24 August 2013

The Indian Rupee Keeps Falling While New Delhi Scrambles for Solutions

Aug. 22, 2013 

Kunal Patil / Hindustan Times Onlookers standing outside the Bombay Stock Exchange react as they watch share prices on the facade of the BSE building in Mumbai on Aug. 19, 2013The rupee is in trouble, and nobody seems quite sure what to do about it. The Indian currency closed at an all-time low of 64.11 against the U.S. dollar on Wednesday alongside a tumbling market, feeding widespread anxiety over the fact that the government has yet to curb the currency’s downward trajectory since it started tumbling in May. On Wednesday, Deutsche Bank issued a report saying the rupee may reach as low as 70 in the coming months.

It’s the latest bit of unwelcome news in a bad few years for the Indian economy, which has slowed from its rapid 9% growth rate to a forecast of between 5.5% and 5.7% for this fiscal year.

Why is it the rupee’s turn to take a beating? Part of the problem is not India’s alone. With the U.S. Federal Reserve expected to start tapering off a stimulus program that has pumped cash into the global economy, investors have grown wary of the emerging markets they became so fond of in recent years. Countries running their own current account deficits (CAD) have borne the brunt of the mood swing: currencies in India, Brazil and Indonesia, among others, have seen drops as investors pull money out ahead of the Fed’s anticipated tightening.

That problem may be global, but the fact that the Indian economy has some homegrown structural problems has exacerbated the flight of foreign funds. “If you’re an investor, you want to put your money where there’s going to be growth,” says Daniel Martin, an economist with Capital Economics in Singapore. “The shine has come off India. It’s not the glaring success story it was a few years ago.”

That’s not a new assessment, but it’s important now because it means that the core issues slowing down Indian growth are now hurting its currency — and, by proxy, Indian consumers who want to buy, say, an imported phone, or foreign carmakers that need to import parts. Those fundamental weaknesses — poor infrastructure, unreliable power supply, difficulty in securing land and lots of sticky red tape — are all keeping foreign investment out of the country, and that’s a problem for a country that imports far more than it exports and thus needs to finance a large current account deficit. When the CAD widens, the rupee’s decline accelerates further. So even at a time when many emerging markets are looking risky to investors, India is looking riskier than most.

The government is attempting several things to stem the rupee’s decline, including trying to reduce the CAD by increasing import taxes on gold and limiting how much money Indians can send abroad. In July, after the rupee hit an earlier low, the Reserve Bank of India made moves to raise interest rates to tighten liquidity in the domestic market. That didn’t help, and this week, the bank changed tack, announcing it would take action to flow more cash into the economy to bring interest rates down and usher in growth. The move caused markets to open on Wednesday on a note of optimism, but that fizzled by the end of the day.

Why the panic over India, asks economist Paul Krugman

August 23, 2013 

When there is all-round gloom over India’s economy, with everyone from experts and others tearing into the government for its inability to control the rupee’s tango with the dollar, soaring inflation and falling GDP figures, here’s a bit of good news for the UPA.

Writing in the New York Times, Paul Krugman, the Nobel Prize winning economist, agrees that while the falling rupee is the big story of the story, why the panic?

The rupee may be down a lot in quick time but it is not unique among emerging market currencies, he writes, and offers a comparison with another comparable emerging market economy, Brazil. According to the real effective exchange rate arrived at by Krugman from the Bank for International Settlements figures and his own estimates, the Indian rupee’s REER is around 88 per dollar, while the real’s REER is at a steep 110.

Krugman also demolishes the theory that the emerging market currencies are in turmoil over the US Fed’s quantitative easing.

The rupee’s recent decline is sharp, yes, he says, but the tale would be scary if India was like the Asian crisis countries of 1997-98, or even Argentina in 2001, when large amounts of debt was denominated in foreign currency. According to him, India’s percentage of external debt to GDP was around 20.

Since comparisons have been made to India’s current economic plight and the 1991 payments crisis -- when the economy was rescued by then finance minister Manmohan Singh who is now the prime minister -- it is educative to realise that the external debt to GDP percentage then was double, at 40.

Krugman rounds off his article with the caveat about the downside to the rupee’s fall -- a spike in inflation -- but even this, he says, should be temporary.

This must come as sweet music to the government’s ears!


When development may also mean destruction

Politics and Play - Ramachandra Guha

Thirty years ago, a group of students from Delhi University went on a long walking tour of the Narmada valley. The journey was arduous, and it was not undertaken for pleasure. The students wished to study, at first-hand, “the possible environmental impact of the massive hydroelectric and irrigation complex planned for the Valley, and to see and document the existing natural and cultural heritage of the [Narmada] river”. They wrote a report based on their trip, versions of which were published in the The Ecologist of London and the Economic and Political Weekly of Mumbai. Rich, fact-filled, and written in understated prose, these documents are of considerable historical interest. For it was by reading the article in the EPW that Medha Patkar, then a social activist in the city of Mumbai, decided to shift to the Narmada valley to work there.

An ambitious ‘master plan’ conceived by the government had envisaged the construction of 30 major dams in the Narmada valley. Some 135 medium-sized dams were also planned. The student researchers asked a fundamental question — had the authorities carefully studied the social and environmental consequences of these projects? They discovered that they had not. The valley had a variety of forest regimes, and was staggeringly rich in biodiversity. There had been no studies of the potential loss of forests and wildlife when these dams came up, or of their impact on the livelihood patterns of forest-dependent villagers. Nor had there been any research on the geological impact of the building of so many dams in a seismically-fragile zone.

The scientific negligence was compounded by a sociological one. The valley was also home to a vast array of peasant, tribal, and artisanal communities. The social arrangements and lifestyles of these communities had not been investigated. No account had been taken of the temples and other sacred sites that would be submerged along with the forests and the villages. Even more strikingly, the student researchers found that “at no stage have local people been involved in the planning of the project”.

The reservoirs planned to facilitate the dam would, the students estimated, displace more than a million people. Yet there had been no anthropological studies undertaken to find out the requirements of the oustees. Alternate land had not, in many cases, been identified. The compensation proposed was well below market rates. On the other side, building, construction and rehabilitation costs had been seriously underestimated, by, in the students’ view, as much as 300 per cent.

The project authorities had also largely ignored the colossal environmental damage that the projects, when completed, would lead to. The natural forests of the valley played a key role in stabilizing the soil, conserving water, and providing a congenial climate. With these forests now coming under the axe — or the water— these ecological benefits would be lost. There had been, in the past, an increase in soil salinity and waterlogging through the building of large canals. Yet the canals proposed under these new schemes took no account of such likely externalities.

The student researchers saw the Narmada projects as symptomatic of a wider indifference to environmental sustainability. In their view, the model of economic growth that India had chosen is “not only ecologically non-sustainable, it is also socio-culturally destructive. It has increased inequalities; concentrated power in the hands of a few; swamped valuable traditional cultures and knowledge systems; destroyed the spiritual part in us; broken integrative social relationships and isolated individuals from each other and from Nature”.

Maoists: Crimson Tide

24 Aug , 2013

With adequate potential for civil war aimed at Balkanizing India, the Maoist insurgency requires total national focus and synergy, according equal importance to politico-social-economic issues in addition to operations by security forces to manage violence levels. As India races against time to manage social change, the Maoist insurgency must be given due priority. India must also, in all sincerity, establish deterrence against irregular forces and their external support bases on proactive basis.

If we cannot get our act together, the Maoist insurgency will consume us in the coming years.

The repeated dance of death in Dantewada, Bhadrakali, Garhchiroli and the recent macabre killings of 13 CRPF personnel and four civilians at Latehar closely followed by severely injuring another 11 CRPF personnel at Bokaro has once again exposed government intransigence and the hollowness of claims by the Home Ministry since 2010 that the Maoist insurgency will be resolved in the next two to three years. The fable of Indian crabs pulling each other down is passé – replaced by the Indian ostrich that simply refuses to recognise what is so very obvious. Ironically, the lives of security forces personnel appear to be of little value.

Latehar has affirmed the gross lack of understanding of the Maoist problem, absence of required strategy, inadequacies of the security forces and most significantly, leaving the issue to be dealt with by individual States. If China and Pakistan are leaving no stone unturned to create a civil war-like situation in India, it is because we have offered them, and continue to offer them a readymade asymmetric battlefield covering 40 per cent of the country. The writing on the wall is clear – if we cannot get our act together, the Maoist insurgency will consume us in the coming years. The crimson tide is coming.


It would be prudent for the policy makers to read the Maoist document titled “Strategy and Tactics for the Indian Revolution” scripted as late as 2004 that says, “The central task of the Indian Revolution is the seizure of political power. To accomplish this, the Indian people will have to be organized in the People’s Army and will have to wipe out the armed forces of the counter revolutionary Indian State and establish in its place their own state”. It further goes on to say, “As a considerable part of the enemy’s armed forces will inevitably be engaged against the growing tide of struggle by various nationalities, it will be difficult for the Indian ruling classes to mobilize all their armed forces against our revolutionary war”.

Treating the Maoist insurgency lightly and underestimating their military potential will be a great folly.

Treating the Maoist insurgency lightly and underestimating their military potential will be a great folly especially knowing that the ideologies for the Maoists in both Nepal and India were scripted in Beijing. It is not without reason that CPI (M) cadres were openly visiting China in the past and perhaps may even be conferring with Wei Wei, China’s Ambassador to India akin to Hurriyaat in cahoots with Salman Bashir. It may be recalled that Zhang Yan, Wei Wei’s predecessor, when questioned about the Chinese map showing Arunachal Pradesh and Ladakh in China and Kashmir in Pakistan, arrogantly told an Indian journalist to shut up. Our policy paralysis apart, there should be no doubt that the Maoist insurgency is a dangerous secessionist movement.

From Jalalabad to LoC: Interpreting Pakistan Military’s Objectives behind the Offensive

By D Suba Chandran

Suddenly there is an offensive against India by Pakistan’s military – both on its eastern and western fronts. If the suicide attack on the Indian embassy across the Durand Line, using its proxy came as a warning against India, subsequent attacks along the Line of Control has confirmed – that there could be a larger design in action by the military in Pakistan and the attacks against India across the Durand and along the LoC is a strategy.

Both the attacks against India (Jalalabad and LoC) and the primary objectives need to be investigated and understood in the larger context, and not just responding to Pakistan on an ad hoc basis based on a jingoistic media and unruly opposition aiming to score cheap points at the Parliament. The Indian response – political and military has to be measured, keeping in mind long term interests of the country, and the larger designs of Pakistan, especially its military vis-a-vis India, and its non-military arms – the Lashkar and the Taliban.

At the outset, it is perhaps essential to make a differentiation between Nawaz Sharif and the military, in terms of who is the primary factor behind the recent anti-Indian offensive. Though Nawaz Sharif may have been elected with a majority within Pakistan, when it comes to Afghanistan, US, China, Kashmir (and India), Nuclear Weapons and the non-State actors in Pakistan (from Hafiz Saeed to Dawood Ibrahim), the military and its ISI will call the actual shots. Neither the Parliament (with majority or otherwise) nor the judiciary (proactive and selective) in Pakistan have the powers and the reach to make any dent on military’s thinking, when it comes to the above issues. The much debated civil society and a ‘free’ media in Pakistan will be forced to fall in line with the thinking within the armed forces. Military in Pakistan has remained, and will remain the primary actor on the above issues.


The suicide attack on the Indian Embassy in Jalalabad, though could not succeed in terms of breaching the security cordon, the objective is clear. The following questions are irrelevant, for they are obvious: Was Taliban behind it? Did Taliban carry the attack under the instructions from the ISI. This would not have happened within Islamabad nudging the Taliban; perhaps, a section within Pakistan would want to see this as an Indian and Afghan conspiracy!

Rather, what needs to be probed is: what are the objectives behind the attack on Indian embassy? Does this signal the strategy that Pakistan is likely to pursue vis-a-vis India in Afghanistan, using its proxy – the Haqqani network?

Pakistan’s Objectives: More the Same, and Perhaps Worse
While Pakistan’s larger objectives in Afghanistan have always been clear and well understood, there was a general belief, atleast within Pakistan, that it needs a revision. With the deadline in Afghanistan approaching for the American exit in December 2014, there has also been an expectation at the international level at the international levels, that the region should play a positive role in contributing to the Afghan stability before and after 2014.

What does the attack on the Indian consulate in Jalalabad signify, in terms of Pakistan’s approach? First, it clearly identifies, there is no shift in Pakistan’s strategy towards Afghanistan, despite the general call for a revision within its own strategic community. It appears, Pakistan would like to treat Afghanistan as its geographic backyard and strategic harem. There is unlikely to be any revision to Pakistan’s original vision of having Afghanistan as its strategic depth. 

Second, Pakistan does want India to be in Afghanistan. Period. The general perception is, why should India be in Afghanistan, especially when it does not share a boundary with the latter? This is a myopic view, that only country that shares border should have a closer relation with another. If that is the case, why should US be in Pakistan? Or, why Pakistan should be in Nepal and Sri Lanka? 

Why Pakistan wants to blow apart LoC ceasefire

August 23, 2013

Until Nawaz Sharif walks the talk on peace with India, he can never be considered a credible partner in the normalisation process. Indian meanwhile must respond and react appropriately and proportionately to any and every provocation from Pakistan. Equally important, India needs to disabuse the West of any notions of playing a mediatory role on the issue of Kashmir, says Sushant Sareen

Even though there have been occasional violations by Pakistani troops of the ceasefire agreement on the Line of Control in Jammu and Kashmir, the recent flare-up has placed enormous strain on the Confidence Building Measures that has been mutually agreed in late 2003. 

The violations of the ceasefire are no longer limited to either a small section of the LoC or to use of small arms but are taking place all along the LoC. What is more, the exchange of fire has continued unabated in one or the other sector of the LoC for nearly three weeks now. 

On the Indian side, the restraint that was being shown by the army in the face of regular provocations -- pushing in infiltrators, firing on Indian positions, carrying out cross-LoC raids etc -- by the Pakistan army and its jihadist paramilitaries has now all but run its course. 

With the gloves coming off, the Indian army has started to retaliate in a calibrated and proportionate manner. 

The message being sent is clear: unless the Pakistanis pull back (after all they started the shooting match with the killing of five Indian soldiers on the Indian side of the LoC) there is a clear and present danger of the ceasefire agreement collapsing. If this happens, things will return to the pre-ceasefire situation in which both sides suffered heavy casualties of not only troops but also civilians living close to the LoC. 

The problem for Pakistan is that open hostilities breaking out on its eastern front is the last thing that the over-stretched military can afford at this point in time. 

As it is, Pakistan is sinking in a sea of crises, not the least of which is a tanking economy, rampant terrorism, two and a half insurgencies (the Islamist one in Khyber Pakhtunkhwa and FATA, a separatist movement in Balochistan, and the stirrings of a nationalist insurgency in Sindh), abysmal state of law and order with sectarian violence and criminal mafias tearing the country apart.


Nawaz Sharif seems to have no qualms about Pakistan’s frequent ceasefire violations on the LoC. He continues to look upon India as a lucrative market, writes Abhijit Bhattacharyya

The recent news of the killing of five Indian soldiers on the LoC by Pakistani troops shocked, but did not surprise, me. This is because the killing constitutes one of those numerous ‘innocuous’ instances of foreign invasions in India which have taken place since time immemorial, and can be owed to the deplorable failure of the political command to curb the killing of Indians on their own territory.

Readers may like to revisit the genesis of the incursions of independent India in the light of facts. To do so, it would be a good idea to take the assistance of a Pakistani rather than an Indian, lest the latter is accused of being biased. Babar Ayaz, the veteran Pakistani scribe, who in his recent book, What’s wrong with Pakistan?, traces the “genetic defect of Pakistan” thus: “It was on the eve of the golden jubilee of Pakistan in 1997 that I made the following observation about the ‘two nation theory’ while giving an interview to BBC World Service:— ‘Although the Muslims were a small minority in India, they ruled the sub-continent for almost 650 years, and it never occurred to them that they were a separate nation. However, after 1857, when it came to democracy, where numbers matter, the fear of being ruled by a Hindu majority suddenly started haunting the Muslim elite. After centuries of convenient amnesia they realized that they were a separate nation.’”

The dormant syndrome appears to persist; it is at times rekindled in the psyche of the Punjabi Pakistanis. The latter were the ultimate gainers from the creation of Pakistan after having suffered most during, and after, the Partition riots. Slowly and steadily, they got hold of virtually all branches of the state machinery, thereby depriving the majority Bengali population as well as the Baluchis, Pashtuns and the Sindhis. This overbearing attitude subsequently led to resentment and revolt among the Bengalis, resulting in the birth of Bangladesh in 1971. Today, the Punjab once again dominates the three other provinces of Pakistan. The prime minister, Nawaz Sharif, can take credit for some of this, since he is a Punjabi himself.

Sharif, who has been the prime minister twice before this, is back in the premier’s chair after nearly 14 years. His main concerns are the Punjab, Kashmir, militancy, the army, privatization of industry and Saudi Arabia, among others; he has now added doing business in the Indian markets to the list. Ghulam Jilani Khan, who was the director general of the Inter-Services Intelligence from 1971 to 1978 and then the governor of the Punjab, along with the army chief and president, Zia-ul Haq, were instrumental in Sharif’s rise in politics. It took Sharif less than five years to become the governor of Punjab with the blessings of his two mentors. The friendship between Sharif and Zia also ensured the return of the steel industry — which was nationalized by Zulfiqar Ali Bhutto in the early 1970s — from the government. A strong advocate of capitalism and free market economics, Sharif is known to have invested large capital in Saudi Arabia during his days of exile, and in oil-rich Arab countries in the Middle East in order to restart his steel empire. As the finance minister, Sharif focused only on developing the Punjab, thereby contributing to an increased inequality between the other three provinces and the Punjab. The Muttahida Qaumi Movement and the Pakistan People’s Party of Sindh opposed Sharif for beautifying the Punjab and Kashmir while neglecting Sindh. Baluchistan too resented Sharif’s actions in the past. During his last two unfinished tenures as prime minister, Sharif took active steps towards conservatism with parties which had extreme religious ideologies. He always raised the subject of Kashmir in international forums.

Nuclear Threat and Disaster Management


Workshop on "Best International Practices In Building Resilient Cities,” Bangalore August 5-7, 2013

Dr. L.V. Krishnan, Adjunct Faculty, NIAS, Bangalore
Dr. Jai Asundi, Principal Research Scientist, CSTEP, Bangalore

Commentators speak of two types of nuclear threat. Attack with a stockpile nuclear weapon by an adversary State during a conflict is one of them. This would most probably be set off high above the ground to maximise damage. It may not be a solitary attack. Surprise attack by a terror group with an improvised device is another possibility. This is likely to be of a lower yield and explode at ground level. There are significant differences between the two. Many reports have been published about the likely mass casualties in the event of a nuclear explosion.

Our focus here is on the management of the consequences to facilitate early rescue and recovery.
For the complete presentation click here

Indian Ocean Region: Can New Delhi Guarantee Regional Stability?

By Barana Waidyatilake
23 August 2013

Programme Officer, Regional Centre for Strategic Studies, Colombo

With the recent launch of its first indigenously-developed aircraft carrier, India has announced its entry into yet another elite club. Historically, developing naval power projection has been seen as a major indicator of ‘great power’ status; the launch of INS Vikraant underscored India’s intention. Beyond the prestige factor, it is worthwhile considering how such burgeoning strategic capabilities impinge India’s role within the Indian Ocean Region (IOR). 

With its growing economic and military clout, strategic analysts discuss India’s increasingly capable of playing an effective role as a guarantor of peace and stability within the IOR. What are the enabling factors and obstacles for New Delhi in meeting the challenge?

Firstly, it must be emphasised that, India is the only country in the IOR possessing adequate resources and, more importantly, a central strategic location, to effectively provide a security umbrella for the region. As underscored by reputed historian like K.M. Panikkar - the Indian subcontinent, juts out by a thousand miles into the Indian Ocean, placing India in a strategically advantageous within the IOR than, say, the USA in relation to the Atlantic Ocean or China in relation to the Pacific Ocean. India could most definitely perform this role with greater technical proficiency and at a lower cost than the USA (which has faced substantial costs in deploying forces and combating piracy in the IOR, with dubious results). Therefore, geopolitical circumstances make a strong case for India being the nation to provide a comprehensive security umbrella for the region.

Internal political structure should also be considered while discussing the Indian capabilities regard is its. Being a democracy, and having a foreign policy that (despite recent pro-US tilts) is generally non-aligned and non-aggressive, India can be trusted to use its burgeoning military capabilities in the region in a responsible manner without engaging in unilateral adventurism. It is worth drawing a contrast in this regard with China; its launch of its first aircraft carrier was greeted with a significant amount of anxious speculation among its neighbours in the Asia-Pacific, due to the opaque nature of its political structure and its generally aggressive foreign policy within its immediate neighbourhood. Therefore, Indian soft power (supported by its democratic structure and relatively benign foreign policy) are major factors that will assuage any concerns that its IOR neighbours might have about its strategic intentions; this, in fact, would be a good working example of what Joseph Nye termed ‘smart power’. All this makes a strong case for India’s ability to effectively guarantee regional security.

When considering strategic naval doctrine, India again displays strengths that mark it out as a good candidate for ensuring security in the IOR. The Indian navy’s doctrine encompasses a very broad understanding of security, taking into consideration the importance of the IOR as a region through which two-thirds of the world’s oil shipments and half of its container trade passes; it also highlights new security threats emerging from piracy and maritime terrorism. Therefore, it could plausibly be argued that the Indian navy possesses a comprehensive strategic vision that accurately captures the emerging security needs of the IOR. Furthermore, it goes without saying that the development of carrier fleets significantly increases the Indian navy’s capability to conduct surveillance over larger parts of the IOR, and also reduces the response time against various maritime threats (piracy naturally comes to mind). 

Coherence and Resolve in Foreign Policy

 23 Aug , 2013

In the recent LoC incident, many TV channels indulged in competitive hysteria and opposition too went overboard demanding ten heads for one! This contrasts glaringly with the mature support the national media and opposition in USA extended to its Government over 9/11. There is a need therefore, to educate media persons who deal with foreign policy and security issues. Thereafter, it should be Standard Operating Procedure that, at the earliest after a crisis erupts, the media, opposition leaders and relevant cabinet members/bureaucrats are briefed and brought on the same page – that of national interest.

We have been particularly incompetent in dealing with our nuclear neighbours – Pakistan and China…

The primary goals of a nation’s foreign policy are to mould the external environment to promote national security and to safeguard national values. However, our current policy has singularly failed in achieving these goals. After 65 years since Independence, it has only succeeded in creating the most insecure neighbourhood of any major nation and exposed our people to gruesome attacks within our homeland. We have been particularly incompetent in dealing with our nuclear neighbours – Pakistan and China. The recent fiasco over the outrage on the Line-of-Control (LoC) is illustrative. The Pakistani envoy was called to the Ministry of External Affairs (MEA) and handed a demarche for Pakistan’s grave provocation and human rights violations. Immediately afterwards he launched a counter-tirade on Indian Television, painting India as the aggressor. In New York, Hina Rabbani pulled off a remarkable media blitz. Within 24 hours, she appeared on the Council for Foreign Relations, the Asia Society and the Charlie Ross Show, where on the world stage, she presented her country as reasonable and peace-loving and India as an aggressive, warmongering bully! Our MEA was projected to be flat-footed, inept and stodgy.

Caught napping by the media outcry and the rage of the Indian Army at the pathetic response by the government, during the Army Day celebrations on January 15, the Prime Minister of India made the understatement of the year, ‘no business as usual’. However, it was the Army Chief’s tough line that caused Hina Rabbani to tone down the rhetoric and offer to resume peace talks. Only four days later, Salman Khurshid returned to ‘business as usual’ stating that peace talks are back on track! But the Raksha Mantri’s assertion differed from that of Salman Khurshid.

These deplorable contradictions and U-turns are nothing new. It has been our foreign policy trademark at least since the capitulation over the Kandahar hijacking. At first, the government displayed some resolve in resisting demands by the hijackers, but soon wilted under pressure from competitive breast-beating by the media after the killing of a hostage. Consequently, three top terrorists were released, including Masood Azhar and Omar Saeed. Each new provocation thereafter has been met with first by simulated outrage followed by quick reconciliation. Many concessions have been gifted despite complete absence of reciprocity, often resulting in more provocations.

No Missiles Required: How China is Buying Taiwan’s “Re-Unification”

By J. Michael Cole
August 23, 2013 

While experts continue to look at the rapidly expanding military capabilities of the People’s Republic of China (PRC) as the greatest threat to Taiwan’s sovereignty, Beijing would much prefer bringing about “re-unification” without having to fire a single missile. Ongoing cross-strait investment liberalization could help make that possible.

The key to the strategy is two-fold. First, flooding Taiwan’s economy with Chinese investment and second, ensuring that a greater number of Chinese are in positions of authority on the island. Since June 2009, when limited Chinese investment was first allowed in Taiwan, Chinese citizens who invest as much as 15 million New Taiwan Dollars (US$490,000) in the economy have been entitled to a one-year, multiple-entry visa. As with other foreign investors, the permit can only be renewed if the company the investor has put capital into has an annual revenue that exceeds 10 million NTD.

While a number of core sectors, such as traditional industries, remain closed to Chinese investment, ongoing liberalization trends will gradually create a more permissive environment for Chinese investment. Under the Economic Cooperation Framework Agreement of June 2009, Taiwan opened 205 manufacturing, services, and finance sectors to Chinese investment, which was followed by a further opening up of 42 sectors — 25 in manufacturing, eight in services, and nine in public construction. On March 19, the Executive Yuan approved a “third stage” of investment liberalization in opening up an additional 161 categories in manufacturing, services, and infrastructure, as well as 43 items of public facilities, to Chinese capital. In the 115 areas in the manufacturing sector included in the new policy, in only two — LED and solar battery manufacturing — are Chinese investors not allowed to hold controlling power. And still, Chinese officials and academics complain that Taiwan remains too closed to Chinese investment.

The Cross-Strait Services Trade Agreement signed on June 21 contains provisions that, according to opposition lawmakers, lower the threshold for Chinese investors to obtain a multiple-entry permit to as little as 6 million NTD, or about US$200,000. Under current quotas, a Chinese professional is given a one-year, multiple-entry visa to Taiwan for every US$300,000 in investment, with a maximum of seven Chinese professionals eligible per project.

Chinese companies with offices in Taiwan that invest at least US$1 million annually, as well as firms operating in export processing zones, are also now able to apply as inviters for the granting of multiple-entry visas to Chinese professionals.

Although the various trade agreements signed since 2009 are ostensibly (albeit not fully) reciprocal and allow Taiwanese investors preferential access to China, the political ramifications of the growing investment between the two sides — especially Chinese investment in Taiwan — warrants much greater scrutiny. The reason is that while both countries are World Trade Organization members, the relationship is not a conventional one: Beijing does not recognize the existence of Taiwan and now increasingly relies on economic encirclement of the island to achieve eventual unification. When it comes to Taiwan, it would be foolhardy to assume that Chinese only think in profit terms: there almost always is a political component, and the price of Chinese money “helping” or “rescuing” Taiwan’s under-performing economy is Taiwan’s sovereignty, something that Beijing never made a secret of.

China’s Troubled Myanmar Policy

August 23, 2013 

A self-serving approach has clouded local perceptions of China’s presence, especially in troubled Kachin State.

Considerable effort to improve its neighborhood relations, with the goal of maintaining stable borders and a viable trading environment. In so doing it has undertaken significant diplomatic efforts in maintaining networks among governments and governing elites. As time passes, one of the main shortcomings of this policy approach is becoming evident: China is increasingly finding itself at odds with non-governmental actors. Myanmar is a case study.

China’s interests and investments in ethnic areas of Myanmar, and Kachin State in particular, are increasingly touching on fundamental questions of political self-determination and with it national conciliation. The issue of disposition over land and resources is a matter of a constitutional process, something that Chinese actors seem to ignore.

In dealing with issues concerning Kachin State, a larger pattern of uncoordinated actors and self-serving interference has become evident. Until the transition from the Tatmadaw to civilian rule and the gradual lifting of international sanctions, China almost had carte blanche in its dealings with Myanmar. Deals with the elite did not go unnoticed but had no serious repercussions either inside or outside the country. Now, however, with an evolving civil society and greater prominence of inter-ethnic reconciliation on the national agenda, China’s operations have come under increasing scrutiny.

Officially, China has in the past described its interests in Myanmar as stability, border security, security of its investments, and connecting landlocked Yunnan Province to neighboring markets. In pursuing these interests, however, it has become difficult for Beijing to cover up its shortcomings and deal with increasingly negative perceptions across Myanmar society.

Beijing is being forced to realize that its focus on strictly inter-governmental relations, taking a revisionist stance on the 1947 Panglong agreement on a diplomatic level, while ignoring the needs and interests of ethnic nationalities, no longer serves its interest. Halfhearted engagements at the local level and poor crisis management have added to the widespread perception that China is solely concerned about the security of its business operations. In view of ethnic groups having potentially a greater impact on government policies and with existing investments at stake, China’s approach has become more ambiguous with respect to its intentions and stance towards domestic issues in Myanmar.

In Kachin State, two Chinese investments with diplomatic relevance had been at stake: the Myitsone confluence hydroelectric power plant project and the Sino-Burma pipelines owned by China National Petroleum Corporation (CNPC). In both projects Chinese SOEs by and large lacked long-term vision and ignored the investment environment. Myanmar so far lacks a system that would provide titles for land. Companies such as CNPC and China Power Investment Corporation (CPI) took profit from facile resettlement processes. However, they failed to provide sufficient compensation to enable those displaced to rebuild their livelihoods.

The Great Potash Power Play

August 23, 2013

Critical to improving farm yields, potash is increasingly a strategic product for Asia’s largest economies.

Potash is perhaps the world’s most strategic fertilizer. Mineable deposits are concentrated in a handful of countries, it cannot be synthesized, and crop yields suffer badly without it. Russia-based Uralkali, the world’s largest potash producer, turned the global potash market on its head when it announced in late July 2013 it would market potash independently and stop selling through the Belarus Potash Company (“BPC”) marketing structure it previously used to coordinate exports and production. Prior to Uralkali’s move, two major global marketers—BPC and Canada’s Canpotex—controlled around 70% of potash volume traded worldwide, which helped constrain supply and keep prices high.

Uralkali aims to boost its market share in China, where it is estimated that each 10 kilos of pork consumed requires 1 kilo of potash to produce, since Chinese pigs are increasingly fed with potash-hungry corn and soybeans. Similarly, every 44kg of rice eaten in China is thought to require 1 kg of potash to grow, with application intensity likely to rise in the year to come as China runs short of arable land and seeks to produce more grain from a static land area. Uralkali exported approximately 2 million tons of potash to China in 2012—primarily by rail—and now wants to increase this to 2.5 million tons per year, approximately 22% of China’s forecast 2013 potash demand.

China and India are the world’s largest and fourth largest consumers of potash, respectively, yet farmers in both countries still under-fertilize because potash has often been too expensive for them. This has taken a sizeable toll in the form of lost grain productivity and helps make both China and India more dependent on imported grains. Academic studies show farmers in both China and India can significantly increase yields of wheat, rice, and corn by using more potash—achieving gains of as much as 15-20% in areas such as Northern China where intensive farming and improper fertilizer use has depleted soil potassium levels.

Potash—perhaps even more so than oil—may emerge as a commodity space where China and India compete head-to-head to secure new supplies that both ensure availability of this critical fertilizer and also confer bargaining leverage when Chinese and Indian buyers negotiate with foreign potash suppliers in Russia and Canada. 

Potential potash mine buyers in China and India will feel pressure to move quickly because the market gyrations Uralkali set in motion will likely drive potash prices up again. As lower prices unleash pent-up demand for potash, farmers in price-sensitive emerging markets such as India and China will reap larger crops. Once more intensive potash use takes hold on farms in emerging markets and developed world farmers also boost application, there is a real chance that structural shortages will begin to re-emerge and prices will once again start to climb.

Between Russia and China, a Demographic Time Bomb

August 23, 2013

In his recent commentary, “The Avoidable Russia-China Romance,” Nikolas Gvosdev provides a strong case that despite recent examples of teamwork between the two powers, a sustained collaboration is hardly inevitable. Gvosdev focuses on the ways in which the United States can limit the risk that a “Eurasian entente” will arise in the near term, refuting the notion that such an alignment is historically determined.

Regarding the Sino-Russian relationship through a wider temporal lens not only reinforces Gvosdev’s conclusion, but suggests that the tide of history may begin to drag the two nations towards contention rather than conspiracy. Recent instances of tactical and diplomatic cooperation between Beijing and Moscow show why Washington should remain open to working with each, yet these initiatives also hide an obstacle in the path to partnership. Set when Russia acquired a portion of Manchuria in the nineteenth century, a demographic time-bomb may bring any marriage of convenience to an unhappy end.

In the grand scope of Chinese history, Russia’s presence in Northeast Asia is a recent development. Until the reign of Ivan III, which ended in 1505, Muscovy held less than 3 percent of present-day Russia, and it was not until 1639, at the end of the European Age of Discovery, that Russian explorers would first reach the Sea of Okhotsk. Russia arrived in the region in an era of tumult, as the sinking Ming Dynasty tried to contain a peasant rebellion and stave off waves of incursions by Manchu horsemen, who finally captured Beijing in 1644, establishing the dynasty that would become known as the Qing.

During the late seventeenth century, Cossacks would clash with Manchu forces along the Amur River, which today separates the Russian Far East from the northeastern Chinese provinces of Heilongjiang and Jilin. The Manchus mostly got the best of the interlopers, and the first Sino-Russian treaty, signed in 1689, awarded the Qing territory north of the Amur in exchange for Russian traders’ access to Chinese markets. Henceforth, Moscow would adopt a canny strategy of free-riding, slowly advancing when the Qing faced other external or internal threats, but it would need to wait nearly two centuries, until China’s final imperial dynasty had entered its death spiral, to capture all of coastal Manchuria.

In contemporary China, it is known as the “century of humiliation”: the period starting with Britain’s victory in the First Opium War in 1842 and lasting at least until Mao Zedong’s declaration of the People’s Republic in 1949. Beginning in the 1850s, Russians seized advantage of Chinese disarray to pressure the Qing’s northern frontier, from restive Muslim Xinjiang in the west to the Amur River in the east. Two “unequal treaties” in 1858 and 1860 gave Russia more land than it had conceded to the Manchus two hundred years earlier, including the vast region then called Outer Manchuria. The southern part of this concession would become Russia’s maritime province, Primorsky Krai, where the city of Vladivostok (“Ruler of the East”) was chartered in 1880.

The century that followed Moscow’s “Amur annexation” introduced dramatic changes to Northeast Asia’s political landscape, but did not erase Chinese resentment over this lost territory, which was to become a significant irritant during the Sino-Soviet split. What started as an ideological dispute between the world’s two largest communist states led to a set of border clashes, the most explosive of which occurred along an Amur River tributary in 1969. Five years earlier, Mao had infuriated Moscow when he told visiting Japanese reporters that much of the Russian Far East was stolen land; now, he instructed Chinese premier Zhou Enlai to press this inflammatory line in emergency talks with his Soviet counterpart. The risk of war passed despite Beijing’s provocative rhetoric, but Chinese bitterness did not—as Henry Kissinger would learn during his first meeting with Deng Xiaoping in 1974, when the topic of a U.S.-Soviet arms summit in Vladivostok prompted the future Chinese leader to lecture him on Russian rapacity.

Violence in Iraq in Mid 2013: The Growing Risk of Serious Civil Conflict

By Anthony H. Cordesman, Sam Khazai
Aug 22, 2013

The rising level of violence in Iraq is difficult to measure and interpret, but it presents a serious risk that Iraq could return to the level of civil conflict it experienced during the mid-2000s. A new analysis by the Burke Chair in Strategy at CSIS examines the patterns and trends in Iraqi violence since the departure of US forces at the end of 2011. It examines both the statistics on violence and their limits. It also examines the relative role of the Iraqi central government as a cause of such violence relative to the role and nature of violent non-state actors and extremist groups.

The study is entitled Violence in Iraq in Mid 2013: The Growing Risk of Serious Civil Conflict, and is available on the CSIS web site at http://csis.org/files/publication/130822_iraq_violence.pdf.

The study finds that there are many serious challenges in analyzing the available data on Iraq and problems in estimating its level of violence, its causes, and the responsibility of given actors. The data are, however, good enough to warn that Iraq may be sliding back towards a level of civil conflict that will amount to a serious civil war.

The data also reflect the fact that violence is not simply the product of extremists and terrorist groups; Iraq’s growing violence also results from the fact that Iraq is in the midst of an ongoing struggle to establish a new national identity: an identity that one hopes can bridge across the deep sectarian divisions between its Shi’ites and Sunnis, as well as the ethnic divisions between its Arabs and its Kurds and other minorities.

Iraq does have great potential and its political divisions and ongoing low-level violence notwithstanding, Iraq can succeed in establishing stability, security, and a better life for its people. Iraq cannot succeed, however, by ignoring the problems it faces, failing to address increasing internal violence, and denying the responsibility of its current political leaders to take on the challenges it faces.

Improving the quality and focus of Iraqi efforts at counterterrorism and internal security is a key priority, but Iraq cannot end its violence through force or repression. Iraq’s leaders must build a new structure of political consensus. They must build an effective structure of governance, and social order that sharply reduces the problems caused by the problems it currently faces, including dictatorship, war, sanctions, the lingering effects of occupation, and a burgeoning civil conflict that began in the 1970s and has continued ever since.

Iraq must also deal with deep underlying problems. It must cope with a steadily growing population, and diversify an economy that is so dependent on petroleum exports that they provide some 95% of its government revenues. If left unaddressed, Iraq’s escalating violence and ongoing governance issues will continue to strain the country, contribute to new rounds of serious civil conflict, and could potentially divide the country along ethnic and sectarian lines.

The Egypt Aid Dilemma

August 23, 2013

As Egypt is convulsed by violence, Al Qaeda celebrated its twenty-fifth anniversary this past weekend. United States counterterrorism efforts, heavily reliant on missile strikes from unmanned aerial vehicles, significantly degraded the bulk of Al Qaeda’s core organization located in Pakistan. But the uprisings that roiled the Arab world enabled a jihadist expansion across the region, thereby creating new threats to U.S. interests from Al Qaeda affiliates and associated movements. Promoting democratic inclusivity as a means of undercutting their rise has repeatedly run headlong into other realpolitik concerns, and Washington has yet to devise a consistent policy for managing these competing interests. Events in Egypt have highlighted, once again, the vexed choice facing American policymakers.

While U.S. policymakers debate how to respond, Al Qaeda’s leader, Ayman al-Zawahiri, who previously headed one of Egypt’s two largest jihadist groups, undoubtedly views events in his native land as an ideal anniversary present. Jihadist forums lit up after the Egyptian military launched its latest crackdown, which has since left over 1100 dead. Al Qaeda-associated elements are already active in the Sinai, where violence has escalated since the Egyptian military ousted the Islamist president, Mohamed Morsi. Many analysts expect it is only a matter of time before jihadist attacks come to Cairo--car bombs, suicide vests, and so on.

The last revolutionary jihad in Egypt, waged in the 1990s, was brutally suppressed.

The Muslim Brotherhood, after suffering decades of repression, had renounced violence by then in favor of an approach centered on proselytization and the provision of social services. Some of its frustrated members found their way into the Islamic Group, which became Egypt’s largest jihadist organization. Others formed the smaller, more clandestine and far less prolific al-Jihad, ultimately led by al-Zawahiri.

Whereas the Islamic Group leadership, largely imprisoned by the turn of the century, renounced violence, al-Zawahiri merged a faction of al-Jihad with Al Qaeda as a means of organizational survival. Exiled remnants of the Islamic Group later joined as well. Al-Zawahiri’s decision demanded that he adopt bin Laden’s agenda, which prioritized attacks against the United States. However, this was always a global means to a revolutionary end, as bin Laden believed ridding the Muslim world of American influence was necessary to create the conditions for local insurgencies to succeed.

The weakening of the core Al Qaeda organization responsible for the 9/11 attacks, the rise of its regional affiliates, the arrival of a new jihadist generation and the instability that resulted from the Arab Spring have shifted the focus back toward the local. Old jihadist groups are resurgent and new ones emerging in Syria, Iraq, Yemen, Tunisia, Lebanon and the Sahel. Having learned from the violent excesses of the Algerian Armed Islamic Group in the 1990s and Al Qaeda in Iraq more recently, many of these groups are exercising restraint when it comes to dealing with local populations and are taking a more comprehensive approach that includes the provision of limited social services. This approach has helped to enable their gains across the region. Now Egypt may be on the precipice of a potential Islamist insurgency. At the very least, the country is primed to become a more active theatre for jihadist violence.

It’s unclear whether Egypt’s generals view this as a bad thing. The Muslim Brotherhood is not blameless for the recent spate of violence. Encouraging supporters at Cairo encampments to martyr themselves, as protest leaders reportedly did , is hardly a means of deescalating the situation. Muslim Brotherhood members and supporters have also traded fire with the security services, and targeted Coptic Christians across the country. But it was the military that balked at any reconciliation, renewed the conflict in the streets, threatened to ban the Brotherhood and arrested most of its top leaders, including its supreme guide Mohamed Badie. Many second-tier leaders are either dead or in hiding.

Should America Help Britain Hold onto Its Colonies?

August 23, 2013

British territorial disputes with Argentina and Spain are heating up, leading to demands that Washington support its foremost ally. The issue offers a reminder that military alliances should be directed at serious geopolitical threats, not used to accumulate international Facebook “friends.” George Washington was correct when he warned the United States against permanent foreign entanglements.

Once the world’s greatest colonial power, Great Britain retains territorial oddities about the globe. The Falkland Islands and “the Rock” of Gibraltar (a peninsula) are causing particular difficulties with Argentina and Spain, respectively. No one is likely to go to war, but the disputes have gotten ugly.

The Falklands lie near the coast of Argentina, which calls them the Malvinas. Buenos Aires began pressing its claim when it joined the United Nations in 1945, but negotiations foundered on the understandable desire of island residents to remain British. The Argentine military junta embarked upon what it thought would be an easy conquest in 1982, but Prime Minister Margaret Thatcher launched a successful counterinvasion.

The generals fell from power, and the two countries eventually restored diplomatic ties. But three years ago the prospect of energy exploration under British control triggered renewed claims from Buenos Aires and a campaign of harassment—blocking supplies for drillers, forbidding access to cruise ships which also visited the Falklands, boarding fishing vessels licensed by the island government. Argentina also sought support from other Latin American governments and earlier this year renewed its request for debate before the UN Security Council.

Tensions between the UK and Spain over the Gibraltar, or “the Rock,” also have flared. Madrid ceded ownership of the Rock to London in 1713 after losing the so-called War of the Spanish Succession to Britain. Last year Prime Minister Mariano Rajoy urged talks over sovereignty. But these residents, too, wish to remain British. Thousands of Spanish work on the Rock, while Gibraltarians routinely shop on the mainland. In July the Gibraltar authorities blocked access by Spanish fishermen to surrounding waters. Spain retaliated with lengthy border inspections of the thousands of cars which pass each way every day. Madrid cited tobacco smuggling and tax fraud. The Rajoy government threatened to impose a hefty entry fee on islanders entering Spain, close Spanish airspace to planes landing on Gibraltar, and investigate islanders with Spanish investments. “The party is over,” said Foreign Minister Jose Manuel Garcia-Margallo.

The UK considered going to the European Union, to which both countries belong. There also is talk of challenging Madrid’s actions in the European Court of Human Rights. The Rajoy government talked of going to the International Court of Justice at the Hague and plotted with Argentina to bring both issues before the United Nations.

Both controversies have comic-opera aspects to them, but remain deadly serious. The Falklands war was short but costly in lives and money. Britain left a sizeable garrison on the islands should conflict again erupt.

Petroleum to the People

Africa’s Coming Resource Curse—and How to Avoid It

A man walks away as crude oil spills from a pipeline in Dadabili, Niger state, April 2, 2011. (Afolabi Sotunde / Courtesy Reuters)In October 2011, the U.S. Department of Justice filed a motion to seize a palatial cliff-top home in Malibu, California. The 16-acre property towers over its neighbors, with a palm-lined driveway leading to a plaster-and-tile mansion. Situated in the heart of one of the United States’ most expensive neighborhoods, the $30 million estate includes a swimming pool, a tennis court, and a four-hole golf course. In its complaint, the Justice Department also set its sights on high-performance speedboats worth $2 million, over two dozen cars (including a $2 million Maserati and eight Ferraris), and $3.2 million in Michael Jackson memorabilia -- in total, assets equaling approximately $71 million. What made these extravagant possessions all the more remarkable was that they belonged to a government worker from a small African country who was making an official salary of about $80,000 a year: Teodoro Nguema Obiang Mangue, the oldest son of and heir apparent to Teodoro Obiang Nguema Mbasogo, the longtime president of Equatorial Guinea.

Home to over one billion barrels of oil reserves, Equatorial Guinea has exported as many as 400,000 barrels of oil a day since 1995, a bonanza that has made the country wealthier, in terms of GDP per capita, than France, Japan, and the United Kingdom. Little of this wealth, however, has helped the vast majority of Equatorial Guinea’s 700,000 people: today, three out of every four Equatorial Guineans live on less than $2 a day, and infant mortality rates in the country have barely budged since oil was first discovered there. The president’s family members and other elites connected to the Obiang regime, meanwhile, have prospered.

As a result, Equatorial Guinea has become a textbook example of the so-called resource curse, a global phenomenon in which vast natural resource wealth leads to rapacious corruption, decimated governance, and chronic underdevelopment. Worse still, for the last three decades, the Obiang family was able to trade and travel freely around the world, until the Justice Department finally moved to seize the younger Obiang’s home and possessions on the charge that he had used his position and influence to acquire illicit wealth. The United States’ recent crackdown is laudable, but the family’s ability to travel and conduct business in the United States and around the world for so long highlights the gaps in the architecture of international accountability and justice. Equatorial Guinea’s story yields many foreboding lessons, but none more obvious than this: oil-rich developing countries that want to avoid the resource curse cannot wait for the international system to fight corruption for them.

Equatorial Guinea’s example will become increasingly relevant over the next decade as a massive wave of new oil and gas discoveries transforms Africa’s economic and political landscape. Over the next ten years, new technologies will allow oil producers to extract billions of barrels of exportable oil from the East African Rift Valley and West Africa’s Gulf of Guinea. If current estimates are even close to accurate, trillions of dollars in oil revenue will ultimately descend on a dozen African countries that have never before experienced such influxes. In East Africa, that list will likely include Ethiopia, Kenya, Malawi, Mauritius, Tanzania, and Uganda; in West Africa, it will probably include Gambia, Ghana, Liberia, São Tomé and Príncipe, Senegal, and Sierra Leone. (Niger is another possibility, but given the lack of firm estimates of its oil reserves, it is not included in the calculations here.) And this windfall would come on top of the enormous oil revenues that some still-poor sub-Saharan African countries, such as Angola, Chad, Gabon, Nigeria, and Sudan (and South Sudan), have been earning for decades, as well as the new oil revenues that Ghana is beginning to accrue. All told, within a decade, a third or more of African countries may derive the majority of their export earnings from oil and gas.
New sources of oil and gas could inject close to $3 trillion into the economies of some of Africa’s poorest and least developed nations.