a day has also come down from 42 percent to 24 percent over the same period. For more details, see http://www.worldbank.org.in/WBSITE/ EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21880804~pagePK:141137~p iPK:141127~theSitePK:295584,00.html The MDGs consist of a set of eight goals that respond to the main development challenges of the world. These goals were drawn from the targets contained in the Millennium Declaration which was adopted by 189 nations and signed by 147 heads of state and governments during the United Nations Millennium Summit in September 2000. One of the first and primary objectives of the MDGs is income poverty reduction by 2015, though there are others, including universal primary education, promotion of gender equality in primary/secondary education and empowerment of women, reduction of the infant (under five) mortality rate by two-thirds. For details, see http://www.developmentgoals.org. The International Conference on Financing for Development was held from 18-22 March 2002 in Monterrey, Mexico. This was the first United Nations-hosted conference to address the key financial and development issues in the world and it was attended by 50 Heads of State or Government, over 200 ministers as well as leaders and senior officials from various organisations.

resources required to help achieve the internationally-agreed development goals including the MDGs. In particular, the donor countries agreed to work towards meeting the United Nations target of increasing their respective ODA to 0.7 percent of their respective Gross National Income (GNI). 7 This notwithstanding, even after close to six years since the adoption of this consensus there appears to be no obvious progress on ODA commitments. 8 Recognising the limitations of official financing even if ODA targets were met, the Monterrey Consensus also stressed the need to focus on other private sources of development financing for development processes that include international trade (export revenues), private capital flows and workers’ remittances. Trends and Patterns in External Financing to Developing Economies Given the important role to be played by the sources of private external finance, the remainder of this paper will discuss the relative magnitudes of the various sources of private external finance to developing countries on the whole, with a specific focus on individual South Asian countries. 9 We also attempt to shed some light on the degree of stability of these components as sources of financing for development. The World Bank data on net resource flows to the developing economies on the whole reveals that net total private capital flows, including workers’ remittances to all developing countries, peaked just prior to the Asian financial crisis in 1997 and has been on a gradual recovery since then. Net total private flows including workers’ remittances to all developing countries in 2007 stood at above US$1,270 billion compared to about US$260 billion to US$270 billion in 2000-01 (Table 1). Net foreign direct investment (FDI) inflows and workers’ remittances clearly emerge as the most significant components of external financing for developing countries. Over the period 2000-07, on average, about three quarters of total private inflows into the developing countries involved FDI and workers’ remittances. 10 The remaining two components of external financing are portfolio equity inflows and short-term debt inflows. While the net portfolio equity inflows experienced a significant increase in recent years, up from about US$13.5 billion in 2000 to US$145 billion in 2007, net short-term debt flows have also witnessed a dramatic increase from about US$3 billion in the year 2002 (negative values in previous years following years of deleveraging after the Asian crisis) to nearly US$130 billion in 2007. However, both these components tend to be highly variable and, hence, might

7 8

9 10

For more details about the 0.7 percent target, see http://www.unmillenniumproject.org/press/07.htm. To be specific, recent data from the World Bank reveals that net ODA disbursements by major donors (consisting primarily of the Organisation for Economic Co-operation and Development countries) have been stagnant at just over US$105 billion in recent years. However, ODA disbursements from the donors, excluding debt relief, have been increasing over the years – from about US$60 billion in 1995 to a little over US$87 billion in 2007. Excluding debt relief, ODA increased from 0.23 percent of the GNI of donor countries to 0.25 percent between 2002 and 2007, still well below the 0.33 percent attained in the early 1990s and way behind the United Nations’ target of 0.7 percent. We focus on the four major South Asian economies – Bangladesh, India, Pakistan and Sri Lanka. An important point that needs to be borne in mind about FDI is the fact that a growing share of FDI going to developing countries seems to be in the form of Mergers and Acquisitions (M&A). The macroeconomic implications of M&A can potentially be quite different from Greenfield investments. See Rajan and Hattari (2009) and Gopalan and Rajan (2009) on a discussion of M&As to and from emerging Asia and India, respectively.

be considered rather unstable sources of financing. This will be discussed in greater detail later in this paper. Importance of Remittances to South Asia Workers’ remittances alone have constituted one third of net total private capital flows into developing countries, second only to FDI flows. Despite this, somewhat less attention has been paid to this source of financing. Table 2 clearly reveals that there has been a marked increase in the magnitude of workers’ remittances into developing countries from about US$85 billion in 2000 to about US$265 billion in 2007. We can infer from the table that, among the developing countries, the South Asia countries have, on average, received about 20 percent of global remittance receipts destined for developing countries between 2000 and 2007. Given the significance of remittance inflows into individual South Asian economies, we consider this component in more detail in the following paragraphs. As Table 3 shows, a large portion of the inflows has gone into India over the years (about 70 percent). The average remittance inflows to India between 1995 and 2007 stood at about US$16.2 billion. For the corresponding period, the average inflows into Bangladesh and Pakistan were about US$2.7 billion to US$2.8 billion, while that to Sri Lanka was about half that at US$1.4 billion. While the absolute values indicate India’s dominance as a host of South Asian remittance flows, this is not surprising in view of the fact that India constitutes about 80 percent of aggregate South Asian output. Accordingly, the relative significance of remittances to the respective economies would be better reflected when one examines workers’ remittances as a share of the respective country’s gross domestic product (GDP). Referring to Table 3 again, it is clear that Bangladesh has the highest share of remittances as a percent of its GDP, with a share of about ten percent in the year 2007, followed closely by Sri Lanka with a share of about eight percent. 11 Pakistan and India lag with shares of four and three percent respectively. While Bangladesh has experienced a steady rise in remittance inflows as a share of GDP, there appears to be no obvious pattern in the shares in other countries, though there has been a marginal increase in India. Sri Lanka has seen its share grow over the years consistently until 2005 after which one can notice a marginal dip in its share. Pakistan’s pattern has been quite volatile with varying shares over the years. Another useful indicator that underlines the significance of remittances to these economies is their share of total external private sources of financing. According to Table 4, the average share (over the period 1995-2007) of remittance inflows expressed as a percentage of the sum of total private capital flows stands at about 25 percent for Bangladesh, the corresponding figures for the other four South Asian countries being about 15 to 17 percent. Clearly, workers’ remittances are an important source of external financing in absolute and relative terms for the South Asian economies, especially Bangladesh.

A caveat needs to be borne in mind. When one considers all the seven South Asian countries, Nepal emerges as the highest recipient of remittances in the region with its share being over 15 percent of the country’s GDP in 2007 (World Development Indicators Online). But due to limited data availability of Nepal’s other types of private sources of financing, we have excluded the country from our analysis.

Relative Stability of Remittances After decades of neglect, workers’ remittances have become recognised by policymakers and observers as important sources of external finance. There is, in fact, a growing body of literature that deals with this issue. 12 The most important feature of the remittances component, as highlighted in various papers, is the stability of such flows in contrast to other types of private capital flows. A simple way to examine relative volatilities over a short period is to compute the coefficient of variations (CVs) of the various sources of financing. 13 We compute the CVs for the individual South Asian countries over a period of 12 years from 1995 to 2007 and we confine the period to 2000 and 2007 for calculating the CVs for the cluster of developing countries as a whole. Figures 1 and 2 reveal the volatilities of the various sources of financing for the individual South Asian countries and developing countries as a whole, respectively. The CVs corroborate the earlier discussed point about remittances being more relatively stable when compared to the rest of the sources. As is clear from Figure 1, one can see that workers’ remittances are the least variable component when compared to the other types of capital flows, followed by trade flows and FDI flows. As expected, portfolio flows and short-term commercial bank lending appear to be the most volatile components in all countries. It is not without reason that these components are referred to as “mobile capital”. 14 The results do not vary much when we look at Figure 2, where the volatility is shown for all developing countries lumped together. Beyond this measure of volatility, arguably of more importance is the fact that while private capital flows are generally considered pro-cyclical, viz. capital flows rising at times of growth booms and falling during busts, remittances are generally expected to be countercyclical. Thus, remittances could serve as macro-economic stabilisers during times of an economic slowdown, as migrants are expected to increase the amounts of money they remit back home when most needed (that is, during a downturn in their home country). 15 As a significant portion of the migrants’ incomes are being spent in destination countries, this could also provide for the much needed economic stimulus to spur domestic demand in times of economic distress. Also, in contrast to other types of capital flows, workers’ remittances do not create liabilities such as debt servicing in future. 16

14 15

See Kapur (2003), Ratha (2003) and the World Bank (2006) for an in-depth discussion on the various issues concerning remittances. The CVs become less effective (and misleading) as a measure of (in)stability if there is a trend in the data. Thus, it is inadvisable to use it for longer time periods when series have unit roots (Rajan, 2005 and references cited within). See Rajan (2009). Unless of course, there is a generalised global downturn, as in the case from mid- to late-2008 and early 2009. Some have argued that the large inflows of remittances into a particular country could result in a “Dutch Disease” type of situation where the recipient country experiences an overvalued real exchange rate (due to an appreciation or strengthening of its currency) which would lead to a loss of export competitiveness that would in turn make the production of such tradable goods less profitable. Loser et al. (2007) provide a detailed discussion about the possibility of a ‘Dutch Disease’ phenomenon arising out of large flows of remittances in Latin America. However, there are a growing number of empirical studies that seem to suggest that this concern is misplaced. See World Bank (2006) for an overview.

Conclusion A preliminary analysis of the magnitude and relative stability of various sources of external financing to developing countries, especially the larger South Asian economies, reveals workersâ&#x20AC;&#x2122; remittances to be potentially the most stable and vital source of financing for developing countries. 17 An important area of policy concern that needs to be addressed by all the countries involved is the presence of excessively high transaction costs associated with remittance transfers. According to some estimates, the providers of remittance services in the formal sector tend to charge a remittance fee that is 10 to 15 percent of the principal amount which typically leads to a reduction in the amount of net funds transferred. 18 Apart from the huge financial burden that is placed on the poor migrant remitters, the presence of high transaction costs has also resulted in the growth of informal channels of remittances (constituting about 50 percent of total remittance inflows). 19 Rightly or wrongly, these informal fund networks have been accused of promoting financial smuggling, money laundering and even sponsoring terrorist activities, apart from having larger macro-economic implications on inappropriate exchange rate movement and tax revenues in the recipient country. 20 The presence of a weak competitive environment, inadequate development of technology supporting payment and settlement systems, and excessive regulatory and compliance requirements has resulted in the perpetuation of high transaction costs in the formal remittance market. 21 Thus, effective bilateral cooperation arrangements between the remittance-originating countries and remittance-recipient countries are crucial in enhancing the flows of remittances as they could go a long way in lowering these transaction costs. Apart from promoting competition, the governments could also take proactive measures in expanding the network of formal financial intermediaries in order to lower the intermediation costs of remittances. In the final analysis, while remittances have become significant private financial resources for households in developing countries, they cannot be considered a substitute for other sources of development financing like FDI, which might generate broader multiplier effects on the economy. 22 Hence countries should work towards mobilising various international resources to meet their development objectives.

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18 19

20 21 22

An important caveat is in order. Due to data limitations, our data on capital flows are on a net rather than a gross basis. World Bank (2006). This also implies that workersâ&#x20AC;&#x2122; remittances are in reality much more significant that the official numbers suggest. See Jongwanich (2007) for a detailed discussion. For details, see Chapter 6 of World Bank (2006). It is increasingly acknowledged that, in the right environment FDI has immense potential to foster growth in the economy by promoting competition, enhancing technological capabilities, boosting export competitiveness and generating significant employment opportunities in the economy (see Rajan, 2005).

References Chen, S. and Ravallion, M. (2008), “The Developing World is Poorer than We Thought, But No Less Successful in the Fight against Poverty”, Policy Research Working Paper 4703, World Bank. Gopalan, S. and Rajan, R. S. (2009), “India’ Foreign Direct Investment Flows – Trying to Make Sense of the Numbers”, Policy Insight No. 79, Institute of South Asian Studies, National University of Singapore. Jongwanich, J. (2007), “Workers’ Remittances, Economic Growth and Poverty in Developing Asia and the Pacific Countries”, Working Paper 07/01, UNESCAP. Kapur, D. (2003), “Remittances: The New Development Mantra?”, mimeo, The G-24 Technical Group Meeting. Loser, C., Lockwood C., Minson, A. and Balcazar, L. (2007), “The Macro-Economic Impact of Remittances in Latin America – Dutch Disease or Latin Cure?”, mimeo, Inter-American Development Bank. Rajan, R. S. (2005), “Financing Development in the Asian and Pacific Region: Trends and Linkages”, Studies in Trade and Investment, No.55, pp. 21-65. Rajan, R. S. (2009), “Booms and Busts in Private Capital Flows to Emerging Asia since the 1990s”, ISAS Brief No. 113, Institute of South Asian Studies, National University of Singapore. Rajan, R. S. and Hattari R. (2009), “The Global Financial Crisis and Cross-border Mergers and Acquisitions in Developing Asia”, ISAS Brief No. 110, Institute of South Asian Studies, National University of Singapore. Ratha, D. (2003), “Workers’ Remittances: An Important and Stable Source of External Development Finance”, Chapter 7, Global Development Finance 2003, World Bank, Washington D. C. Ratha, D., S. Mohapatra and Xu, Z. (2008), “Outlook for Remittance Flows 2008-2010: Growth Expected to Moderate Significantly, but Flows to Remain Resilient”, Migration and Development Brief 8, 1 November. World Bank (2006), “Global Economic Prospects 2006: Economic Implications of Remittances and Migration”, Washington D. C. World Bank (2008), “Global Development Finance 2008: The Role of International Banking”, Washington D. C. World Development Indicators Online, World Bank.

Table 1: Components of Private External Financing in Developing Countries (US$ Billion) Year

Workersâ&#x20AC;&#x2122; remittances

Net FDI Inflows

Net Portfolio Equity Inflows

Net Short Term Debt Flows

Net Total Private Inflows (Incl. Remittances)

2000 2001 2002 2003 2004 2005 2006 2007

84.5 95.6 115.9 143.6 161.3 191.2 221.3 239.7

165.5 173 160.7 161.9 225.5 288.5 367.5 470.8

13.5 5.6 5.5 24.1 40.4 68.9 104.8 145.1

-6.4 -24.9 3.1 53.5 67.5 89.6 94.2 129.7

271.5 260.1 285 417.7 573.8 742.6 981.6 1268.6

Source: Based on Global Development Finance (2008), World Bank.

Table 2: Remittance Flows to Developing Countries, 2000-07 (US$ Billion) Year

Total Inflows to Developing Countries

Inflows to East Asia and Pacific

2000 2001 2002 2003 2004 2005 2006 2007

84.5 95.6 115.9 143.6 161.3 191.2 229.0 265.0

16.7 20.1 29.5 35.4 39.1 46.6 53.0 58.0

Inflows to Inflows to Inflows to Inflows Inflows Europe Latin Middle to to Suband America East and South Saharan Central and the North Asia Africa Asia Caribbean Africa 13.1 12.7 14 16.7 21.1 29.5 39.0 51.0

20 24.2 27.9 34.8 41.3 48.6 57.0 61.0

12.9 14.7 15.3 20.4 23.1 24.2 27.0 32.0

Source: Based on Global Development Finance (2008) and Ratha et al., (2008)

17.2 19.2 24.1 30.4 28.7 33.1 40.0 44.0

4.6 4.7 5 6 8 9.3 13.0 19.0

Table 3: Significance of Remittances in Select South Asian Economies Year

Bangladesh Pakistan India Workers’ % of Workers’ % of Workers’ Remittances GDP Remittances GDP Remittances (US$ Billion) (US$ Billion) (US$ Billion) 1995 1.20 3.17 1.71 2.82 6.22 1996 1.35 3.31 1.28 2.03 8.77 1997 1.53 3.61 1.71 2.73 10.33 1998 1.61 3.64 1.17 1.88 9.48 1999 1.81 3.95 1.00 1.58 11.12 2000 1.97 4.18 1.08 1.45 12.89 2001 2.11 4.48 1.46 2.02 14.27 2002 2.86 6.01 3.55 4.92 15.74 2003 3.19 6.15 3.96 4.76 21.00 2004 3.58 6.34 3.95 4.03 18.75 2005 4.31 7.16 4.28 3.91 21.29 2006 5.43 8.77 5.12 4.02 25.43 2007 6.56 9.59 6.00 4.20 35.26 Source: Compiled from World Development Indicators, World Bank.

% of GDP 1.75 2.26 2.51 2.28 2.47 2.80 2.99 3.10 3.50 2.68 2.63 2.78 3.29

Sri Lanka Workers’ % of Remittances GDP (US$ Billion) 0.81 6.21 0.85 6.13 0.94 6.24 1.02 6.48 1.07 6.85 1.17 7.14 1.19 7.53 1.31 7.65 1.44 7.62 1.59 7.69 1.99 8.16 2.18 7.73 2.53 7.81

Table 4: Total Private Sources of External Financing in South Asia and Relative Share of Remittances Year

Bangladesh Pakistan India Total Remittances Total Remittances Total Remittances Private as a % of Private as a % of Private as a % of External Total Private External Total Private External Total Private Financing Financing Financing Financing Financing Financing (US$ (US$ (US$ Billion) Billion) Billion) 1995 5.60 21.47 12.97 13.19 48.82 12.75 1996 5.83 23.09 13.40 9.58 55.92 15.68 1997 7.15 21.34 13.59 12.56 60.38 17.11 1998 7.63 21.06 11.23 10.44 56.29 16.84 1999 8.21 22.01 10.22 9.75 66.53 16.72 2000 9.50 20.72 11.17 9.63 76.87 16.77 2001 9.25 22.76 11.74 12.45 82.28 17.35 2002 9.94 28.75 16.31 21.78 92.56 17.00 2003 11.50 27.75 18.84 21.04 121.31 17.31 2004 13.25 27.05 20.99 18.79 148.57 12.62 2005 15.68 27.51 25.66 16.68 199.96 10.65 2006 19.02 28.54 30.75 16.66 257.98 9.86 2007 21.44 30.61 34.14 17.57 87.95 40.09 Source: Compiled from World Development Indicators, World Bank.

Sri Lanka Total Remittances Private as a % of External Total Financing Private (US$ Financing Billion) 5.59 14.48 5.90 14.44 7.06 13.35 7.11 14.39 6.73 15.94 7.92 14.73 7.39 16.04 7.36 17.78 8.06 17.84 8.94 17.77 9.90 20.11 10.87 20.09 12.49 20.23

Figure 1: Volatility of Components of Private External Financing in Select South Asian Countries (1995-2007) 14 12 10 8 6 4 2 0 -2 -4 -6

Exports

Net Exports Net FDI Inflows Bangladesh

Workers Remittances

Pakistan

India

Net Portfolio Commercial Equity Flows Bank Lending Sri Lanka

Source: Authorâ&#x20AC;&#x2122;s Calculations based on World Development Indicators, World Bank.

Figure 2: Volatility of Components of Private External Financing in Developing Countries (2000-2007)

1.2 1 0.8 0.6 0.4 0.2 0

Workers Remittances

Net FDI Inflows

Net Portfolio Equity Inflows

Net Short Term Net Total Private Debt Flows Inflows

Source: Authorâ&#x20AC;&#x2122;s Calculations based on Global Development Finance (2008), World Bank.

ISA S Insights No. 84 – Date: 15 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

Looking beyond Current Account Imbalances: Imperatives for The United States Suparna Karmakar 1 Abstract The growing trade disparity between the world’s two largest economies, the United States and China, is often seen as the genesis of the current global imbalance, which exploded in 2007 with the onset of the financial crisis in the United States and the resultant worldwide economic recession. In other words, the crisis was caused by three interlinked factors – high liquidity (in turn, catalysed by imbalances in payments), high leverage and regulatory oversight. Many solutions for unwinding the global imbalance have been proposed, requiring nations to moderate production and consumption imbalances and calling for financial sector regulations and reforms. However, the issue which needs to be put into the centre of domestic reform policies is that of managing the changing relative competitiveness of nations. This change needs to be reflected especially in the world’s largest economy, viz. the United States. Introduction The world has been hurled into a new flux since mid-2007 with the onset of the housing and financial crisis which rapidly morphed into a global economic crisis in 2008. For most East Asian and Southeast Asian countries, however, this was a year-long trade crisis which at last appears to be bottoming out. The demand for Asian exports collapsed in the aftermath of the demise of Lehman Brothers in September last year; in the fourth quarter of 2008 and the first quarter of 2009, quarter-on-quarter growth rates of exports declined by close to 60 percent in the Asian newly-industrialising economies (NIEs), by about 30 percent in Japan and ASEAN-5, and by 50 percent in China and India. 2 Though the freefall of global trade seems to have been arrested in the past month, global trade volumes are still expected to decline by some 10 percent in 2009, the worst decline in trade since the 1930s.

Dr Suparna Karmakar is a Visiting Research Fellow with the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. The views expressed are strictly personal. She can be contacted at isassk@nus.edu.sg. IMF Staff calculations, based on CEIC Data.

There are many causes for the present financial crisis, with roots in the growing global current account imbalance, 3 in short-sightedness and excessive leverage at financial institutions, and basic failures in financial supervision and regulation. However, the argument that has gained in strength during the ongoing crisis is the role of global payments imbalances as one of the more fundamental underlying causal factors of the world’s economic woes. Most economists, financial analysts and central bankers, including the present Chairman of the United States Federal Reserve, Ben Bernanke, and the current United States Treasury Secretary, Timothy Geithner, “attributed the large United States current account deficits to a savings glut in China and emerging markets, understating the role that excessive fiscal deficits and debt accumulation by American households and the financial system played”. 4 While the United States’ arguments were aimed at highlighting the deleterious effects of excess saving in the rest of the world while underplaying the overconsumption effects, even the central bankers from developing countries concurred on the larger issue of the unsustainability of large global imbalances. D. Subbarao, Governor of the Reserve Bank of India, recently argued that, “No crisis as complex as this has a simple or a single cause…but if we probe deeper, we will learn that at the heart of the crisis were two root causes – the buildup of global imbalances and developments in the financial markets over the last two decades”. 5 The financial sector deregulation in the United States in the 1980s allowed markets to innovate, and the increasing securitisation of United States mortgages in the 1990s helped unleash a huge amount of liquidity that lifted markets everywhere. Data from Bloomberg show that the Dow zoomed around the time of this deregulation, rising from a level of around 1,000 in 1980 to nearly 11,000 in 2000 and crossing 14,000 just ahead of the onset of the current financial crisis. A part of this liquidity also went to the riskier emerging markets as market- and efficiencyseeking investments by multinational corporations (MNCs), especially as certain productive activities started becoming uncompetitive at United States costs. This began the cycle of repatriating profits and net capital outflows from developing countries. This trend was subsequently reinforced by the recycling of trade surpluses (a major part of which was due to the exponential growth of intra-firm and intra-industry trade in the later part of the 20th century) of Asian countries. 6 The increasing foreign exchange reserves by the surplus 3

5 6

The phenomenon of “growing imbalances” in the world economy is popularly understood as the changes in current accounts of major actors, with the rising United States deficits receiving special emphasis in recent discussions. The current account balance of a national economy or a group of economies is a statistical construct, which highlights cross-border linkages of productive processes (through external trade) and capital/labour movements (through interest, profit and wage remittances). Moreover, current account balance is also the starting point in estimating net resource flows from and towards a national economy (or a group thereof). Roubini (2009a). Ben Bernanke in a 2005 speech asserted that rather than the United States saving too little, the rest of the world saves too much, and made it fashionable to focus on the savings-investment balances of surplus countries as a key perpetrator. One of the most developed models is presented in Caballero, Farhi and Gourinchas (2008). The perspective of excess saving outside the United States as the primary cause of low interest rates is echoed in the comments of Lawrence Summers, Bradford DeLong, and Richard Cooper at the 2008 conference where the paper of Caballero and others was presented. Within the context of the world balance of payments, a deficit at one of the major blocs has to be compensated by a surplus somewhere else. Well-known macroeconomic identities show that such a situation signifies low savings with respect to investment in the former and vice versa in the latter. Aggravation of global imbalances occurs when the gulf between the two ratios rises. The search for causality may be an impossible task since the two processes are supposed to be simultaneous. ASSOCHAM JRD Memorial Lecture, New Delhi, 31 July 2009. Pettis (2009).

countries was an obvious indicator of the accentuating imbalance, notwithstanding the precautionary justification for the buildup of Asian trade surpluses after the Asian Financial Crisis in 1997-98. 7 A part of the Asian trade surplus was accumulated in United States dollars (estimated at around 65 percent of their foreign exchange reserves) since managed exchange rate policies and the trade financing requirements in Asia limited the ability of governments to diversify significantly out of the dollar. In this paper, we analyse the role of different factors in creating the global imbalance, in particular, underlining the role of non-trade policies in the United States and China in creating and feeding the growing global imbalance, and based on that suggest the policy reforms that the United States must consider to help rebalance the global economy. The Rise of China in United States’ Trade Relations The United States’ current account imbalance with Asia has been deteriorating since 1980s. However, the United States-China bilateral trade imbalance and build-up of reserves since the turn of this century in particular, are regarded as the most important contributors to the ballooning global imbalance in the past few years, though generally the continuing United States imbalance with the East and Southeast Asian economies (in aggregate) is cause for equally serious concern. 8 In the last decade of the 20th century, the United States household savings also started to nosedive. Excess consumption in the United States was financed by net dis-saving (as discussed, the United States became a net importer of capital), a large part of which was reflected in rapidly increasing trade deficits vis-à-vis the rest of the world since 2001 and, in particular, vis-à-vis trade in goods with China. Data collected by the National Bureau of Statistics, China, reveal a strikingly sharp rise in China’s total trade as a percentage of gross domestic product (GDP) since China’s entry to the World Trade Organisation (WTO) in 2001. 9 The latter evidently ensuring rule-based market access for Chinese exports into the western markets, alleviating the uncertainty of having to renegotiate market access conditions annually with individual trade partners. This certainty also favoured the United States-China trade, and the United States bilateral merchandise trade deficit with China ballooned from around 2003 onwards, until the onset of the financial crisis in 2007. Of course, the fact that most of the East Asian exports started to flow out of China by this time did add to the growing bilateral trade imbalance, with the changing competitiveness and consequent splicing of production processes in the region enabling China to become the final assembly hub for many of the region’s exports to the rest of the world.

The Deputy Managing Director of the International Monetary Fund, Takatoshi Kato, suggests that the myth that large stocks of foreign exchange reserves offer an effective insurance against capital account crisis has been dismantled in the current crisis. The vast build-up of Asian reserves during the past decade certainly came in handy during the massive wave of the financial turmoil last September-November. However, the high levels of reserves were not able to insulate Asian economies, and the real and financial strains in the West were still transmitted to Asia. Germany and Japan are the other two major world economies with unsustainable trade imbalances (though not vis-à-vis the United States), but the sheer scale of the imbalance between the United States and China and the relatively larger impact of the world’s two largest economies appears to be at the root of this global obsession with the United States-China trade and financial imbalance. It also needs to be remembered that since the late 1970s, United States has run sustained trade deficits with the East Asian countries, beginning with Japan, followed by the NIEs and then ASEAN-5 nations. Kroeber (2006).

The 2007-09 recession did help to mitigate a part of the above imbalances, as the United States consumers started saving at their fastest pace in 15 years. The United States household savings rate rose to 6.9 percent in May 2009 (equivalent to annual savings of US$750 billion in today’s economy), the highest since December 1993, as increases in personal spendings were less than increases in incomes (the rate in April 2008 was zero). Furthermore, the current-account deficit of the United States, which includes trade in goods, services and income transfers, narrowed in the first quarter of 2009 to its lowest since 2001 as Americans saved more and bought fewer imported goods (the discretionary spending component). The United States current-account deficit has shrunk dramatically from almost six percent of GDP in 2006 to less than three percent of GDP in 2009. Taken by itself, the increased household saving has the potential to eliminate almost all of America’s dependence on foreign capital. 10 China has also increased domestic spending in order to counter the effect of the recession on its domestic economy. The Chinese trade surplus is shrinking because the country’s economic growth in 2009 reportedly came from domestic demand which requires continued imports, though exports continue to remain weak. 11 China’s merchandise trade surplus has narrowed to US$35 billion in the second quarter of 2009, a 40 percent year-on-year decline, which when translated in real terms is even more impressive. Goldman Sachs estimates that after adjusting for changes in prices, China’s export surplus in the second quarter of 2009 will have shrunk to less than a third of its level a year ago, even suggesting that a monthly trade deficit is possible in the near future. However, the United States-China bilateral trade continues in the same pattern as before. Recent data from the United States International Trade Commission and Economic Policy Institute indicate that China’s share in the United States non-oil merchandise trade deficit has grown and while the United States monthly nonoil trade deficit declined to 53 percent in the past one year, China’s share in this deficit has surged from 69 percent in 2008 to 83 percent through May 2009 (see the chart below).

10 11

Feldstein (2009). China’s reported economic health in the face of continued weakness of exports has led many analysts to contest it. Makin (2009) argues that this is a ‘bogus boom’ running on liquidity and creative accounting.

It would thus appear that the underlying causes of growing United States-China bilateral imbalances have accentuated in the current recession, with the trade imbalance continuing to be a key contributor. While United States consumers seem to have tightened their belts, the interplay of the counter-cyclical macroeconomic and financial policies adopted by the various national governments seem to have done little to help unwind the global imbalance, a key perpetrator of the worst global economic recession since the 1930s. In fact, recent data indicates that though the global economic freefall seems to have been arrested, the prospects of a global recovery (ex-China and India) continue to be anemic at best. 12 This requires countries to actively work at deviating from their complacent “business-as-usual” models and search for viable and sustainable policy options for domestic economic restructuring and reorientation in order to moderate the imbalance over time. Using the recession as a correction mechanism and stabiliser is a rather painful way of effecting the much needed economic restructuring; rebalancing via the recession is hardly recommended. Furthermore, with a (albeit modest) recovery in sight, the incentives for policymakers to inflict painful restructuring measures on the already hurting electorate will diminish. In trying to understand whether and how the global imbalance can be unwound so as to have minimal costs of restructuring, we first discuss whether China’s mercantilist policies are the main cause of accentuating global imbalances and reserve accumulation, and thereafter discuss possible interim policy options for the United States. The optimal solution for righting the internal imbalances in major economies without further adding to external imbalances is well known: consumers in the surplus countries must provide the growth impetus needed to replace the withdrawal of the United States consumer from the world economy. However, this is easier said than done. Economists now argue that the policy actions that have proved so effective in averting the worst recession since the 1930s from deepening into another Great Depression are working to perpetuate the extant imbalances rather than reducing it. Is Trade Imbalance the Only Culprit? Among the major causes for the existing global imbalance, the most vilified suspects are: trade imbalances arising out of the unbalanced global demand and supply situation and the consequent net saving imbalance of nations. It is a well-accepted argument today that the Asian countries have a high dependence on the markets of western-industrialised countries for domestic economic growth and development (the ill-famed export-led growth model or mercantilist policies). 13 As argued in the International Monetary Fund (IMF) report, much of Asia relies heavily on technologically-sophisticated, high-end manufacturing exports, 14 essentially high income-elasticity products, whose demand has collapsed. Thus, given that 12

The favourable growth and profitability prospects of companies in most countries (across all economic sectors) are largely on the basis of cost cutting and improved efficiency, since sales continue to remain depressed. The higher-than-expected profits posted by financial institutions are “on paper, as forbearance and public subsidies are, for now, hiding their mounting losses”: Roubini (2009b). But in fact, the notion of high intra-regional trade in Asia (intra-regional trade accounts for over 55 percent of total Asian trade) as a key source of regional growth appears a fallacy when corrected for intra-industry and intra-firm trade. In reality, a large fraction of trade within the region is intra-industry processing and assembly through vertically integrated production chains of transnational manufacturing companies (and many of them are American MNCs) that use the region as a base for global supply. In particular automobiles and electronic consumer goods, and electrical and electronic capital machinery that go into manufacturing of the first two sectors. These sectors also tend to exhibit a stronger cyclical response, and heavy reliance on financing, all of which contributed to increasing susceptibility to the financial crisis and more rapid deleveraging following the onset of the crisis of confidence. Source: IMF (2009), Chapter 1.

final demand for products from the region rested largely in demand from westernindustrialised economies, and in particular the United States, it is argued that any sustainable increase in domestic or regional consumption will necessarily require structural changes of the economies in the region. A global economy over-dependent on American consumerism is therefore advised to reduce its dependence on United States imports, and boost domestic consumption in the surplus countries, most notably in East Asian countries such as China, South Korea and Japan. From the above, the most logical recommendation would be that the Asian economies (and in particular China) need to increase their domestic and intra-regional consumption of goods and services, thus reorienting domestic growth away from excessive dependence on extra-regional net exports. 15 Insofar as the United States-China bilateral trade imbalance is deemed the most pernicious contributor to burgeoning global imbalances, the relevant question to ask therefore is how much of the United States deficit is explained by the Chinese surplus. In fact, the recent surge in Chinese reserves in United States dollars by US$178 billion to US$2.132 trillion 16 (despite the publicly-aired concern by several Chinese leaders about the sustainability of United States dollars as global store of value) does indicate that there is a huge short-term self-interest on the part of the Chinese in not forcing America to reduce its capital inflows too quickly. However, it appears that the primary cause of China’s most recent reserve accumulation is not the great surplus of its exports over its imports, but the domestic financial and fiscal policies. This has resulted in a surge of liquidity (not all the directed bank lendings are deployed in productive investment yet 17 and a major part of the stimulus spending also has been saved) that has – somewhat counterproductively – flowed into stocks, property markets, commodity stockpiles, and consumer durables (with the help of special incentives for purchases of durables). Higher corporate savings, and the excess liquidity temporarily held in currencies and liquid assets, are presently bolstering the net reserve position of China. But how important have trade surpluses been in building China’s massive United States dollar reserve chest? It is important to assess the extent of which the reserve accumulation and the savings glut in China (and also other Asian economies) has depended on trade surpluses. As an illustrative case we analysed the United States trade balances vis-à-vis China. Data released by the WTO 18 indicate that US$295 billion of China’s merchandise trade surplus (assuming all of China’s trade is with the United States) can explain about a third of the US$865 billion merchandise trade deficit that the United States registered in 2008. In the same year, however, the United States registered a US$130 billion surplus in its commercial services trade with the rest of the world, reducing its trade and services deficit to US$735 billion. The United States-China bilateral trade deficit was US$268 billion in 2008, having increased by US$10 billion over the 2007 trade deficit. 19 Thus the huge United States deficit of six percent of its estimated US$14 trillion plus GDP cannot be explained in its entirety by the United States-China bilateral trade imbalance, though the latter did help sow some of the seeds of this imbalance. 15

18 19

Almost all economists and western policymakers, analysts from all the multilateral agencies as well as consultants from private firms have inevitably recommended the need for Asia to rebalance its current account and reorient its demand pattern inwards. These voices were first heard in the aftermath of the Asian Financial Crisis a decade ago, but have become much stronger since 2002-03. Vide Chinese reserves data released on 15 July 2009, http://www.bloomberg.com/apps/news?pid=20601087 &sid=alZgI4B1lt3s. Makin (2009, op cit) argues that while the measured pace of China’s increase in production is rising, the public works projects and actual spending already recorded are falling behind schedule. World Trade Report 2009, Chapter 1. US DOC May 2009 Release: http://ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf.

However, focusing on the bilateral trade balance misses a bigger and more important story. As Greg Mankiw argues that while the bilateral trade deficit is not fiction but rather meaningless statistic. Furthermore, the overall trade balance is inextricably linked to a nation’s savings and investment; that is not true of a bilateral trade balance. As discussed in the earlier section, the United States-China trade imbalance in this decade is largely a result of a shift in the United States’ trade with East Asia. The Asia Foundation Report (2008) on “America’s Role in Asia” notes that by 2006, China replaced the United States as the number one trading partner of Japan, South Korea, Taiwan, and a number of Southeast Asian countries. Furthermore, the United States’ trade deficit with the rest of the world has grown more than that with China and East Asia. Between 1998 and 2007, the share of the rest of the world in the United States’ trade deficit grew from 25 percent to 51 percent. 20 It may be recalled here that in the face of its falling international competitiveness, the United States has, since the late 1970s, consistently used trade imbalances as an excuse to protect domestic industries from foreign competition. 21 The United States’ rhetoric on the savings surplus that emerged in China in 2005 and the subsequent years is, in some respect, reminiscent of the debate between the United States and Japan on the origins of the two countries’ external imbalances in the 1980s. In that period, United States economists emphasised excess saving and a current account surplus in Japan as primary causes of the external imbalances between the two countries. 22 However, it is time that the country’s policymakers targeted the more important perpetrator of the United States’ trade woes, namely, the declining United States competitiveness in a large group of consumer industries. How to Unwind the Imbalances: Options for United States Policymakers Assuming that policymakers are willing to take hard decisions and enact necessary reforms, what can be the least disruptive manner of restoring balance and restructuring large economies at a time of global economic weakness? Furthermore, it needs to be evaluated whether or not this reorientation is feasible. While the basic logic of the above recommendations is accepted, countries should not rush into adopting mitigation policies without a careful analysis of their medium-term impact. In a recent blog entry, an European researcher has in fact questioned the merits of reorienting China’s (and by extension Asia’s) economic growth model, noting that contrary to popular belief, China’s growth has always been investment-led rather than export-led. 23 It has been estimated that the composition of the Chinese economy in recent times has been 40 percent investments, 40 percent consumption, 10 percent net exports, and the rest is government consumption. However, over 80 percent of China’s growth this year will be state-directed, either through public spending or officiallyinduced lending, and the government’s share in consumption is likely to rise further. A decomposition of the ongoing Chinese stimulus programmes shows that about 72 percent of 20

22 23

See the chart on Composition of the United States Global Trade Deficit, US-China Business Council (2008) report on “US-China Trade in Context”, http://www.uschina.org/public/documents/2008/04/us-china_trade_ in_context 2008.pdf. Baldwin and Richardson (1984): By the 1970s the United States’ export competitiveness was no longer unchallenged, which led to changes in attitudes and approaches of the United States’ politico-economic engagements with other nations and its trade policy initiatives and negotiations. The change was manifest in that after 1970s, the United States’ trade policy insisted on the inclusion of non-tariff escape clauses allowing the United States to modify or withdraw tariff reductions if increased imports resulting from a concession that was deemed have caused/threatened to cause injury to domestic industry (i.e. alleged ‘unfair’ trade practices by partners). Bosworth and Flaaen (2009). Fredrik Erixon (2009): http://www.ecipe.org/blog/re-orienting-china2019s-economic-growth-2013-do-wereally-want-it.

China’s massive US$586 billion stimulus (about 14 percent of the Chinese GDP) is devoted to infrastructure creation (at the national level). If we add the local and municipal stimulus programmes to this, and if the bank lending programmes are also encouraged, the share goes up further. Thus simply reducing export shares may not reduce the net savings, unless other non-trade policy changes are also initiated. Moreover, the net reserves accumulation is more than a function of the net trade surplus. Financial policy and savings management plays an important part in this. As argued by Michael Pettis (2009) and Nicholas Lardy (2008) among others, building consumer-centric economies in Asia would call for a reorientation of domestic fiscal and financial policies in a manner that eliminates financial repression (defined as low or negative real return on deposits), especially in China. Many analysts have long pointed to exchange-rate manipulation as a quick fix for trade imbalances. However, as past experience has shown that unless commensurate domestic policy changes are undertaken, a currency appreciation need not necessarily lead to a decline in bilateral trade imbalances. In response to the Plaza Accords, Tokyo directed a flood of low-interest credit into the manufacturing sector while informally guaranteeing corporate borrowers. Manufacturers increased production for export markets even as household consumption declined. The trade surplus with the United States increased. China is trying to do the same thing, despite a rising yuan. The country’s policies include low lending rates enforced by the central bank, energy and commodity subsidies and most importantly, a flood of implicitly-guaranteed credit aimed at investment in infrastructure and the manufacturing sector. The outcome is a rising trade imbalance from 2003-07, despite the steady depreciation (real effective) of the United States dollar vis-à-vis the yuan from February 2002. Furthermore, after the Asian Financial Crisis of 1997-98, the countries in the region have strengthened their external payments and absorbed the excess supply of foreign exchange by accumulating large amounts of reserves as a self-insurance against the sudden stop and reversal of capital flows. To that extent therefore, maintaining the value of these reserves becomes critical. However, banks are the biggest beneficiaries of financial repression, though the latter provides enormous implicit subsidies to corporates, and the high profitability of the favoured few 24 are at the expense of other businesses as well as consumers. All this has led to a further accumulation of savings, which in view of the official policy of limiting the agents and modes of savings management and reserve accumulation, results in a narrow band of options in which the Chinese reserves can be stored. In fact, more problematic than providing for low-interest credit and incentivising production for exports, are the Chinese financial sector policies that require all business savings (other than reinvested earnings) to be deposited with the central bank for the proper channelling of savings. The Chinese central bank then uses these savings mostly to buy the safest instruments, namely the United States Treasury bonds. The central bank deposits add to the accumulation of United States dollars as reserves in China. 25 Thus, it can be argued that domestic fiscal and financial policies were the 24

It has been argued that from 2000 to 2005, savings vis-à-vis GDP in the household and corporate sectors in China rose from 14.8 percent to 16.2 percent and 15.5 percent to 20.4 percent, respectively (Kuijs, 2006). In recent years however, corporate sector earnings have improved tremendously, especially in the state-owned enterprises that have a strong monopoly in their markets. These enterprises are not obliged to pay dividends to the government, and so the abundance of their internal reserves become the saving of the corporate sector and pay for new investment. Of course, in this case, wasteful investment is aggravated because the cost of raising funds is effectively zero. China does not release the currency composition of its reserves, but the dollar is thought to make up around 65 percent of the portfolio; that share could actually have increased slightly in Q2. Euro assets make up most of the rest, along with a small amount of pound sterling, yen, and likely even a small amount of Canadian

more important perpetrators of the current account imbalances than the much maligned trade imbalance. In fact on the contrary, determinants of international trade imbalance include anything that affects domestic consumption and production, or in other words, any domestic policy. A freer capital account is a positive and necessary step on China's long-term path towards economic modernisation and consolidation as a global economic powerhouse, but is unlikely to resolve the current account imbalances on its own. Nonetheless, it is not only the Asian economies that need to reform their domestic policies to ensure that the unwinding of the global imbalances is sustainable. China can help, but it remains a relatively poor country to be able to shoulder the major burden of adjustment. It is also argued that progress is already being made in reducing global imbalances; but there is no guarantee that this process will continue, or be sustainable. Studies by William Cline and John Williamson at the Peterson Institute suggest that the United States’ current account deficit will rise back above five percent by 2012 and soar into unprecedented terrain thereafter, unless the budget deficit is reduced sharply and the dollar depreciates substantially. In the absence of an alternative store of value and reserve currency (at least in the medium term), 26 the dollar is unlikely to weaken to the extent necessary to restore balance and competitiveness unless drastic occurrences take place. The contention in this paper is that the United States has an important leadership role to play in the above restructuring, one that goes beyond the increases in household savings and has to begin with the acknowledgement that unless the United States’ competitiveness is restored, the trade (and current account) imbalances will continue to remain at unsustainable levels. This is not to suggest that the United States is not a competitive nation. It remains one of the most efficient producers in many capital goods and high technology industries, and also in a wide range of services. However, over time, the United States has lost its competitiveness in many consumer goods industries, partly as a result of strong trade union activism which raised the wage costs. This is also caused by a transport and technology-led integration of the world’s production processes, which added nearly three billion Asian labourers into the global production processes, thereby hugely altering the intra-regional comparative advantages. Stakeholders in the United States need to lobby for, or adopt policies that reflect this change. If either through minimum wage legislations or physical rationing of foreign labour inflow (usually resulting from special group lobbying and trade union pressures), the costs of domestic labour is maintained above the international average, profit-maximising companies will either relocate their production/outsource or move to higher-value added production processes that can sustain the higher costs. Both have happened in the United States since thte

and Australian dollars. China has also increased its gold holdings. Despite the increase, gold makes up a less-than two percent share in Chinese reserves, much smaller than its share in United States or European reserves. Can Special Drawing Right (SDR) work as the alternate reserve currency, as proposed by China? Economists say that to be viable global traders would have to begin denominating transactions in SDRs instead of dollars, and there is no sign of that happening anytime soon. Richard Portes of the London Business School says using SDRs as the top international currency is “not impossible,” but he adds that “the fundamental problem is that the issuer of the [international] currency also has to be the lender of last resort. The IMF does not have the legitimacy to do that.” Also, the store of value function of a reserve currency is important. SDR derives its value from the economies whose currencies it is valued on. And like the strength of a chain is its weakest link, SDRs value will depend on the strength of its weakest currency, and thus add to volatility. Dollar’s supremacy and status as the world’s reserve currency seems certain for the next decade and half, unless the present balance of payments system implodes as in the inter-War era.

1970s, with disastrous long-term consequences. The efforts of Detroit automobile makers to win protection from Japanese competition in the 1980s did give them temporary respite, and helped maintain the American standard of living for the United States’ auto workers. However, after 25 years and having experienced the great recession, the United States automobile industry lies in shambles, with the firm realisation that unless operations are changed drastically, life is going to be even more difficult. Today, the United States automobile unions have volunteered for pay-cuts or the freezing of salary payment to retain what remains of the United States’ competitive edge. It need not have come to this, had the corrective measures to address the key competitiveness issue been addressed in the 1980s. On the other hand, most consumer industries responded to rising wage costs by relocating production facilities. These return to the United States as imports to satisfy the United States consumer demand. Returning to semi-autarky and the localisation of production (a hugely popular idea these days) will at best retain some economic activity at home but at the expense of the consumer; a sure recipe to force the United States economy back into a low-growth equilibrium for some time to come. Moving to higher-value added products also has its own limitations. First, there is a limit to which new and more higher-value-added activities can be identified and the economy restructured suitably. Second, and more importantly, such upgrading is almost always capital- and technology-intensive. The mass of the low- and semiskilled population in the United States needs new employment opportunities. Unless the United States accepts a much higher rate of unemployment as the new norm, creating new economic activities that can re-employ the laid-off and new job seekers may call for lowering the average wages and wage expectations. This will also help restore the economic viability and competitiveness of some of the economic activity that had to be moved offshore in the past few decades. It will not be easy to convince an already hurting populace to accept weaker wages, but the recession has already revised wage expectations downward and policies can be instituted that will ensure this weakness persists – reforms by stealth, which requires immense vision, political will and connivance. The government will also need to allocate more to social sector spending. However, over time, this will reverse the present highly-skewed situation whereby the United States wage income as a share of GDP has been progressively and rapidly declining for the past half a century. A critical lesson of the recent rise in racial antagonism in the developed countries needs to be interpreted to also include the very real angst of those middle-income members of the society, especially those who are not college graduates, who have had to bear the brunt of economic change bred by globalisation and technological transformation. Even before the recession, the decline in the number of well-paid jobs in manufacturing hit the incomes of this group of Americans hard. This group is now even more rapidly denied the chance to make a decent living, as the now-obvious structural shift of the United States economy away from industrial production has compounded the problem. This trend needs to be reversed simply to avert potential adverse social fallouts and insurrections, and one simple solution would be to adopt domestic industrial policies geared towards increasing the competitiveness of products and processess that can employ the mass of moderately-skilled United States job seekers. The lesson from industrial success is that adhering to fundamentals of commerce is a must – give what the consumer wants, control costs and deliver value for money. The United States manufacturing industry seems to have lost this plot since around the 1970s, but it is not too late to relearn it.

References Baldwin, Robert E. and Richardson, J. David (1984): “Recent US Trade Policy and its Global Implications”, NBER Working Paper No. 1330, April. Bosworth, Barry and Aaron Flaaen (2009): “America’s Financial Crisis: The End of an Era”, ADBI Working Paper No. 142, July, Tokyo: Asian Development Bank Institute. Feldstein, Martin (2009): “US Saving Rate & the Dollar's Future”, Business Standard Opinion, 25 July. IMF Regional Economic Outlook for Asia and Pacific (2009): Global Crisis – The Asian Context, May, Washington D. C. Kroeber, Arthur (2006): “China’s Industrial and Foreign Trade Policies – What are they and How Successful have they been?”, paper presented at the Kelley School of Business, Indiana University, Bloomington, Conference on Capitalism with Chinese Characteristics: China’s Political Economy in Comparative and Theoretical Perspective, 19-20 May. Kuijs, Louis (2006): "How will China's Saving-investment Balance Evolve?" World Bank China Research Paper No. 4, May. Lam, Willy (2009): “Rich China, Poor Peasants”, Opinion Asia, Wall Street Journal, 24 July. Lardy, Nicholas R. (2008): “Financial Repression in China”, Peterson Institute Policy Brief, No PB08-8, September. Makin, John H. (2009): “China: Bogus Boom?”, AEI Economic Outlook, August. Pettis, Michael (2009): “US and China must Tame the Imbalances Together”, YaleGlobal, 6 January. Roubini, Nouriel (2009a): “The Great Preventer”, New York Times Op-Ed, 25 July. Roubini, Nouriel (2009b): “The Road Ahead for the Global Economy”, Forbes Opinion Column, 29 July. WTO World Trade Report, 2009.

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ISA S Insights No. 85 – 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

Sri Lanka’s Post-Conflict Transition: Reconstruction, Reconciliation and Aid Effectiveness Darini Rajasingham Senanayake 1 Abstract In the heyday of the Non-Aligned Movement, Sri Lanka’s politicians and diplomats wielded an influence disproportionate to the country’s size on the international stage. However, the last 30 years of armed conflict and the way in which it ended has tarnished the island’s international reputation. Yet, at home, the Mahinda Rajapakse government, by comprehensively defeating the Liberation of Tamil Tigers of Eelam, has secured the lasting gratitude of the majority of the people and is widely expected to sweep the general and presidential elections to be held in 2010. The Sri Lankan government also has a golden opportunity to move quickly to heal the wounds of years of conflict through timely reconstruction and reconciliation. The international community would need to support the transition by ensuring aid effectiveness and good donorship. Introduction The President of Sri Lanka, Mahinda Rajapakse, had planned to attend the 64th Sessions of the United Nations General Assembly in New York in September 2009 and showcase the success of the island’s military strategy in defeating terrorism. The current regime in Colombo had argued all along that it was fighting a “war on terror” and various experts had suggested that the country may be a role model for defeating terrorism. However, President Rajapakse’s trip was later cancelled and Prime Minister Ratnasiri Wickremanayake went in his place instead. In the same week, the United Nations sent two high profile representatives of the Secretary General to Sri Lanka for consultations on the post-conflict resettlement and reconciliation process. 2 Though the United Nations annual meetings in New York may have provided an ideal venue to showcase Colombo’s success on the terrorism front, the failure to resettle approximately 250,000 displaced people still held in internment camps in the north and to develop a roadmap for reconciliation and power sharing with the Tamil-speaking minority communities 1

Dr Darini Rajasingham Senanayake is a Visiting Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. She can be reached at isasdr@nus.edu.sg. The two representatives were Walter Kaelin, United Nations Representative on the Human Rights of Displaced People and B. Lynn Pascoe, Under-Secretary-General for Political Affairs.

in the northeast, as well as the general human rights situation in the country, seem to have caught up with Colombo. Western countries with large Tamil diaspora communities that protested the war in northern Sri Lanka in the days of the final dénouement had been circumspect about Colombo’s credentials to be a model of how to defeat terrorism. While the President’s office remained tight-lipped on why he had changed his mind about attending the United Nations General Assembly meetings, he suggested that there is an international conspiracy to devalue the victory over the Liberation Tigers of Tamil Eelam (LTTE). The President also stated that he is willing to face any judiciary processes and defend the soldiers who fought for their motherland and defeated the LTTE. Four months after the end of the war, Sri Lanka is in transition. The challenge of winning the peace, demilitarising, democracy and governance, and integrating the minority communities to ensure reconciliation and lasting peace remain. The government continues to act as if the LTTE presents a clear and present danger even though the organisation has been dismantled. Given the highly centralised organisational structure of the LTTE, the remaining foot soldiers are unlikely to present a significant threat, as was the case with the Janatha Vimukthi Peramuna (JVP) once its leadership was gone. In the present context, the levels of militarisation and securitisation, particularly of Colombo and the northeast regions, seem to merely serve the purpose of extending the extraordinary executive privileges of the ruling Rajapakse family. Sri Lanka’s post-conflict challenges may be classified into two categories – immediate humanitarian and human rights issues; and long-term political settlement with the devolution of power to the conflict-affected regions, and the recognition and institution of multiculturalism. On both these counts, the Sri Lankan government is under considerable pressure from India, the United States, the European Union and the United Nations to quickly resettle those held in camps and to come up with a political solution to the conflict to ensure lasting peace. At the same time, Colombo has secured the support of India and China as well as Iran, with which it recently inked an oil deal with a loan on an extended payment plan. Japan too remains actively engaged in Sri Lanka and historically has been its largest donor. The Sri Lankan government has secured an International Monetary Fund (IMF) loan of US$2.4 billion to stabilise its balance of payments crisis and post-conflict reconstruction in the aftermath of the war. The Sri Lankan Central Bank announced last week that its foreign reserves have never been larger. Resettlement of 250,000 internally-displaced people held in camps The resettlement of the 250,000 internally displaced people (IDP) held in internment camps is an immediate humanitarian and human rights concern. These people lack the ability to move about freely and engage in income generation. Many are held involuntarily. The government argues that there is mine clearing to be done before they can return safely and that there are LTTE cadre in the camps. It therefore needs to carry out rigorous screening in the interest of security. Some of the camp inmates may be witnesses to war crimes committed by both parties. However, many of the people held in camps have relatives whom they may stay with before returning to their own homes, and the government has announced that those whose relatives apply for their release and are willing to house them may leave. The government has been working with selected international non-government organisations (the International Committee of the Red Cross) and United Nations agencies to provide food, shelter and

medical care to the IDP and has assured the United Nations Secretary General, Ban Ki-moon, that it plans to resettle 80 percent of the IDP by the end of the year. The Sri Lankan government has also solicited aid from the international community to help fund and speed up the de-mining process, as well as assist with the return and resettlement of IDP in villages. This entails rebuilding villages, housing infrastructure, providing electricity, water, access roads and basic services, as well as a cash grant as a start-up allowance. Leaders and members of the Tamil-speaking minority communities themselves appear to have adopted a pragmatic stance, and the Tamil National Alliance (TNA) [formerly the party that represented the LTTE] has pledged to work with the government to facilitate the speedy resettlement of IDP. Long-term political solution for sustainable peace: Implementation of the 13th Amendment to the Constitution Unless the root causes of conflict are addressed, terrorism may return to the country in a few years or decades. For sustainable peace in the long-term, the highly centralised post-colonial state in Sri Lanka would need to devolve power to the northeast regions and share power with the minorities. The substance of power-sharing with the Tamil and Muslim minorities in the northeast is contained in the 13th Amendment to the Constitution, which was effected when India intervened in Sri Lanka in 1987 to ensure a peace settlement between the Sri Lankan government and the LTTE. The 13th Amendment to the Constitution established Provincial Councils as a means to decentralise power and enable self-governance in the regions. However, it was never properly implemented in the north and east due to the secessionist struggle. There are two models of post-conflict reconciliation. One is reconciliation based on addressing the root causes of the conflict and the second is a more pragmatic model of reconstruction and development sans addressing the thorny issues of human rights violations and war crimes by both parties to the conflict, or the devolution of political power to ensure greater autonomy for the regions. In the near-term, the Sri Lankan government appears to favour the latter model of reconstruction and development of the conflict-affected areas without redress of the political grievances and demands of the Tamil minority community living in the north and east for greater devolution of power to the provinces. This may be largely be due to the fact that some ultra-Sinhala nationalist coalition members of the ruling United Peoplesâ&#x20AC;&#x2122; Front (UPF) are against the devolution of power or power-sharing with the Tamil minority. This could change after the presidential and general elections are held in 2010. The All Party Representatives Committee (APRC), which was convened three years ago to develop a framework for a political solution, after consultation with all political parties, has recommended a new Constitution and the pruning of Presidential powers. The APRC process was meant to go beyond the 13th Amendment and fix its deficiencies. The APRC report recommends maximum devolution of power to the provinces within a unitary state, and that the provinces should have the power to formulate legislation for the provinces without interference from the centre. There would be a clear division of powers between the centre and the provinces by doing away with the concurrent list, which was one of the obstacles to the setting up of the provincial council system as proposed in the 13th Amendment to the Constitution. However, land, police and security would not be devolved subjects.

Obstacles to a political solution – the 2010 Elections It is widely believed that the next general elections would enable the Sri Lanka Freedom Party (SLFP), the principle party of the government, to dump its ultra-nationalist coalition members and move towards the implementation of the 13th Amendment. Through this process, therefore, the election can offer a political solution to Tamil demands for selfgovernment in the north and east by the devolution of power to all regions. The current ruling coalition comprises the ultra-nationalist JVP and the Jathika Hela Urymaya (JHU), formerly a Buddhist monks’ party. Both of these coalition partners are opposed to the devolution of power to the north and east and political settlement with the minorities. It is hoped and anticipated that the 2010 general elections would enable President Rajapakse to address the issue of the political solution to the conflict if his party’s reliance on these two ultranationalist parties is diminished. As long as the LTTE controlled significant parts of the northeast, the central government feared that the group would use the devolution of power to consolidate a separate state. Hence, the provincial council system was never properly implemented in the north and east. However, now that the LTTE no longer exists as an organisation on the ground, one of the obstacles to the devolution of power has been removed. The principle stumbling block at this time is the ultra-Sinhala nationalist coalition parties of the government. The primary opposition, the United National Party, has stated that it would support the devolution of power to the provinces as a means of power-sharing with the Tamil and Muslim minorities in the north and east of Sri Lanka. Economic and governance challenges in post-conflict areas The Rajapakse government is increasingly dovetailing its policies to make Sri Lanka a destination for Indian and Chinese investments. As a first step in attracting investments in the former northeastern conflict zones, the government recently announced a 15-year tax holiday for companies setting up operations in these regions. Among those queuing up are NTPC, Cairn, L&T, Purvankara and various information-technology companies. India’s National Thermal Power Corporation is expected to sign an agreement soon to set up a 1,000 MW coal-based power plant in Trincomalee with an investment of US$500 million, while Cairn India has received approvals for oil exploration projects at a cost of US$400 million. Infrastructure companies Larsen & Toubro and Puravankara are also headed to the island nation to set up shopping complexes and housing projects. BSNL recently bid for the Sri Lankan operations of Luxembourg-based mobile service provider, Millicom International. Sri Lanka is seeking technological investments as well. Meetings with information-technology majors such as Mphasis, HCL and Accenture to set up delivery centres have been concluded, according to C. Ignatius, Director of the Board of Investment, the Sri Lankan government’s investment promotion agency. Clearly, development cannot be a substitute for democracy and power-sharing with the minority communities in the north and east. Rather, development and democratisation must be concurrent. Presently, in the northeast, some government-backed Tamil paramilitaries continue to engage in the old war economy of terror, extortion, taxation and cronyism. Development priorities are not done in line with the development needs and priorities of local populations, but are rather controlled by Colombo, particularly the President’s brother, Basil Rajapakse, who controls reconstruction in the northeast with related crony capitalists.

There are also anxieties about a land grab of valuable coastal lands from IDP to build hotels and Special Economic Zones, particularly in the Sampur area in the Trincomalee District, where the INTP is to build its coal power plant as well as other parts of the northeast at this time. Simultaneously, moderate Tamil voices remain marginalised from the development process. In this context, there is an urgent need to fully implement the 13th Amendment to the Constitution and devolve power to the provincial and regional governments. The Chief Minister of the Eastern Province, a former LTTE child soldier that was part of an eastern wing that broke away from the organisation and supported the government, has repeatedly stated that his office is marginalised and does not receive the funds necessary for the reconstruction and development work in the eastern province. Moreover, recently, the highlyrespected University Teachers for Human Rights (Jaffna) reported that while fishing restrictions by the navy have been lifted in the conflict-affected regions, Tamil fishermen were harassed by the navy when Sinhala fishermen brought to Mannar (on the west coast) were challenged by the native Tamil and Muslim fishers of the area who have smaller boats and no political or military backing. Aid effectiveness and responsible donorship At the macro-level, in the context of an expanded defence budget for 2010, the IMF may need to review the situation before the disbursement of the second tranch of its US$2.6 billion loan to the Sri Lankan government even though the LTTE has been defeated. The expanded military budget may be subsidising corruption in high places given aid fungibility â&#x20AC;&#x201C; this is especially so since military budgets are rarely open to scrutiny for reasons of â&#x20AC;&#x153;national securityâ&#x20AC;?. At this time, questions are being raised as to whether the defence budget is part of a Rajapakse slush fund, given that significant parts of the almost-defunct Mihin Airlines budget came from the Ministry of Defence and the President and his brother are the Minister and Secretary of Defence respectively. Locally, in the northeastern post-conflict zone, the old land and resource conflicts and forms of state-sponsored economic discrimination against the minorities that were at the root of the 30-year war between the government and the LTTE in the northeast need to be addressed in a transparent and objective manner to ensure economic justice and necessary reconciliation, particularly for people who have been displaced and the traumatised in the war. In this context, post-conflict reconstruction assistance provided by foreign donors must have provision for tracking, monitoring and evaluation of aid projects by independent academics and civil society experts to ensure transparency, and that the funds reach their intended beneficiaries. Aid should not contribute to a new set of conflicts and conflict-sensitive aid policy and frameworks are necessary. Aside from Japan, the new Asian donors tend to have a circumscribed view on aid and have not been concerned about linking aid to good governance or human rights. Monitoring and evaluation have increasingly been part of the Organisation for Economic Co-operation and Development aid frameworks, which have recognised, over time, that aid could fuel poor governance, corruption, and cycles of conflict. Simultaneously, the current regime in Colombo needs to reaffirm that Sri Lanka is a multicultural and multi-religious polity and a Commission on ethno-religious equality should to be set up. Finally, the challenge would be to move from a national security state to the human security paradigm that, in the post-conflict period, people and equitable human development should be put first to ensure sustainable peace in Sri Lanka. In the language of human rights, this would entail balancing civil and political rights with economic and social rights.

Local-global disjuncture in the post-conflict aftermath In post-conflict Sri Lanka, it is apparent that there is a disjuncture between a significant part of the international community and domestic opinion. Domestically, President Rajapakse and the UPF government enjoy high levels of popularity for defeating the LTTE, listed as one of the world’s most dangerous terrorist organisations in the world. The conflict was a 30-year scourge on the country, with an estimated 80,000 killed and well over half a million displaced internally and into the Sri Lanka diaspora during that time. Prime Minister Wickremanayake announced during his United Nations General Assembly address that the last thrust to defeat the LTTE had cost the country US$2.8 billion. At this time, the majority of people in Sri Lanka, regardless of their ethnicity, are glad that the bombs are no longer going off, their children have a more secure future and the prospect for development in the country is brighter than it has been in the past three decades of armed conflict. Yet the question of reconciliation and substantive peace-building, which would entail re-structuring of the highly centralised state and power-sharing with the minorities in northeast Sri Lanka, remains. Elections, both general and presidential, are expected in 2010. President Rajapakse and the SLFP are widely expected to sweep through, given the comprehensive defeat of the LTTE. President Rajapakse’s personal popularity and the ruling UPF coalition government’s popularity is evident in the local government and municipal council elections held in August and October 2009 in the southern and northern districts. In the south, the ruling party’s candidate won almost 80 percent of the vote. Municipal council elections were held in Jaffna and Vavuniya. In the north, the results were mixed, with the pro-government Eelam Peoples’ Democratic Party (headed by a former rebel, Douglas Devananda) winning in the Jaffna municipal council elections. On the other hand, in Vavuniya, where over 250,000 people are held in internment camps, the TNA, which is the LTTE’s political front, won. There is a continuing trust deficit between Colombo on the one hand, and the United Nations and West on the other, which was not helped by Colombo’s decision to cancel the visa of a United Nations employee in the country last month – for the first time. At the same time, the European Union is currently pondering and is likely to extend the Generalised System of Preferences (GSP)-plus facility, which if lost to the country, could significantly affect the garment sector. The extension of the European Union’s GSP-plus facility is linked to the human rights situation in the island. Conclusion Sri Lanka was once recognised as a leader in the developing world in the decades following independence in 1948. During the heyday of the Non-Aligned Movement, the island’s politicians and diplomats wielded an influence disproportionate to the county’s size on the international stage. During those decades, Sri Lanka was also considered an ‘outlier’ with some of Asia’s best human and social development indicators despite relatively low per capita income. However, the last 30 years of armed conflict and the way in which it ended has tarnished the county’s international reputation. It may be that the government which won the war in Sri Lanka may lose the peace but the jury is still undecided on this matter. Having succeeded in comprehensively defeating the LTTE and securing the lasting gratitude of the majority of the people, the government has a golden opportunity to move quickly to heal the wounds wrought by three decades of war on the island’s multicultural and multi-faith social fabric, by ensuring the demilitarisation and

the restoration of full democratic rights and institutions, including a repeal of the Emergency Regulations and the Prevention of Terrorism Act. At the same time, the Sri Lankan governmentâ&#x20AC;&#x2122;s defeat of the LTTE raises the question of how, when and under what circumstances do the ends justify the means in combating terrorism. The key players in the international community, including the United States and the European Union, had listed the LTTE as one of the most dangerous terrorist organisations in the world and the chaos of the final showdown was orchestrated by the LTTE that held civilians as human shields. The international community had agreed that the LTTE needed to be neutralised but the means employed by the Sri Lankan government have been regarded as excessive. On the other hand, there are claims about western hypocrisy with regard to the war on Al-Qaeda and the Taliban in Afghanistan and Pakistan, where tens of thousands have been displaced and drones that target terrorists also fall on civilians. It seems that there are degrees of difference and these degrees matter when it comes to the number of people killed and displaced and the manner in which this is done, as well as, perhaps most importantly, how reconciliation, peace-building and post-conflict justice is enabled.

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ISA S Insight No. 86 – Date: 9 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

Towards a World without Nuclear Arms: Can 2010 be a Year of Hope? Iftekhar Ahmed Chowdhury1 Abstract The first decade of the twenty-first century began with bleak prospects for non-proliferation and disarmament of nuclear weapons. A set of unilateral actions by big powers led some to conclude that ultimate protection only lay in the acquisition of nuclear weapons. India and Pakistan expanded their arsenals, and North Korea joined the club. Iran ratcheted up what it called its ‘peaceful nuclear programme’. The 2005 Non-Proliferation Treaty (NPT) failed dismally, with nuclear ‘haves’ emphasising non-proliferation, and the ‘have-nots’, disarmament. Then the picture began to change with Mr Barack Obama’s election victory as United States (US) President in November 2008. He renewed US commitment to both non-proliferation and disarmament. The key players agreed to bring the United Nations (UN) back to centre stage in the deliberations, a complete reversal from the earlier position. Two important meetings are scheduled for 2010 – a summit in April in Washington, and the next NPT Review Conference in May. These have generated hopes for progress next year. The paper argues that 2010 can only be a year of hope if the global leadership can adequately respond to the challenges. A series of steps and measures for them to consider have been identified. The risks of failure have been underscored. It has been argued that the time has come for a forward movement from the doctrine of deterrence involving mathematical and quantitative analysis of destructive capabilities to a set of norms embodying a ‘culture of peace’, signalling the graduation of humanity to a higher level of civilisation. It proposes a convention banning all nuclear weapons, which for now can only be an aspiration, but one around which there should be consensus rendering it a universally-agreed goal.

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.

Introduction It has been long since advocates of a world without nuclear weapons have had any reason to cheer. Over the past decade things appear to have gone from bad to worse. The entry into force of the arduously negotiated Comprehensive Test Ban Treaty (CTBT) could not be effected for want of a requisite number of ratifications.2 India and Pakistan tested a number of devices each in 1998, and a decade later North Korea joined the ranks. The 2005 Review Conference of the Non-Proliferation Treaty was an unmitigated disaster.3 The Bush administration’s interventionist actions in Iraq and Afghanistan fuelled the notion that a surefire way to protect oneself from bigger powers was to acquire nuclear capability by hook or by crook. While it is true that deterrence held, and no conflict occurred involving nuclear weapons, with the increase in acquisitions by a larger number of states, the mathematical probability of a disaster, even unwitting or unintended, was enhanced. There was another burgeoning concern. Some of the new nuclear powers may have regimes that are weak or unstable. This has increased the fears of insurgents or extremist non-state actors toppling such governments and acquiring either state power and therefore control over such weapons, or some devices by themselves. The debate on whether the Pakistani arsenal is vulnerable to the Al-Qaeda or the Taliban is a case in point. Also, such prospects may sharpen the determination of the insurgency if there is such reward to be had for them at the end. The situation becomes complicated also because such threatened governments may hesitate to call in external intervention for fear of being seen to be accepting erosion of national sovereignty, even if they themselves are unable to tackle such insurgencies on their own, particularly when such insurgents would have no qualms about marshalling the international support of their ilk in advancing their goals. Anyhow, the picture with regard to non-proliferation and disarmament looked bleak indeed as the years wore on. This was exacerbated by the fact that the formal Nuclear Weapon States (NWS) appeared to be ignoring the disarmament aspects of the debate and focusing instead on non-proliferation, while the Non-Nuclear Weapon States (NNWS) were doing just the opposite. The situation was further complicated by the arrival on the scene of two countries, India and Pakistan, with fairly advanced nuclear weapon capabilities demanding seats at the table, but being denied it for fear that this might encourage others to take that route (North Korea? Iran?) The Picture Changes This picture began to change with the intellectual acceptance by the most significant player, the US, that both non-proliferation and disarmament needed to be addressed simultaneously, and the time to do it was now. 2

The CTBT, meant to complement the 1968 Nuclear Non-proliferation Treaty (NPT) and designed to advance the cause of its goals by promoting a global norm that would prohibit all modes of testing nuclear weapons, was opened for signature in 1996. It has not entered into force as it has failed to obtain the ratification of 44 key states. While 180 states have signed the Treaty, of the required 44 states, 35 have ratified it and nine have not. Three have not become signatories at all. 3 The US had largely ignored the event. The differences between the nuclear ‘haves’ and ‘have-nots’ were much too great, and both sides thought it better not to have a final document at all as they determined that a bad conclusion was worse than having no conclusion at all. The author, then the Ambassador of Bangladesh to the United Nations in New York, was a participant at that Conference.

The person to whom credit is owed for this is President Barack Obama, who, soon after assuming office in January 2009, followed up on his election pledges by laying out in Prague in April his vision of ‘a world without nuclear weapons’.4 He also stewarded a resolution in the UN Security Council on 24 September 2009 in which all the council members, including the five permanent members (P5), each one an NWS, to the NPT.5 The return of the issue to the UN, as this action obviously implied, both pleased and encouraged the world body to plan positive actions in this regard in the future.6 The fact of President Obama’s receipt of the Nobel Peace Prize should be a spurring factor in this regard to outweigh any criticism of the Nobel Peace laureate ratcheting up the war in Afghanistan by dispatching 30,000 more US troops. So the stage is set for the two key meetings on Disarmament and Non-Proliferation next year in 2010 – the summit on the subject that the US is planning in April 2010, and the NPT Review scheduled to take place immediately thereafter in May at the UN. Both the Administration officials and their ‘new’ partners at the UN Secretariat are committed to working to render these meetings successful, holding out hope, and leading analysts at least to see the glass as half full! Naturally success would be contingent upon the achievement of progress on at least two fronts, the CTBT and the NPT. Future of the CTBT There are three main reasons why a country would want to test its nuclear weapon. First, if it has acquired the weapon for the first time, it may deem necessary to announce this fact to the rest of the world, so that the potential adversary would take note, and be deterred. Second, if it is already a NWS, then the test would largely be focused on improving the weaponry in terms of kill-power, precision, deliverability, and survival under a situation of counterattack.7 Finally, a country may do so to seek recognition and prestige as a higher power, and thereby stake its claim to play a greater role in shaping global affairs in consonance with its perceived national self-interests. These are powerful incentives. The only way to wean away states from these would be to counter each of the above through the creation of norms and legislations, and a strong 4

Real Clear politics. http://www.realclearpolitics.com/articles/2009/obama_nuclear_proliferation.html (accessed on 6 October 2009). 5 For a more detailed analysis, see Iftekhar Ahmed Chowdhury, “Non-Proliferation versus Disarmament: A Destabilising Dichotomy”, ISAS Working Paper No. 94, 21 October 2009, p. 7. 6 The author’s meeting with the UN Secretary General Ban Ki-moon, 24 November 2009, during which the latter expressed his satisfaction at this development. 7 Acquisition of capabilities by new states, or a state-to-state spread of nuclear weapons is known as ‘horizontal proliferation’, whereas improvement of existing arsenals, usually undertaken by NWS is known as ‘vertical proliferation’. Earlier generation of nuclear powers see the former as more destabilising, while others argue that the latter is also both immoral and dangerous, as it enhances the propensity to use by appearing to be able to limit collateral damage with greater precision Because the US has not developed any newer weapons since 1992, they have evolved a programme to check reliability and maintenance of nuclear arsenals without testing, known as ‘Stockpile Stewardship’. Since the need for testing was obviated, this would normally draw the US close to the CTBT. But under the Bush Administration a new programme was introduced known as the ‘Reliable Replacement Warhead’, to expand on ‘Stockpile Stewardship’ and seek to enable the development of newer weapons within 18 months, and construct newer designs within four months, but without physical testing and using computer simulations, thus remaining largely within the letter, but NOT the spirit of non-proliferation norms.

negative public opinion with the aid of the civil society, academics and experts among others. For instance, with regard to the first point, testing may oblige the potential adversary to follow suit rather than submit to awe, as it happened in the case of Pakistan vis-à-vis India. Secondly, getting the powers to realise that seeking qualitative improvements can lead to a race in the area where each would strive for a higher level of superiority as between the US and USSR during the Cold War era, and currently among the US, China and India. Finally, and this is a major challenge, to create an international climate, whereby both new acquisitions and qualitative improvements would attract international opprobrium, backed by practical steps to deny them advantages, such as seats at significant tables including the Security Council, unless the states display sufficient conformity with the generally agreed norms, whether they are formal signatories to the relevant agreements or not. To date, 2,000 nuclear tests have been conducted by eight countries, some in the atmosphere, some underground, and others underwater. In the past, radioactive elements from the tests not only polluted the atmosphere, but also led to direct casualties, as in the case of a Japanese boat, oddly named “Lucky Boat”, which was not lucky at all when its crew was killed by fallout in 1954 from a hydrogen bomb test in the Pacific. The then Indian Prime Minister Jawaharlal Nehru floated a proposal for a “standstill” agreement a few weeks after the incident. Indeed, it was he who had made “the earliest and the most notable public calls for the cessation of nuclear testing.”8 As a result of such moral pressures eventually a Partial Test-Ban Treaty (PTBT) was agreed upon banning tests in the atmosphere, underwater, and in the outer space. It was flawed in that it allowed for underground tests, which continued for decades, and seemed to address the problems of only ‘horizontal proliferation’, in line with the wishes of the bigger powers. When the NPT was negotiated in 1968, and extended indefinitely in 1995, the CTBT was the result of the ‘package deal’ connected with the extension. But for reasons stated earlier, sadly, it is yet to come into force.9 But the prospects are improving. The UN SecretaryGeneral, encouraged by the burgeoning global sentiments, included nuclear test banning goals in his ‘five-point’ disarmament proposal announced at the UN on 24 October 2008.10 Hans Blix, the well-known expert on the subject and chair of the International Weapons of Mass Destruction (WMD) Commission said in 2006: “The Commission believes that a US decision to ratify the CTBT would strongly influence other countries to follow suit. It would decidedly improve the chances for entry into force of the treaty and would have more positive ramifications for arms control and disarmament than any other single measure. The US should reconsider its position and proceed to ratify the Treaty. Only the CTBT offers the prospect of a permanent and legally binding commitment to end nuclear testing.”11

Keith A. Hansen, The Comprehensive Nuclear Test-Ban Treaty: An Insider’s Perspective, (Stanford, Stanford University Press, California, 2006), p. 5 9 The author was involved in the relevant negotiations as the Ambassador of Bangladesh to the Geneva-based Conference on Disarmament, and thereafter as Vice Chairman of the first ever Bureau in Vienna of the Comprehensive Test-Ban Treaty Organization (CTBTO). 10 Ban Ki-moon, ‘Five Steps to a Nuclear Free World’, Guardian.co.uk., 23 November 2008, accessed on 4 December 2009. 11 Cited in Sergio Duarte, ‘The Future of the Non-Proliferation Treaty’, UN Chronicle Volume XLVI, No.1&2, 2009, pp. 34-35.

The pressure, not just on the US but also on all responsible international actors, is growing. Also, the consequences of inaction are becoming starker. All eyes will be focused on the events next year with the hope that these will not become missed opportunities, since the price of failure increases by leaps and bounds every year. Future of the NPT The cornerstone of all nuclear disarmament and non-proliferation efforts remains the NPT, negotiated in 1968 and entered into force in 1970. It rests on three pillars – horizontal nonproliferation; vertical non-proliferation and nuclear disarmament; and the peaceful uses of nuclear energy. The signatories were of two kinds – first, those who possessed the weapons at the time of signing, the NWS; and those who did not, the NNWS. The NNWS were to forego acquisition in return for assistance in developing the capacity to use nuclear energy for peaceful purposes. The NWS were to accord such support, and at the same time seriously pursue nuclear disarmament, starting with a cessation of tests. The CTBT complemented it in 1996. The NPT to be reviewed every five years, was indefinitely extended in 1995. What was to be a partnership between the NWS and NNWS soured quickly. The NNWS saw it as “discriminatory”, and tilted against them. The NWS did not keep their part in engaging in serious negotiations for disarmament. They did not assist in the transfer of knowledge for peaceful uses of nuclear energy (mostly for fear that it could be used for proliferation by some countries). Also, they did not provide any assurances that they would not use or threaten to use nuclear weapons against the NNWS. While it is true that the actual number of weapons, of which 130,000 to 140,000 were built, were eventually reduced to 25,000 or so, still enough to blow up the planet many times over, the chasm in understanding between the two groups did not close. Indeed some countries, such as India, Pakistan and North Korea acquired the capability overtly and Israel, covertly. Iran began its ‘peaceful’ nuclear programme with such zeal as to arouse considerable Western suspicion, and there were some rumours pertaining to Myanmar. A number of Gulf countries including Saudi Arabia and the United Arab Emirates suddenly began to evince keen interest in ‘peaceful nuclear power’, much in the stated Iranian mode. The delay in progress regarding the goals of the treaty led to complications as it afforded time for some to effect acquisitions, and thereafter claim their place at the table as formally recognised NWS. While the current NWS were chary of granting their wish, these countries, India and Pakistan, were militarily too powerful to be ignored, or to have any global regime developed without their positive assent, and indeed explicit support. The failure of the 2005 NPT Review conference did nothing to generate any optimism. Yet, just in the case of the CTBT there has been a sudden spike in confidence mostly flowing from the altered American position. Specifically speaking to the NPT, Obama said, “Countries with nuclear weapons will move towards disarmament, countries without nuclear weapons will not acquire them, and all countries can access peaceful nuclear energy.”12

Cited in, Paolo Cotta-Ramusino, Next Steps to Universal Nuclear Disarmament’ UN Chronicle, No 1&2, 2009, p. 45.

On the face of it the remarks may seem a trifle rhetorical at worst, and aspirational at best. There is no reason to believe that on his part there will be any lack of sincerity. But good wishes by themselves will be insufficient to secure the desired goals. The challenge before him and the rest of the international community would be to devise a set of measures that would allow for enhanced security for all states without the need to recourse to nuclear weapons. How can this be done? The rest of the essay will focus on seeking an answer to the query. Prognosis for 2010 As the curtain comes down on the current year and we enter the final year of the decade, there appears to be more reasons for hope than when we entered the decade and the century. The traumatic experience of 9/11 and the invasions of Afghanistan and Iraq bode ominous signals for humanity’s future. It seemed for a while that Samuel Huntington’s deadly forecasts were about to come to fruition.13 That was the bad news. The good news, however, is that these apprehensions have generated among most nations an urge to positive action. By far the foremost important political change in the global scene has been the election to the most powerful position of the globe of President Barack Obama, which happened, and this is also significant, against the matrix of the ‘rise’ of China and India. All indications point to the fact that President Obama seems to be moving towards building of bridges and designing of consensus. He faces great challenges, nevertheless, and to date, his performance has resembled a Sisyphean struggle.14 He must carry the world, of course, but beginning with his own country where there appear to be some holdouts, particularly in determining how much the US can actually afford to disarm without seriously eroding its capacity to protect national interests.15 A good backdrop has been created for the scheduled Summit of April, and thereafter the NPT Review Conference of May in 2010. In July 2009 the US and Russia were able to agree to cutting stockpiles to below 1,700 warheads. Despite the impressive show of military prowess by China at the parade to mark the sixtieth anniversary of the Revolution on 1 October 2009, that country appears to have become a ‘willing partner’ in strategic bilateral talks with the US. In November this year, the Indian Prime Minister Manmohan Singh became the first ‘state visitor’ of the Obama Administration, and in course of the visit, President Obama tactfully praised Indian leadership as “expanding prosperity and security across the [Asian]

Samuel P. Huntington, ‘The Clash of Civilizations?’, Foreign Affairs, Summer 1993. In this famous essay Huntington argues that the faultlines of civilisations are the battlelines of the future. In the emerging cultural conflict he advises the US to forge alliances with similar cultures wherever possible. However, he concludes that, and this message is often lost among the audience, in the final analysis all civilisations will have to learn to tolerate one another. 14 In Greek mythology, Sisyphus, a King, was destined to roll a huge boulder up a hill, only to have it roll down, and to repeat it throughout eternity. The difference, of course, in the analogy is that Sisyphus was labouring under a curse, and Obama is carrying out a responsibility. Also, in the latter’s case, the effort will not, hopefully, take an eternity! 15 There are those who assert that the US must always retain the right ‘capabilities’ to prevent negative conclusions being drawn by adversaries. See, Keir A. Leber and Daryl G. Press, ‘The Nukes We Need: Preserving the American Deterrent’, Foreign Affairs, November-December 2009.

region.”16 Indeed given India’s stated unhappiness over the lack of recognition of its nuclear status, as also the case with Pakistan, it would be extremely key to integrate these two countries into the global non-proliferation regime. The US, it seems, is at last beginning to act as Coral Bell would have it, that is to recognise its own pre-eminence and yet to conduct its policy in a way as it were still living in a world of many centres of power.17 It would be extremely important at the May NPT Review Conference to demonstrate that the original nuclear powers are committed to disarmament, and indeed that the ‘discrimination’ between the ‘haves’ and the ‘have-nots’ that the Treaty entails is purely temporary. The Review conference must be able to initiate serious steps towards future convention banning nuclear weapons altogether just as has been done in the case of chemical and biological weapons. The North Atlantic Treaty Organization must be seen to be taking tangible measures to eliminate the use of nuclear weapons from its strategic doctrines. The Genevabased Conference on Disarmament must be encouraged to reach the Fissile Material Cut-off Treaty (FMCT) forbidding the production of new fissile materials, for that is the major ingredient that non-state actors aspiring to create nuclear weapons would like to lay their hands on. There should be a series of regional meetings with the aim of creating concentric circles of nuclear weapon free zones covering the entire globe.18 This is particularly true of Asia, where the new nuclear powers lie, and who remain outside the pale of the current NPT. Henceforth, the UN should be brought to the centre stage of these initiatives, and its Secretary-General adequately empowered and resourced. Conclusion Obviously these goals will not be easy to achieve. But that these are goals to aspire to is now widely acknowledged. That in itself implies a modicum of progress. Long ago the Greek sage Aristotle had said that all men’s well being depend on two things – one is the right choice of target, of the end to which actions should tend; and the other lies in the actions that lead to the end. These wise words are still valid today, as they were then. The steps and measures that have been enumerated in this essay earlier are important ones that must receive priority of the global negotiators. However, experts cannot achieve this alone. Global leadership at the highest levels must become engaged. The time has come to move forward from the doctrine of deterrence to a culture of peace, from the mathematical calculations of quantitative destructive powers to moral norms that would imply humanity’s graduation to a higher level of civilisation. A convention banning nuclear arms altogether would demonstrate that. The prospects of the spread of such values are stronger now than ever before. Bold leadership will be called for to provide these ideals a legislative framework. 16

John Pomfret, ‘Obama welcomes Singh, hails India’s leadership role in Asia’, Washington Post, 25 November 2009. 17 See, Coral Bell, “American Ascendancy and the Pretense of Power’, The National Interest, No. 57, Fall 1999, pp. 55-63. 18 The Nuclear Weapon Free Zone, as defined and recognised by the UN, is an agreement, with mechanisms of verification and control of its obligations, whereby a group of nations ban the development, use or deployment of nuclear weapons in a given area. Currently there are nine of them: Antarctica (covering that region); space (covering outer space); Tlatelolco (covering Latin America and the Caribbean); sea-bed (covering all sea and ocean floors); Rarotonga (covering the South Pacific); Bangkok (covering the ASEAN countries); Mongolia (covering that state); Semei (covering Central Asia); and Pelindaba (covering Africa). There is nothing as yet that covers India, Pakistan, North Korea, Israel, or with an eye to the future, Iran, Egypt, or Saudi Arabia.

As Henry Kissinger has urged that [positive] prospects must not be allowed to vanish because those that have the ability to prevail shrink from what their opportunities require.19 With regard to nuclear weapons it must be remembered that if some have them, others will want them also. To try and deter this normal and logical predilection from happening through sanctions and threats of force will only still their resolve. We have seen that sanctions do not work as there are always detractors that do not comply. Force will not work for no one possesses that overwhelming might as the capability to wreak unacceptable levels of damage to adversaries is much widespread now. Also it is important to bear in mind that a disarmed world by itself will not lead to the kind of order we may seek, and a lightly armed world will not be necessarily more peaceful than a heavier armed one.20 But at least the world would not be threatened by an Armageddon. Recognising these simple truths can make a vast difference in meeting our aspirations. We will not achieve all this in 2010. But perhaps we can, indeed we must, make a beginning. oooOOOooo

Henry A. Kissinger, Does America Need A Foreign Policy? Toward a Diplomacy for the 21st Century, (New York, Simon & Schuster, Touchstone Edition 2002), p. 318. 20 For an elaboration of this idea, see, Hedley Bull The Anarchical Society : A Study of Order in World Politics, (London, The Macmillan Press Ltd , 1977), p. 238

ISAS Insight No. 87 – 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

The Copenhagen Climate Accord: Half May be Better than Full Shahid Javed Burki 1 Abstract It took strenuous efforts on the part of the United States President Barack Obama to get the squabbling conferees representing 193 countries to issue the “Copenhagen Accord”. This was a three-page, twelve-paragraph and two-annex document made public a few minutes before the two-week “conference of the parties” was set to conclude. The Accord is not a binding treaty and as such does not commit the major atmosphere-polluting countries to cut carbon emissions according to an agreed set of targets. As such, the Accord did not please the environment community or the thousands of protesters who kept vigil for two weeks outside the conference hall. That said, the Accord will be a historic document for at least three reasons. Firstly, the conferees – especially the United States (US) – accepted the finding by scientists that global warming was occurring because of human activity. Secondly, it was recognised that much greater adjustment efforts needed to be made by rich countries compared to those that were still at a relatively early stage of development. And, thirdly, that the developing world needed a large infusion of capital to move towards a less carbonintensive strategy of development as well as to cope with the consequences of global warming. Many in the developing world were bound to be severely affected no matter how stringent were the mitigating actions were, or how much the global community was prepared to take or likely to adopt. Introduction The world made slow progress in coming to terms with the problem created by global warming. This was due to the gradual accumulation of scientific knowledge about climate change and its long-term economic and social consequences. Politics was also difficult. It involved trade-offs between countries as well as between generations within countries. Both needed more political will than the international community was able to muster. The US political system left little room to maneuver the executive branch. Even though President 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.

Barack Obama had included controlling climate change as one of his top priorities while campaigning for the presidency, but once in power he found it difficult to move in the direction in which he wished to go. The quest for a solution to the problem started 17 years ago when the United Nations (UN) adopted the Framework Convention on Climate Change (UNFCCC) at the Earth Summit held in Rio de Janeiro. Its aim was “to achieve stabilization of green-house concentrations in the atmosphere at a level that would prevent dangerous interference with the climate system.” The next step was the negotiation of the Kyoto protocol which attempted to realise those goals. It was signed in 1997 by the then US Vice President Al Gore who played a leading role. Although the US failed to follow through with endorsement of the protocol by the Senate, it still came into force in 2005. The protocol was accepted by Europe and Japan. The US refusal to consider the protocol for endorsement was in part because of its limited application. It did not have binding commitments by developing countries to limit their carbon emissions. This was one reason why China’s emissions continued to increase to the point where they exceeded that of the US. In 2008, China passed US as the largest emitter of carbon into the atmosphere. Kyoto’s first commitment period runs out in 2012 and the one that needed to be put in place will take at least three years. This is the reason why the Copenhagen conference that began on 7 December 2009 acquired such significance. Since the UNFCCC was signed in 1992, there has been a considerable accumulation of scientific knowledge, although as noted below, still not enough to take care of all the skeptics. According to the Intergovernmental Panel on Climate Change, the body was set up by the UN to establish a scientific consensus on what is happening – “heat waves, draughts, floods and serious hurricanes have increased in frequency over the past few decades; it reckons that those trends are all likely or very likely to have been caused by human activity and will probably continue. Temperatures by the end of the century might be up anything from 1.1 degree centigrade to 6.4 degrees.” 2 Previous International Parleys When the full history of the development of the world economy gets to be compiled, three international conferences would stand out as having contributed massively to economic change and economic betterment. The first was the 1945 meeting at Bretton Woods in New Hampshire, in the US. There the British economist John Maynard Keynes was able to persuade the countries that had defeated the Nazis in Europe to usher in a new world economic and financial order. The conference led to the orderly management of the exchange rates and the mechanisms for helping the countries facing economic stress. Two institutions were created at Bretton Woods – the International Monetary Fund to look after global finance and provide emergency assistance to the countries faced with financial crisis, and the World Bank to provide affordable financial assistance to under-developed countries. Half a century later – in 1995 – the third pillar of the new system was added in the form of the World Trade Organization to manage international trade according to the rule of law. The second conference was held on the eve of the third millennium. Convened in New York in September 2000, heads of state from most countries represented in the UN agreed to 2

The Economist, “Getting warmer: A special report on climate change and the carbon economy”, 5 December 2009, p. 3.

implement a set of targets to improve the living standards of the less privileged segments of the world population. This agreement had only some moral force; it did not come with a new institution to monitor the progress in the developing world or to provide finance for achieving the Millennium Development Goals (MDGs). The most important of these was to reduce global poverty by half by 2015. Progress was also to be achieved in a number of other areas, including improving the economic and social status of women. The third conference that will undoubtedly have a lasting consequence for the global economy is the one recently concluded at Copenhagen. Against all expectations, the meeting, attended by more than a hundred heads of state and government, concluded with an agreement that had a number of elements including the promise to lay down targets for reducing carbon emissions, commitment to provide large sums of money to the less developed countries to adjust to a system of production less dependent on the burning of fossil fuels, and a mechanism for monitoring progress concerning the various goals adopted by the international community. Partial success was snatched from the jaws of failure largely because of the pressure exerted by the US under the leadership of President Obama who attended the final day of the conference. The offer by the US to help raise enough funds to provide US$100 billion a year to the developing world for climate change policies and programs helped to strike the deal. The Debate at Copenhagen Those who remained skeptical about the science behind global warming persisted in their attempts to influence public opinion as leaders from the world met at Copenhagen for the two-week conference on climate change. Mrs Sarah Palin of the US, who had partnered with Mr John McCain as a candidate for the presidency in 2008, took up the cudgels on behalf of the skeptics. There were skeptics within the US Senate as well, a body whose support was critical for approving any international treaty. That notwithstanding, climate activists continued to provide data to prove that human activity was harming the globe. Secretary General of the International Weather Agency released data on temperature trends and told the press that the 2000-09 decade was “warmer than the 1990s, which were warmer than the 1980s and so on.” The data for 2009 suggest that the year was likely to be the fifth warmest year on record. This conclusion was confirmed by the National Oceanic and Atmospheric Administration in the US. In the period between President Obama’s visit to Asia and the convening of the Copenhagen Accord, Washington changed its perception of success at the meeting. In Singapore, the American President had agreed with a number of other leaders from Asia that the politics surrounding climate change meant that the international community would not be able to agree to a binding treaty at Copenhagen. At best, the nations participating at the meeting could agree on the need for movement leaving the details to be worked out later 3 . This was one reason why President Obama initially decided not to be present at Copenhagen to the close of the conference when most of the decisions were likely to be taken but promised to make a token appearance at the meeting’s start. He changed his mind when it began to appear that there was some possibility of reaching an agreement. An agreement was reached but, as discussed below, it was not in the form of a binding treaty. 3

See Shahid Javed Burki, “President Obama in Asia – Searching the Basis for a Partnership”, ISAS Working Paper No. 102, 7 December, 2009.

President Obama’s initial reluctance to get too deeply involved in Copenhagen may have been prompted by the difficulties he faced in his own Senate. “Mr Obama enters the Copenhagen negotiations without anything close to consensus in his own party for his capand-trade plan to reduce emissions. The issue pits coastal liberals against the so-called Brown Dogs of the Rust Belt and the Great Plains whose states depend heavily on coal for power and manufacturing for jobs. At least a dozen of these Democrats have made it clear that they will not accept any legislation – or any treaty – that threatens their industries and jobs”. 4 The discussions in the opening days of the conference were taken up with the articulation of the differences between developed and developing countries. Of the many issues that separated the thinking in developed nations from that of developing countries, four were especially significant. There was the matter of monitoring the performance of the countries with respect to the agreed targets. Developed countries pressed for an institutional and transparent mechanism. This was resisted by the developing world, in particular by China on the ground that this would lead to excessive interference in its internal affairs and would mean the surrender of sovereignty to an international organisation which would be dominated by rich industrial nations. The developing countries also pressed for large amounts of financial assistance to cope with the cost of making adjustments to less carbon-intensive systems of production. In setting the targets for emissions, several in the developing world – especially those countries most likely to be affected by rising sea levels – argued for more ambitious reductions. They were of the view that the acceptance of a two-degree centigrade increase in temperature would be too large for them to accommodate. They wanted a lower target, perhaps one-degree Fahrenheit as long as most of the adjustment was made by the developed world. Finally, developing countries pressed the developed world to adopt a more aggressive process of adjustment leaving some room within which developing countries could still improve their economic situation. A 13-page document that was said to have been drafted by Denmark, the conference’s host, included language calling for mechanisms opposed by poor countries for delivering aid to them to help deal with the impact of climate change. 5 The proposal included more oversight than the developing nations wanted. Another document drafted by four emerging economies – Brazil, China, India and South Africa – while not making any specific commitments on their part, rejected outside auditing of projects to reduce emissions financed by these countries on their own. Lumumba Stanislaus Di-Aiping of Sudan, speaking on behalf of 130 developing countries in the G77, challenged President Obama to do more for protecting developing countries threatened by climate change. “We have to ask him, when he provided trillions of dollars to save Wall Street, are the children of the world not deserving help to save their lives?” The European Commission meanwhile welcomed a decision by the US Environmental Protection Agency to begin the process for imposing federal limits on the emissions of carbon dioxide. The so-called endangerment finding of the EPA was an “important signal by the Obama administration that they are serious about tackling climate change and are demonstrating leadership.” 4

John M. Border, “What’s rotten for Obama in Denmark”, The New York Times: Week in Review, 13 December, 2009, pp.1 and 4. Andrew C. Revkin and James Kanter “New data shows warming increased in last decade”, The New York Times, 9 December 2009, p. A10.

What broke the ice at Copenhagen as the conference approached the closing date was the forceful statement by the US. “The administration provided the talks with a palpable boost on Thursday [December 17] when Secretary of State Hillary Rodham Clinton declared that the US would contribute its share of US$100 billion a year in long-term financing to help poor countries adapt to climate change. The administration had remained silent for months as other major economic powers came forward with similar or even more generous proposals.” 6 The figure proposed by the US was similar to estimates by the European Union (EU) of the needed contributions although the amount was less than the US$150 billion suggested by the EU experts. Mrs Clinton said the money would be a mix of public and private funds, including “alternative sources of finance” but did not indicate how much of the proposed amount her country will be prepared to contribute. Also the US offer came with two conditions. First, the nations negotiating the climate deal must reach a comprehensive political agreement that takes effect immediately. The irony of this demand did not escape the negotiators at Copenhagen for it was the US that failed to ratify the Kyoto agreement. The passing of the Bush administration and its replacement by the one headed by President Obama in Washington had brought about a fundamental change in the official stance towards the problem of global warming. Second, and more critically, the US demanded that all nations must agree to some form of verification that they are meeting their environmental promises. As discussed above, China and the G77 were not prepared to do this. However, following the statement by Secretary of State Mrs Clinton, the Chinese opened the door a bit by saying that they will be willing to share the data on climate on a voluntary basis. The Copenhagen Accord It took intense effort by President Obama to have the conference in Copenhagen produce an even non-binding accord. It was signed by only the large countries present at the meeting. The smaller nations did not participate and some of them were concerned that their interests were not served. The Accord provides for monitoring emission cuts by each country but did not set a global target for cutting greenhouse gases and no deadline for reaching a formal international climate treaty. “Although the agreement included some major players – China, India, Brazil and South Africa – it was not universally agreed upon by the 193 nations attending the summit. In fact, some leaders left early Friday in apparent frustration.” 7 The three-page Accord along with two annexes, were issued by the Copenhagen Conference of the Parties a few minutes before midnight, the time set for the conference to end. President Obama delayed his departure from Copenhagen to be present for the Accord to be declared at having been formally reached. He addressed a press conference once the Accord was available to the press, calling it a historical document that could not be a binding treaty considering the differences that remained among the many countries present at the conference. He recognised that some of them, including the United States, had to overcome serious political obstacles at home to move forward resolutely in the area of climate policy. 6

John H. Broder and Elisabeth Rosenthal, “Obama has goal to wrest a deal in climate talks”, The New York Times, 18 December 2009, pp. A1 and A10. Juliet Elperin and Anthony Faiola, “Climate deal falls short of key goals”, The Washington Post, 19 December 2009, p. A1.

The Accord which is “operational immediately” agreed on a number of underlying principles on which it was based. 8 One of the more important among them was “the principle of common but differentiated responsibilities and respective capabilities.” Developed and developing countries could not be treated in the same way for developing mitigating efforts. This point was pressed hard by developing countries. Within the developing world, special attention needed to be given to those that were “particularly vulnerable, especially least developed countries, small island developing states and Africa.” The special problems faced by the countries of South Asia could also have been recognised but were not. The countries from the South Asian region that were active at Copenhagen – Bangladesh and India – were able to secure their interests. Bangladesh, for instance, received special treatment being a member of the least developed countries group. India joined the final deliberations led by President Obama. Another principle recognised by the conference was “the scientific view that the increase in global temperatures should be below 2 degrees Celsius”. Given that it reiterated that “climate change is one of the greatest challenges of our time” was an advance over the previous position of the US. While the two-degrees Celsius finding by the scientific community was used for operational purposes for the time being, the need for making more significant adjustments in the future was to be kept in mind. “This will include consideration of the strengthening of the long-term goal referencing various matters presented by the science, including in relation to temperature rises of 1.5 degrees Celsius.” In this context the Conference recognised the importance of “peaking of global and national emissions as soon as possible” and “that the time frame for peaking will be longer in developing countries and bearing in mind that social and economic development and poverty eradication are the first and overriding priorities of developing countries and that a low-emission development strategy is indispensable for sustainable development.” The Accord is particularly significant for recognising that a large infusion of new money will be needed if the developing world is to move towards a less carbon-intensive strategy of development and for it to deal with the consequences of global warming that had already begun to manifest themselves. “Scaled up, new and additional, predictable and adequate funding as well as improved access shall be provided to developing countries…to enable and support enhanced action on mitigation.” The amount of additional aid will approach “USD 30 billion for the period 2010-2012 with balanced adaptation between adaptation and mitigation. Funding for adaptation will be prioritized”, directed towards those that are considered to be most vulnerable. “In the context of meaningful mitigation actions and transparency on implementation, developed countries commit to a goal of mobilising jointly USD 100 billion dollars a year by 2020 to address the needs of developing countries. The funding will come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.” No immediate institutional arrangement was indicated other than the promise that “new multilateral funding for adaptation will be delivered through effective and efficient fund arrangements”. This was an inducement announced earlier at the conference by Secretary of State Clinton. Bearing in mind the developing world’s increased sensitivity to the application of conditions associated with aiding the Accord, pledges to adopt “a governance structure providing for equal representation of developed and developing countries.” A significant portion of the promised funding will be delivered 8

The quotes used in this paper are from the conference FCCC/CP/L.7 issued by the UNFCCC Framework Convention on Climate Change, 18 December 2009.

through the Copenhagen Green Climate Fund (CGCF). It was not indicated where the CGCF will be housed, whether its operation will be entrusted to an established institution such as the World Bank or whether a new institutional mechanism such as the International Fund for Agricultural Development (IFAD) would be developed. The IFAD was also the outcome of an international conference – the World Food Conference - held in Rome in 1974. The conference gave special recognition to the need for preserving the world’s rapidly depleting forest cover. It promised substantial finance to “reduce emissions from deforestation and forest degradation”. This initiative had acquired its own acronym; the REDD-plus, and funding for it was pushed by Brazil that, along with China, was the most prominent player at Copenhagen among emerging economies. While India was represented by Dr Manmohan Singh, its Prime Minister, and was present in the meeting of a small number of countries when the final deal was struck, it adopted a relatively low profile at the conference. This reflected the lack of political consensus at home on a number of issues including the use of coal for producing electricity and rationalising the use of water for agriculture. The convention laid down a few markers for the future. Two sets of countries, developed and developing, are required to submit to the secretariat details of the policies and program to be adopted to achieve the targets they would specify for the year 2020. This would be done in two separate annexes, Annexes I and II. The developing countries would provide “appropriate mitigating actions” without necessarily laying down time-specific targets. Besides, the convention members called for “an assessment of this Accord to be completed by 2015, including of the Convention’s ultimate objective.” There was no indication that a binding treaty would be concluded sometime in 2010 as was indicated in Singapore in November by President Obama and several Asian leaders. The American President seemed to have concluded that he did not have the political capital left to spend on another high profile policy initiative. Much of what he had was nearly exhausted over the grueling fight over health reform. The Future after Copenhagen There is some expectation that the framework provided by the Copenhagen Accord may be more durable than a Kyoto-like protocol that laid down a number of goals to be met by all the signatories. At Copenhagen, the conferees gave individual countries the responsibility for developing their own programmes for reducing carbon emissions into the atmosphere. It is clear that actions taken by four countries – China, US, India and Brazil – will have profound consequences on global warming. Each country faced different sets of problems and each was developing its own responses. China had travelled a long distance from the time when its government at various levels – the national, state and local – was committed to accelerating growth irrespective of the long-term consequences of pursuing such a policy. More recently, the Chinese officials had begun to recognise that the environmental impact of a growthoriented strategy had to be changed in favor of the one that accommodated environmental concerns. According to one assessment, “one reason for this change is the growing awareness of its vulnerability to a warming world. The monsoon seems to be weakening, travelling less far inland and dumping its rainfall on the coasts. As a result China is seeing floods in the south-east and draughts in the north-west. At the same time the country’s leaders are deeply concerned about the melting of the glaciers on the Tibetan plateau which feed not just the 7

Ganges, the Indus, the Brahmaputra and the Mekong, but also the Yangtze and Yellow rivers.” 9 The Chinese leaders have also become aware of the economic benefits of concentrating on the environment. Within the Clean Development Mechanism of the Kyoto protocol which rewards projects with high environmental payoffs, China has received US$2 billion. This was for cleaning up its industrial processes and building up clean energy capacity. This is half of the total amount disbursed throughout the world. China’s share is expected to rise to US$8 billion by 2012, the final year of the protocol. China is also investing heavily in green technologies, a sector in which no single country dominates. Hu Angang, an economist at Tsinghua University calls this “a huge opportunity for China. The country will become the largest renewable-energy market, bio-energy market, clean-coal market, carbon-exchange market, low carbon economy, exporter of low carbon products and low-carbon innovator.” 10 Having missed out on some other technological revolutions (China, for instance, has very few software patents) it is determined to become the leader in green technology. It is moving resolutely to achieve that ambition. The US, the second largest, carbon emitter is faced with a serious political problem in confronting global warming. In spite of the scientific consensus that now exists about global warming having being caused by human activity, there are influential voices within the political arena that would make any legislative action exceedingly difficult. As the world saw while President Obama struggled to get health reforms through the Senate, a single senator can block the passage of legislation. The President is likely to resort to executive measures to meet some of the obligations to which he committed his country at Copenhagen. Although convinced that legislative action was better than administrative fiat to make progress in the area, President Obama was left with no other choice but to use the existing legislative authority that various agencies in his administration have at their disposal. The Environmental Protection Agency has already moved decisively to establish its domain over carbon emissions by industry and automobiles. Individual states in the US – especially those along the two coasts – are also likely to move in this area. California, always a trail blazer in promoting progressive causes, has already taken a number of actions in controlling environmental pollution even under a Republican governor. Its example will be followed by other states. India and Brazil, the two other large emerging economies that are major polluters, are likely to find politically difficult, the route they need to take to fulfill what is expected of them from the Copenhagen Accord. China, with no obligation to follow popular sentiment, is likely to move faster than these two and other democracies in the emerging world. That notwithstanding, Brazil and India will need to provide leadership in the developing world in two distinct areas. Brazil will need to take strong action to preserve the forest cover provided by the Amazon. This is the last major piece of forest left in the world that can absorb a significant amount of carbon dioxide. This is one reason why saving forests from further degradation was awarded special significance at Copenhagen. India could lead the way in mitigating the impact of the melting Himalayan glaciers. This will affect all countries that lie in the way of the rivers that have the Himalayas as their source. Finance for this effort will also be available. 9 10

The Economist, A special report on the carbon economy”, Op. Cit, p. 16. Ibid., p. 16.

Conclusion What was achieved at Copenhagen was less than expected and also short of what the scientific community and economists believe needs to be done to prevent an environmental disaster from occurring before this century is over. This exceptional situation needed to be addressed in exceptional ways. So many different parts of the world need to work together and so many different economic interests need to be reconciled that it is difficult to craft a comprehensive and binding treaty. To have an Accord that set up a process for the global community to follow with an indicative time line was perhaps a better option. That was the approach taken at Copenhagen. Half may turn out to be better than the full in the context of preventing a global meltdown.

ISA S Insight No. 88 – Date: 28 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 Economics and Politics of China’s Exchange Rate Adjustment M. Shahidul Islam1 Abstract China faces significant political pressure from industrialised economies to revalue its currency upward. Internally, China’s currency adjustment depends largely on the dynamics of its labour and financial markets. Millions of underutilised Chinese labourers, who are in the process of migration from the countryside to urban areas, give Beijing the upper hand in allowing a gradual revaluation of its currency. However, the growing cost of monetary sterilisation is the key hurdle in keeping its currency undervalued for long. Nevertheless, exchange rates are not always determined by economic forces alone – the breakdown of the Bretton Woods exchange rate system in 1971 and the signing of the Plaza Accord in 1985 are two examples. The available data shows that South Asia is generally not hurt, if not a gainer, by an undervalued Chinese currency. Introduction Vladimir Lenin, the leader of the erstwhile Soviet Union, is said to have declared that the best way to destroy the capitalist system was to debauch its currency.2 China abandoned the “communist way of development” long ago and it is indeed in Beijing’s interest to endure the capitalist system. Nevertheless, its exchange rate policy is literally annihilating the global capitalist system with the exception of its own. Beijing faces much pressure from almost all the industrialised economies to allow its currency to appreciate as they believe that the undervalued Chinese currency is eroding their export competitiveness. A recent Reuters’ poll reveals that the renminbi, the Chinese currency, is undervalued by 20 percent.3 The Economist’s Big Mac Index shows that the renminbi is 49 percent weaker vis-à-vis the United States dollar4 and the International Monetary Fund also holds a similar sentiment. Moreover, based on China’s global current account position or the state of its overall balance of payments, one can say that its currency is significantly undervalued. 1

2 3

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. Keynes, John Maynard (1919), The Economic Consequences of the Peace. http://www.forbes.com/feeds/reuters/2009/11/20/2009-11-20T083103Z_01_T308146_RTRIDST_0_CHINA -YUAN-POLL-PIX.html The Economist, 16 July 2009.

China delinked the renminbi’s peg with the United States dollar in mid-2005 and allowed it to appreciate by more than 20 percent, but stopped in late 2008 as the country’s export growth slowed markedly owing to the financial crisis. The renminbi remained on par vis-àvis the United States dollar in 2009 (see Figure 1). A large part of China’s over US$2.2 trillion foreign exchange reserves is seen as a by-product of its undervalued currency. To prevent the appreciation of the renminbi, the People’s Bank of China (PBoC) massively intervenes in the foreign exchange market by selling renminbi and buying dollar assets. It is also widely viewed that China’s undervalued currency has fuelled the global financial imbalances – one of the major causes of the current financial and economic crisis. Both the United States and the European Union believe that unless China revalues its currency upward, the global imbalances are likely to persist. Undervalued Renminbi: Why and How long? Why does the world’s fastest growing economy need an undervalued currency? The more pertinent issue is how long China can enjoy its competitive advantage in exports by keeping its non-tradables cheaper than tradables. The real exchange rate is nothing but the ratio of the goods and services that can be traded in international markets (an iPod, for example) and those that cannot be traded (a haircut, for example). According to Dani Rodrik, a Harvard economist, China’s growth would be reduced by more than two percentage points if its currency were to appreciate by 25 percent in real terms.5 He also believes that undervaluation is the second-best mechanism for alleviating institutional weakness and market failures that tax the tradables.6 Indeed, most East Asian countries followed the same model in their early stages of development, and thus China is no exception. Moreover, cross-country experiences, particularly in the developing economies of Latin America, have shown that without putting in place the right institutions including financial market reforms, a more flexible exchange rate system have led to a currency crisis that eventually derailed their economic rise. How long China can keep its currency undervalued is not easy to forecast. It will depend largely on the dynamics of its labour and financial markets, both of which are highly regulated in China. Two stylised facts are worth noting here. First, the prices of tradable goods and services tend to fall relative to those of non-tradables. Higher productivity lowers production costs that eventually lower the prices of tradables in international markets. Second, as economies grow, 5

This is based on the estimate that a 10 percent appreciation would reduce China’s growth by 0.86 percentage points. See Rodrik, D. (2010) “Making Room for China in the World Economy,” American Economic Review, Papers & Proceedings, May, forthcoming, and The Financial Times, <http://blogs.ft.com/ economistsforum/2009/12/martin-wolf-on-chinas-exchange-rate-policy-jim-oneill-and-dani%20%20%20%20%20%20rodrik-reply/>. Rodrik. D. (2007), “The Real Exchange Rate and Economic Growth: Theory and Evidence”, available at <http://www.cid.harvard.edu/neudc07/docs/neudc07_s1_p04_rodrik.pdf>.

their non-tradables become more expensive vis-à-vis tradables, leading to currency appreciation. There is a huge abundance of labour supply in China, which means the prices of nontradables could grow slowly, arresting the rapid rise of non-tradables prices. A McKinsey Global Institute Report reveals that, between 1990 and 2005, Chinese cities accommodated 103 million labourers from the rural areas7 and they await an influx of another 250 to 350 million migrants by 2025. The same report projects that a whopping one billion people will be living in different Chinese cities in 2030. As a result, China may not face steep wage hikes in every sector. As China needs to create millions of jobs, a strong currency is the last thing it can afford. However, faster productivity growth will raise wage levels (or overall compensation) in some sectors. China’s productivity growth in recent decades has been spectacular – with an 8.1 percent labour productivity growth during the period 1990-2008 which was much higher than in India (4.2 percent), the United States (1.8 percent), the Euro zone (1.5 percent) and Japan (1.1 percent).8 Nevertheless, once the labour migration from agriculture to industry is completed – marginal product of labour equates wage in agriculture – China will face significant upward pressure on its real exchange rate. This could happen in the next 15 to 20 years. As a result, an ad hoc adjustment in its exchange rate could destabilise China’s labour market, in particular, and the economy, in general. However, a rapid rise in current account surplus and associated reserves build-up pose mounting challenges for the Chinese central bank to keep its currency undervalued. The basic premise of an undervalued currency is that the concerned monetary authority has to intervene in the foreign exchange market to postpone current consumption and delay inflation. As an intervener, the PBoC faces the challenge to sterilise the incipient increase in domestic money supply resulting from the large-scale purchase of foreign exchange. If it does not, the excess liquidity in the financial system eventually leads to inflation and currency appreciation. The PBoC generally banks on two instruments in pursuit of this goal: it raises reserve requirements against the deposits of commercial banks and issues renminbidenominated bills and bonds. Both are implemented under China’s highly repressed financial system. However, there is a limit to sterilisation. Following the collapse in interest rates in the United States, the domestic short-term interest rate in China has begun to exceed the United States’ rates. As a result, the spread between the cost of issuing sterilisation bills and the returns on foreign assets is increasing. The PBoC now relies more on the upward adjustment of bank reserves requirement than on central bank bills, thereby shifting part of the sterilisation cost from the central bank to commercial banks.

7 8

McKinsey Global Institute (2009), “Preparing for China’s Urban Billion”. The Conference Board <http://www.conference-board.org/>.

However, there is no easy way out. Interest rates in China have to be kept low to avert capital flows (to avoid further sterilisation). Low lending rates9 generated a US$1.3 trillion credit boom in 2009.10 Moreover, low or negative returns from savings rates11 are prompting people to put their money in speculative investments, such as stocks and properties. The Shanghai Composite Index climbed 81 percent in 2009.12 To cool down the property boom, the State Council in China has of late threatened to re-impose a sales tax on property sales. Exchange Rates Determination: Beyond Economics The values of exchange rates are not always determined by economic forces alone. History is full of such examples. Faced with sheer competition from Japan to a large extent and a hefty current account deficit, in 1985, the United States signed the Plaza Accord with Japan, West Germany, France and the United Kingdom that deliberately devalued the United States dollar’s exchange rate. Japanese exports and economic growth were badly hit because the yen appreciated more than 50 percent. Many analysts believe that a super-strong Japanese currency is largely responsible for halting its unprecedented economic expansion since the 1950s, and the economy stagnated for a whole decade during the 1990s, known as the “lost decade of Japan”. Apart from Japan, the European experience could be another lesson for China as far as exchange rate determination is concerned. Faced with huge trade deficits and runaway inflation, partly due to the Vietnam War, the Richard Nixon administration unilaterally cancelled the direct convertibility of the United States dollar to gold, also known as the “Nixon Shock”, which essentially ended the Bretton Woods system of international financial exchange. Europe’s rather forced graduation from fixed to flexible exchange rates came at a high price. Within one or two years, its unit labour costs rose from 60 percent of the United States level to over 110 percent, and many experts believe that this virtually ended Europe’s miracle.13 Today, China faces similar pressure from the West. The Exchange Rates and International Economic Policy Coordination Act of 1988 of the United States mandates the United States Secretary of Treasury to give a report every two years to Congress on foreign exchange rate policies of other countries that trade with the United States. It also mandates that the United States Treasury identify countries that are currency manipulators.14 China has not yet been officially accused of being a currency manipulator by the United States, but the trade lobbyists in Washington want retaliatory penalties against China. Although United States 9

10 11

12 13

For instance, in late December 2007, the one-year benchmark bank lending rate was 7.47 percent and the inflation rate (corporate goods price index) in the first quarter of 2008 was 9.3 percent – the net lending rate (1.8 percent) – underlies the excess demand for credit [Goldstein, M. and Lardy, N.R. (2009), “The future of China’s exchange rate policy”, Policy Analyses in International Economics 87, Peterson Institute for International Economics]. The Bloomberg <http://www.bloomberg.com/apps/news?pid=20601080&sid=awonLXtlhUzE> For example, in 2008, the real interest rate on a one-year deposit was 4.74 percent. [Goldstein, M. and Lardy, N.R. (2009), “The future of China’s exchange rate policy”, Policy Analyses in International Economics 87, Peterson Institute for International Economics]. Ibid. Collignon, S. (2009), “The answer to our problem with China is not revaluation – but Asian monetary cooperation”, available at < http://www.eurointelligence.com/article.581+M51507dd7967.0.html> Wilkins, T. (2009), “China currency report expected less gentle from Geithner”, available at <http://www.chinastakes.com/2009/4/China-Currency-Report-Expected-Less-Gentle-from-Geithner.html>

President Barack Obama sought China’s help to address the currency misalignment issue in his recent Asia tour, at the same time he took the position that United States-China relations go “far beyond any single issue”. Nevertheless, on currency issues Beijing’s biggest collateral is none other than the Sino-US mutual economic dependence. China is the United States’ largest foreign creditor, holding more than US$800 billion of United States government debt. Moreover, the United States is China’s main trading partner, and the latter is the former’s second largest trading partner. However, the European Union is another entity which is more vocal than the United States because its currency, the Euro, is highly overvalued vis-à-vis the renminbi. Apart from the trans-Atlantic economies, China’s exchange rate policy is a major worry for its East Asian neighbours. Though China faces less political pressure from them, its pegged exchange rate threatens the sustainability of the East Asian production network. According to Willem Thorbecke of the Asian Development Bank, “as Asian economies do not only cooperate within production networks but also compete in third markets, China’s exchange rate peg puts pressure on other countries in the region to prevent their exchange rates from appreciating.”15 He believes that joint appreciations of the renminbi and other Asian currencies would prevent unpleasant outcomes such as “beggar-thy-neighbour” policies. Implications for South Asia South Asia is also not spared from the exchange rate movements of the key global currencies, including the renminbi. As major South Asian economies are members of the World Trade Organization, they are legally prohibited from providing direct subsidies to keep their exports competitive. That leaves them banking on currency undervaluation or improving productivity to remain competitive. The region, more or less, follows the managed float exchange policies where the respective central banks intervene in the currency markets either to avert currency appreciation or to keep their currencies undervalued. Nevertheless, the degree and the type of intervention are not unique. As far as the Indian rupee is concerned, the Reserve Bank of India’s recent challenge, particularly before the current financial crisis, has been arresting rupee appreciation in the wake of a rapid inflow of foreign capital. Nevertheless, the currency witnessed a free fall largely owing to the reversal of foreign institutional investment and the plunge in its export earnings following the crisis. In recent months, however, some external funds have returned to India and the Indian rupee experienced a modest appreciation against the United States dollar. A favourable environment in its external sector16 has forced Bangladesh Bank, the central bank of Bangladesh, to intervene in the foreign exchange market to keep its currency undervalued or at least to block the appreciation of its currency. The Pakistani rupee and the

Thorbecke, W. (2009), “East Asian production networks, global imbalances, and exchange rate coordination”, available at < http://www.econbrowser.com/archives/2009/10/east_asia_the_g.html>. A rapid growth in inward remittances and a steady expansion of export sector have resulted in consistent current account surplus in Bangladesh.

Sri Lankan rupee witnessed a rapid depreciation vis-à-vis the United States dollar in the recent past due to adverse developments in their external sectors.17 The South Asian currencies generally target the United States dollar as far as their currency adjustments are concerned. As can be seen from Figure 2, all major South Asian currencies, with the exception of the Bangladeshi currency, witnessed significant depreciations against the United States dollar in recent years, particularly following the financial crisis. As the renminbi remained pegged vis-à-vis the United States dollar, particularly in 2009, the degree of depreciation between the Chinese currency and the South Asian ones virtually followed the pattern that one can observe as in the case of the United States dollar against major South Asian currencies. Having said this, the undervalued Chinese currency affects the South Asian economies in two ways. First, as all major South Asian countries’ imports from China are much higher than their exports, the region, like many other countries, stands to benefit from an undervalued renminbi (through cheap import price). For instance, in 2008, China’s exports to South Asia stood at US$43.7 billion, whereas its imports from the region were US$21.5 billion.18 Second, South Asia also competes with China in the global export markets and the undervalued renminbi could be one of the hurdles for them to be competitive in some low value-added products, which many South Asian economies specialise in. However, as long as the South Asian currencies do not appreciate against their trading partners’ currencies (including the renminbi) in real terms, their export competitiveness will not deteriorate as far as the exchange rate advantage is concerned. In other words, apart from the bilateral exchange rate, whether the South Asian economies in general could enjoy the advantage of their depreciated or undervalued currencies depends on other factors, most notably inflation rates in the region vis-à-vis their trading partners. The movements of Real Effective Exchange Rates (REER) – the weighted average of a country’s currency relative to a basket of other major currencies (key trading partners) adjusted for the effects of inflation – of South Asian currencies give us an indication of how competitive they are. Figure 3 shows that, in recent times, particularly in 2007-2009, compared to major South Asian currencies, except the Sri Lankan rupee, the renminbi experienced a real appreciation. The monthly REER data of China and India in Figure 4 shows that the Indian rupee underwent a significant depreciation in real terms, particularly following the financial crisis, and the renminbi experienced a marked appreciation. This is largely due to the reversal of foreign capital flows from the Indian capital market and a plunge in its exports income, and the rapid appreciation of the United States dollar (as did the renminbi) as funds returned to the United States in search of a safe haven. As long as the South Asian currencies do not experience significant appreciation in real terms, the undervalued Chinese currency should not be a worry for the region. However, if the United States dollar undergoes rapid depreciation (along with the renminbi), this may be a cause for concern for South Asia. However, in the long-run, it is not merely the exchange rate but productivity that drives a country’s exports competitiveness. 17

Apart from the global economic crisis, internal political conflicts in Pakistan and Sri Lanka weakened their external sectors, eventually affecting their currencies. The Direction of Trade Statistics, International Monetary Fund.

The Way Forward China’s huge supply of labour gives it the upper hand, allowing it to delay an upward adjustment of its exchange rate by suppressing the prices of non-tradables. However, sterilisation and other monetary management issues are the key hurdles in pursuit of this goal. The net effects of its labour and financial market dynamics could lead to the upward revaluation of the renminbi, but the process may be much less steady than what the United States and other industrialised economies are demanding. Nevertheless, if China’s exchange rate is to be determined by factors other than economic forces and if it finally undergoes Japan’s experience owing to global politics, its three-decade economic march could face a major setback. The very essence of Lenin’s economic and political philosophy might have faded away, if not buried, following the fall of the Berlin Wall in the 1990s. However, his observations about currency are very much alive today.

Appendix Figure 1: United States Dollar to Chinese Renminbi Exchange Rates: M1:2004M12:2009.

Source: Oanda (www.oanda.com).

Figure 2: Exchange Rates Movement of Major South Asian Currencies vis-à-vis United States Dollar

Note: BDT= Bangladesh Tak, INR= Indian rupee, PKR= Paksitani rupee, LKR= Sri Lankan Rupee. Source: Asia Regional Integration Center.

Figure 3: Real Effective Exchange Rate Indices of China and Major South Asian Currencies: 1997-2009

Source: Economist Intelligence Unit.

Figure 4: Real Effective Exchange Rates Indices of China and India: M1:2006 M11:2009

Source: Bank for International Settlements.