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The disappearance of the middle ground

By Anupam Manur (@anupammanur)

The end result of an acrid political climate, as witnessed in the US and India, could be one of highly populated extremes and a disappearing middle-ground.

political_parties

Dear America,

Allow me the liberty to predict what will happen over the next few years. This is not another fear-mongering doomsday scenario painting exercise about the potential consequences of a Trump Presidency. I’ll leave that to the experts; experts, who have gotten all their predictions wrong until now. You are in a lot of trouble, not because of what Trump will do or not do, but because of the way you will react to his every move.

If you thought the election campaign trail saw the heights of polarisation, bigotry and racism in your society, then, you have another thing coming. Things are only going to get more divisive from now on. There will be an exponential increase in nationalistic fervour. Public discourse will worsen over the next few years to the point that sensible people will be forced to retire out of sheer frustration and saturation. This is the adverse selection problem in public discourse. If there is a higher proportion of lemons in the market, and the average consumer cannot differentiate between the lemon and the peach, the peaches get crowded out.

Every move by your next President will receive disproportionate attention and reactions. Yes, in a democracy, the citizens have to provide the vigil, but this will take an extreme turn, and perhaps a turn for the worse. The vigil will turn into an obsession, which will saturate public attention. The supporters and detractors will fight out every move, not based on the merits or demerits of the move, but based on the position they took on the day of the election. Supporters will cheer every move and defend it with all their might, irrespective of whether there exists any merits to it. Even terrible moves that might actually induce harm in these stakeholders will find staunch supporters. The supporters might even be willing to endure the negative effects in order to defend their position.

Detractors, on the other hand, will assume that it is their moral obligation to oppose everything. Let us assume that Trump does something reasonable in his tenure, which can be welfare enhancing to Americans, like perhaps fixing the fragile Obamacare. Regardless, the detractors will vilify him, make highly polemical arguments, and go to great lengths to find faults, instead of nuanced debates on how it can be improved. Reasonability and sensibility will disappear from public discourse and so will balanced objectivity. The residue will be a highly charged, hyper-partisan platform for dogmatic exchanges. To make things worse, your political representatives will also be highly divided and it would be reasonable to expect the Congress and the Senate to be in a continuous gridlock for the next few years. Sure, some legislations may get passed, but most of it will have to endure an extremely rough path.

This black hole of negativity will suck in everything in its sight. Previously sane commentators will start taking positions and will stick to it, even in the face of contradictory evidence. Very few will be exempt from this. The middle ground will rapidly vanish and the extremes will start getting populated. There is perhaps some merit in apathy and indecisiveness among citizens, but the time for that has gone. Everyone has a strong opinion and of course, it is the right opinion. The media houses will not be spared either from the hyper-partisan discourse. An independent and impartial media will be left wanting.

I speak from experience. This is what has happened to public discourse in India since the elections in 2014. I am not trying to draw any parallels between our two elected representatives nor our political parties or governments. There is just an overwhelming similarity in the acrid political climate of our countries and the end result could be one of highly populated extremes and a disappearing middle-ground.

Anupam Manur is a Policy Analyst at the Takshashila Institution

 

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Changing alignments in East Asia

by Pranay Kotasthane (@pranaykotas)
Early indications about a Trump Presidency’s impact on partnerships in East Asia

Since Woodrow Wilson, the goal of American foreign policy has been to prevent regional hegemony.

believes Seth Cropsey, Director of the Centre for American Seapower at Hudson Institute. Assuming this was true, the goal is now being reconsidered seriously in the wake of Donald Trump’s victory in the presidential elections. All through the election season, Trump has indicated that the next administration would be more inward-looking — provision of the common good of security, and promotion of free trade, will not be the guiding principles of US foreign policy anymore.

In the early days, the effects of this new strategy are most clearly visible in East Asia. After Obama decided to suspend efforts to pass his signature Trans-Pacific Partnership (TPP) deal through the Congress, Vietnam too will not ratify the deal in the national assembly anytime soon. Trump’s victory also caused panic in South Korea’s financial markets, prompting an emergency meeting of the National Security Council. Australia too followed suit — signalling support for Chinese-led Free Trade Area of the Asia-Pacific.

The framework below gives an idea of how East Asian states are recalibrating their strategies over the past few weeks.

tpp-trump-duterte

Given that the US and China are overwhelmingly powerful in the region, bipolarity exists in East Asia. Further, there are two axes of alignments — political and economic. Based on their relationships with these two major powers, East Asian states can be assigned to one of the four quadrants. There are two bandwagon quadrants (where a state aligns with US or China both, politically and economically) and two hedging quadrants (where a state aligns with one major power in political engagements and aligns with the other in economic arrangements). Grey points indicate positions of East Asian states before Trump’s presidency and black points indicate recent shifts. I haven’t classified all the East Asian states in this framework, yet.

This framework indicates that countries like Australia and Philippines are already moving towards the hedging quadrants. With TPP faltering, a lot of states might follow the Australian trajectory —  economic alignment with China and play a waiting game on geopolitical alignment.

Countries such as North Korea and Japan will find the realignment tougher, and will look out for more options. Faster movement on India—Japan cooperation is an example. No surprises that a landmark nuclear deal between the two countries took place once it was clear that Trump would be the next US president.

Interesting days ahead for East Asia watchers. China can be expected to be strident in the days to come.

Pranay Kotasthane (@pranaykotas) is a Research Fellow at the Takshashila Institution.

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Why is India unable to ‘swing’?

India’s portfolio of capabilities to deliver pain to China (and the US) is not sufficiently developed, constraining India’s ability to swing between US and China.

by Pranay Kotasthane (@pranaykotas)

The Nuclear Suppliers Group (NSG) meeting in Seoul ended without a decision on India’s membership application, despite India’s energetic diplomatic push. In the end, China managed to get India’s membership bid blocked. Following this, the Indian geostrategic community has been trying to ascertain the motive that led China to oppose India’s entry into NSG.

Broadly, there are two lines of thought to explicate China’s opposition. The first argument goes as follows: China’s opposition is a result of the larger US—China powerplay. China wants to prevent an important partner of the US from growing in stature in global forums and hence it opposed India’s NSG membership. WPS Sidhu argued this point of view as follows:

In reality, it [India’s membership] is a contestation between the US and China to determine the future of the nuclear and world order. China’s public declaration to oppose New Delhi’s formal NSG application is more about keeping India out rather than bringing its “all-weather friend” Pakistan (which belatedly also put in an application) in; it is more about securing the existing nuclear and world order rather than strengthening the non-proliferation regime; and, above all, it is a blatant challenge to Washington’s leadership in shaping the evolving world order.

The implication, if this viewpoint holds true, is that any attempt by India to build closer ties with the US will lead to Chinese opposition for India’s membership in multilateral organisations that have the US as the fulcrum. The view also assumes that China will view India more favourably as India grows without coming in the way of China’s geopolitical ambitions.

The second line of thought argues that China’s opposition is consistent with China’s long-held strategy of containing India. Rajesh Rajagopalan, explains this point of view, as follows:

China’s strategy has been consistent since the 1960s and its sole objective was the containment of India. China containment strategy shows little correlation with the state of US-India relations. China transferred nuclear weapons technology to Pakistan in the 1980s, not exactly a period of close US-India ties. It transferred missiles to Pakistan in the 1990s at a time when India had lost its Soviet ally and its relations with the US were still tense. India’s increasing closeness to the US is the result of New Delhi’s reluctant recognition of China’s containment strategy against India, not its cause.

The implication here is that China will oppose India’s growth as a regional and global actor, regardless of India’s equation with the US. Thus, China will not only oppose India’s membership in multilateral organisations where the US has played a powerful role but will also undermine India’s role in Chinese led initiatives such as OBOR, SCO and BRICS.

Both lines of thought concur that China is determined to pose challenges to India’s rise.  This, despite the fact that India has tried to advance its relationships with both China and the US. Essentially, India has tried to project itself as a swing power —a factor that can tilt the equation in favour of any major power which has India on its side. It is with this objective that India is eager to be a part of every global governance forum led by China, even though India’s national interests clash the least with that of the US.

But if China’s actions are an indicator, it appears as though this strategy of ‘swing’ doesn’t seem to be working. Why is that so? A successful “swing” is the one where a state can demonstrate that it can deliver pain for one and pleasure for the other with equal effectiveness. And here in lies India’s problem — our portfolio of capabilities and stated intentions that can deliver pain to China and the US is not sufficiently developed. While India has amply demonstrated that it can be supportive to both Chinese and US multilateral campaigns, there is no articulation of how costly it can be to ignore India.

Let’s look at the current pain deliverance portfolio of India. In what way can it objectively hurt China?

The first option is to amp-up India’s involvement in China’s neighbourhood. Rajesh Rajagopalan explains India’s involvement in East Asia as follows:

India can imitate what China is doing with Pakistan: build up the military capabilities of others on China’s periphery who share India’s worry about China. They may be too weak to match China, but enhancing their capabilities is one way of forcing China to divert its energies and make it understand the costs of strategic blowback. This can take the form of military assistance as well as training and other forms of cooperation.

ASEAN is also divided on the issue of tackling China. States such as Philippines and Vietnam have longstanding conflicts with China. While they are likely to be more vocal against Chinese hegemony, others in ASEAN will bandwagon with China. The next event that will see tempers rising in the region is the upcoming verdict by the Permanent Court of Arbitration (PCA) on the issue of sovereignty over two island groups claimed by both China and Philippines. In all likelihood, this verdict will not go entirely in favour of either nation; PCA will settle for a mix of equidistance and equitable principles just like it did in the case of India—Bangladesh maritime dispute. Back then, India displayed exemplary maturity in accepting the PCA verdict. India can start projecting its own success story before the verdict comes out in the next couple of weeks. Going ahead, India can prioritise its relationship with the ASEAN nations that are likely to challenge China.

Second, India can look at global Chinese initiatives such as Belt & Road (OBOR) from the dual lens of competition and complementation: in the Indian sub-continent, OBOR should be looked at as an aggressive competitor, using it as an excuse to accelerate India’s own projects of connecting markets in India’s own neighbourhood. Outside the Indian sub-continent, India can look at complementing OBOR. For instance, in East Africa, India can work with China under the aegis of “Many Belts Many Roads” to expand its own reach.

Third, India can make its presence felt in BRICS and SCO by taking a strong stand against Chinese hegemony. Quitting these groups at an appropriate juncture can be used to make a point.

These are the three pain deliverance measures that India can implement at its current levels of power. Beyond them, there is little that India can do unless it gets its house in order with a view towards a substantial rise in India’s power in all dimensions — economic, military, maritime and political.

Pranay Kotasthane (@pranaykotas) is a Research Fellow at the Takshashila Institution.

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Geoeconomics Round-up

Global GDP growth has steadily declined in the past few years. Which country can be the engine of global growth? This is a round-up of how different economies are performing.

By Anupam Manur (@anupammanur)

Source: The Economist

Source: Economist.com

Global GDP growth as measured by various international agencies has constantly decreased in this decade falling from about 5% in 2010 to just around 3% now. A 2 percentage points drop in global growth is quite a huge fall, which has alarmed many economists, who are now searching for new sources of global growth. The traditional forces seem to be fading and there hasn’t been any new economic power house to pull the global economy forward.

China has been the engine of global growth for quite some time now. It has consistently managed to grow at around 10% for an impressive 30 years. For the first 20 years, the impressive growth rates were achieved through genuine economic reforms when China moved away from a completely state-run economy to a more liberal, private sector led economy. The next 10 years, roughly the decade of 2000s, saw China post impressive growth rates again (as high as 14% in 2007). However, this time, the growth was unsustainable and was mainly powered by huge borrowings. In the past few years, the unsustainability of the debt fueled growth has begun to show up and China has considerably slowed down. China posted 6.9% in the last quarter of 2015, the lowest growth rate in a long period.

What’s even more worrying is that the Chinese debt burden is manifesting in structural flaws in the economy. Total Chinese debt – government + non-financial corporate + financial institutions + households – account for as high as 282 percent of GDP. In 2001, it was 121 percent of GDP and  158 percent in 2007. Again, the debt problem is compounded by the fact that the Chinese economy is slowing down. This has led to a bond market bubble, a stock market correction, decreased foreign exchange reserves and increased borrowing costs for China.

China is due to slow down further in the coming years and it might not be able to rebound to its previous high rates of growth any time in the near future. Further, China is aiming to reorient its economy from an export oriented, manufacturing dominated economy to an internal consumption led, more balanced one. This can have severe implications for the world economy. Chinese manufacturing accounts for a huge portion of global industrial and manufacturing base. It was a fuel guzzler and was a voracious importer of commodities. Given the slowdown in Chinese manufacturing, not only has the world seen a dip in global index of industrial production, but has also witnessed a massive drop in commodities and fuel prices.

The European Union is now slowly crawling back to positive growth territory. Since the financial crisis, the Euro Area underwent a prolonged recession, with devastating consequences for many of its individual country members such as Greece, Spain, Ireland and Portugal amongst others. The Euro Area posted around 1.5% GDP growth in the last quarter of 2015, largely led by a German revival. However, the Euro Area is faced with some deep structural problems, such as an ageing population and the perennial debt problem (of many of its members). Further, the loose monetary policy maintained by the ECB currently is not sustainable in the long run. Japan is in an even bigger doldrum, with GDP growth rate hovering around 0%. The lost decade of the 1990s has now spilt over for two more decades.

The United States still remains the leading engine of global growth. Though it slowed down considerable after the crisis, it has bounced back gradually. Unemployment rates have been falling and the economy is seeming healthy. It is still the source of most innovations and technological development in the world. Remember, the US economy still accounts for nearly 30% of global GDP and thus, a 2-3% growth of the US economy can be significant for the world.

Most emerging markets have faltered in the changing economic landscape. Commodity exporters like Venezuela, Brazil, South Africa and Russia have been adversely affected by the falling crude oil and commodity prices. The growth rates in these countries have dropped drastically in the past year, with some of  them even facing a contraction of output. The South-East Asian economies are performing moderately well and may continue to do so in the short to medium run.

Finally, India has been seen as the new leader of global growth. Many economists, including our RBI Governor Raghuram Rajan, has commented that India will be the next engine of global growth. However, this must be taken with a pinch of salt. Though it is the fastest growing economy in the world presently, the size of its economy is still too small to make a significant impact on global growth levels. Compare India’s two trillion dollar economy to China’s $12 trillion and US’s $17 trillion economies (nominal GDP). Further, India’s other domestic growth indicators have not been exactly encouraging. IIP numbers have been unimpressive, the size of corporate debt is worrying, the banking sector has been plagued with bad loans, and no significant structural reforms have been implemented in the last few years.

The 3% growth for the global economy should be viewed as the new normal and even for that to remain sustainable requires most of these countries to outperform.

Anupam Manur is a Policy Analyst at the Takshashila Institution. 

 

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India’s Pacific Ambition

In many ways India is not a traditional or a significant power in the Asia Pacific region, but today India is making a concerted effort to look eastwards. There is a divided opinion on India’s Pacific ambition, while some call it as an emerging aspiration, while others call it as a deficit action. However it would be a misnomer and premature to  decipher  India’s  geo-strategic and geo-economic interest as simply void. With US strategic pivot in East Asia, and with expanded US-Japan alliance system, India is drawn into this  power configuration partnership, probably an effort to counterweight  China.

 

India and east asia

There is a growing geo-strategic and geo-economic involvement of India in the region. Host of factors ranging from past history, economy, political and strategic has dominated India’s East and South East Asia dynamics.  Trying to connect the demands of the  post liberalisation era and to engage meaningfully in the region, India re-visited its Look East Policy. India’s engagement with ASEAN is yet another milestone of integrating into the global economy.

The United States as a part of its pivot strategy in Asia , is harnessing  India as an important player in the region.  This has resulted in India’s invitation for the East Asia Summit in 2005. There is a sense of  inclusion of India by Singapore, Indonesia, Thailand, Japan and South Korea despite China’s objection. Defence diplomacy is something that India is judiciously following and has conducted  joint naval exercises with South Korea. Thereafter there has been an greater political engagement with Seoul. There is a special strategic global partnership that is emerging between India and Japan,as both the countries remain very watchful of China.

There are several areas that India-Japan are networking together. The high speed railways between Ahmadabad and Mumbai is a very important initiative towards this effort. The cooperation on nuclear and defence between Japan and India is very significant imperative in Asia’s landscape. There is a crystallisation of trilateral partnership between India-Japan-United States. Maintaining Balance of Power  is extremely vital and the resultant factor is the changing countours in the strategic landscape of East Asia.The triangular relation is seen as a crucial geo-strategic alternative which could probably balance China.

Is the inclusion of India done on the pretext of a growing economy or as an intent to contain China.There is lot of uncertainty that prevails in the region, what is the position of Japan, China and United States over the future of East Asia. Can the emerging powers like India, Japan and Australia fit into the strategic gap as  a stabilising force in the region. There is an emerging power shift that is slowly unfolding , can India benefit from this strategic quadrangle is something that has to be carefully watched.

Priya Suresh is a Research Scholar with the Takshashila Institute. She tweets @priyamanassa.

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Afghanistan’s India outreach

The likely transfer of four attack helicopters from India to Afghanistan marks a significant change in the positions of not only India and Afghanistan, but also that of the US.

by Pranay Kotasthane (@pranaykotas)

Suhasini Haidar reported in The Hindu on November 4, 2015:

India is discussing the transfer of attack helicopters to Afghanistan when Afghan National Security Adviser Hanif Atmar visits New Delhi this weekend (November 7-8) for meetings with NSA Ajit Doval.

As Haidar details further, these four Russian-made Mi-25 helicopters will be India’s first offensive weaponry transferred to the National Unity Government in Afghanistan.

This transfer marks a significant change in the positions of not only India and Afghanistan, but also that of the US, as explained below.

Up to this point, the Indian government had rolled back its engagement with Ashraf Ghani’s administration following his efforts (backed by the US) to reach out to all sections of Pakistan in the hope of getting the Taliban to the negotiating table. Back then, it made sense for India to let its displeasure be made clear to the Afghan government, which chose to throw its weight behind Pakistan-led talks while keeping the Indian connection on the back burner.

However, we had argued in our writings that India should look to refresh its Afghanistan relationship in light of three new developments: failure of the Murree round of talks, splintering of the Taliban movement and its relative weakness in the South, and the changing geopolitics of Afghanistan, Central and West Asia over the last six months.

It finally appears that the Indian leadership has decided to re-energise its Afghanistan desk. Reports suggest that it was the Indian government that reached out to Afghanistan—the invitation to Mr. Atmar was extended by Mr. Doval during a telephone conversation a few days back. This is a welcome change—India looks to have overcome its fear of aggravating Pakistan in order to boost Afghanistan’s quest for strategic autonomy.

Second, this move also reflects a change in the Afghan government’s position. Already frustrated by the failure of the Murree round of talks, the Kunduz attack turned out to be the last straw. Following the Taliban takeover of the important northern city, the Afghan government was forced to re-evaluate its relationship with all its neighbours. The Chief Executive of the government, Abdullah Abdullah welcomed Russia’s potential assistance by saying:

If any country wants to assist Afghanistan in war on terror, Afghanistan welcomes the offer.

This outreach to India is a reflection of this realignment of Afghan government’s priorities.

Third, the National Unity Government’s change of heart is impossible without a change in the US position. We had indicated that the U.S., in search of an honourable exit from Afghanistan, had been shaken by the Kunduz incident and was looking for more options:

The Kunduz attaack makes it clear that the optimism generated by Pakistan-led round of talks was misplaced. The halt in troop withdrawal until 2017 is meant to buy time until the U.S. finds a better roadmap to peace in Afghanistan. While the U.S. and China still continue to place their bets on Pakistan-backed efforts, there is a growing realisation that the price Pakistan demands will never be acceptable to large sections of Afghans. Nevertheless, the U.S. is said to be examining various other possibilities for securing peace.

It is most likely that in search of new options, the US would have encouraged the national unity government to re-engage with India.

A few important questions emerge in the light of the new development: given the new start, will India further deepen its military relationship with the Afghan government? And more importantly, will India help the Afghan government and the US in starting a new peace process with sections of the Taliban? These questions will be answered in the days to come. In any case, well re-begun is almost half done.

Pranay Kotasthane is a Research Fellow at The Takshashila Institution. He is on twitter @pranaykotas

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Why is the Dollar the World’s Reserve Currency?

By Anupam Manur and Varun Ramachandra

Strength, stability, universal acceptability, and a lack of a viable alternative to the dollar makes it the global reserve currency. 

Global trade and businesses function best when there is a currency that is widely accepted. This doesn’t imply a common currency, instead, it refers to the usage of a widely acceptable currency for international transactions. Such a currency reduces the transaction costs of converting one currency to another and enables easy invoicing of traded goods and services. This common currency is referred to as the reserve currency.

The brief history of reserve currencies:

Historically, a reserve currency implied a currency that was in wide circulation even outside the issuing state’s borders. Currently, the US dollar is the world’s reserve currency but this hasn’t been the case forever. The silver Drachma issued by the ancient Athens was probably the first reserve currency. The Roman Aureus and Denarious coins, the Byzantine Solidius coins, the Arabian Dinar, the Florence Fiorino, and the Dutch Gulden have at various points had the status of being the world’s reserve currency.

History of money

 

In 1717, Britain adopted the gold standard – a system where central banks had to back each paper currency note they printed with an equal or proportional amount of gold — and simultaneously built a vast empire. At the height of its power, more than 60% of world trade was invoiced in pounds and this led to the pound sterling becoming the world’s reserve currency. At around the end of the 19th century, America’s economic significance rose and this resulted in the US dollar toppling the pound as the most sought-after currency. Today, more than two-thirds of foreign exchange reserves held by central banks around the world are in US dollars (see figure).

COFER

 

Why do central banks maintain reserves?

Two important reasons for holding reserves are as follows:

First, safety. Reserves act as savings, and central banks can benefit from this in hours of need. When a country faces a balance of payments crisis or some other form of financial crisis, the central bank can use its reserves to alleviate the situation. Typically, central banks manage enough reserves to cover for three months’ worth of imports to maintain continuity of trade in times of crises. Reserves also act as positive assurance to debtors.

Second, reserves are maintained to manage a country’s exchange rate policy (the previous post explored this aspect). Whenever a country’s currency appreciates or depreciates, and moves away from the target exchange rate set, the central bank steps in and uses its reserves to maintain exchange rate stability. The Reserve Bank of India has done this on numerous occasions when the rupee has appreciated or depreciated.

Why is the US dollar the reserve currency?

Since the United States boasts of the world’s largest economy (around $18 trillion) and has a stable political environment, most international trade is invoiced in dollars and about 50-60% of US dollars circulate outside US borders. Since there has been no default or major devaluation of the dollar in the past few decades, the USD and the US government’s treasury bonds are thought of as the safest assets in the world; this inherent stability and risk-free nature of the dollar is attractive to investors and has therefore ensured that the US dollar is the world’s reserve currency.

According to economist Ewe-Ghee Lim, there are five factors that facilitate international currency’s status: a large economic size, the existence of a well-developed financial system, confidence in the currency’s value, political stability, and network externalities. Additional features for currencies that assume reserve status are large-scale current account and financial account convertibility, an independent central bank, a high degree of capital mobility, surveillance of economic policies, and cooperation of monetary policymaking at regional and multilateral levels. The dollar checks almost all of these boxes.

The rise of China since the 80s has made the Chinese Yuan an important world currency, but since the Yuan has been deliberately undervalued to aid exports, the real exchange rate of Yuan is unknown. Japan and Britain are waning economic powers, the emerging markets are too volatile, the Euro has many internal problems, and gold is too static a commodity to be held as the reserve currency. This leaves the dollar as the only viable option for the time being, and probably for some more time to come.

Anupam Manur is a Policy Analyst at Takshashila Institution  and tweets @anupammanur

Varun Ramachandra is a Policy Analyst at Takshashila Institution and tweets   @_quale

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