Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts

Tuesday

“India as a Global Power: Contending Views from India,” Elliott School, Washington, D.C., January 23, 2012


Bharat Karnad at CNAS/GWU Conference on ‘Rising Powers’ in Washington, DC, January 23-24, 2012

Security/Defense Topics:

Q: What are main threats to India’s security at global (ME conflict), regional (Asia) and national (South Asia) levels and how would you prioritize them?

A: Prioritized threats to India are China, Nuclear & WMD proliferation by China, and terrorism, in that order.

The prime regional and Asian continental threat is ONLY posed by China. Serious military conflict is possible on account of (1) disputed border, (2) diversion of the Tibet-originating Yarlung-Tsangpo/Brahmaputra River before it enters India, (3) the Tibet Freedom Movement, (4) Chinese naval and military build-up in the Indian Ocean, (5) Indian naval and military presence to protect vital national interests east of the Malacca Straits, and (6) contested natural resources.

The main global level threat to India’s security is China’s unremitting use of nuclear and other WMD proliferation, for instance, to North Korea, Pakistan, Iran, and Libya to discomfit its perceived adversaries. It is a deliberate and calculated policy tactic that may compel targeted countries, such as India, to respond in kind. I have argued for nearly two decades now that the Indian government should in like realpolitik vein nuclear missile arm Vietnam, Indonesia, and any other country on the Chinese periphery, including Outer Mongolia, desirous of absolute security vis a vis a potentially bellicose China, and to cooperate and collaborate in the nuclear armaments and missile spheres with Taiwan and Japan – as a way to payback in the same coin, and contain, China.

South Asia-based threats: No subcontinental neighbor or state in India’s near abroad is a credible military threat, least of all, Pakistan. However, terrorism spawned by radical and extremist Islam is, but then it threatens peace and social order in all South Asian countries, starting with Pakistan. To the extent that the locus genesis of such threat is within Pakistan, it can be best countered, not by marshalling field armies (as happened in 2002), etc., but by targeted intelligence operations to disrupt the activities of identified terrorist organizations.

Q: Is US hegemony in Asia or world a threat?

A: No, the US as a benign hegemon is not a threat. But this assumes that the United States can muster the will to continue playing this role in Asia, and is politically, financially, and other resources-wise, anymore even in a position to do so, notwithstanding the Obama Administration’s recent shift of military policy focus and resources from Europe to East Asia.

Q: How should India react to growing Chinese military might, especially on the high seas? Is China a threat to India’s traditional dominance of South Asia?

A: The real imbalance is in land forces. At sea the Indian Navy is confident it can more than hold its own, especially with the Arihant SSBN (with three more boats of this class to follow in relatively quick succession) completing its harbor trials and cleared for sea trials, the Akula-class SSN, on lease from Russia, in the process of being inducted, and the aircraft carrier Vikramaditya (Gorshkov, ex- Russia) embarking the MiG-29K, likely joining the Eastern Fleet later this year.

The whip-hand China presently holds is in terms of its extant PLA concentrations and build-up potential on the Tibetan plateau to the extent of 25-30 Group Armies inside of 28 days, courtesy augmented PLAAF airlift capability and the Qinghai-Lhasa railway with the spur line to Xigatze on the Nepal border that will soon open for traffic.

India has 9-10 Mountain Divisions deployed adequately for defensive positional warfare in the Himalayas but, by itself, this capability amounts to handing over the military initiative to PLA, because these forces are incapable of offensive actions of other than extremely short-range tactical kind. I have argued for over two decades now that the Indian Army needs to prioritize the raising of a minimum of 9 to 13 Divisions for exclusively offensive operations to take the fight to the Chinese on the Tibetan plateau, and for this purpose acquire light howitzers, light armor and ICVs (for deployment on the northern Sikkim plateau-plains and to debouch from the ‘Demchok Triangle’ on to the Tibetan shelf) in the Ladakh area, and an integral heli-lift capability. The raising of 2+2 Mountain Divisions, as per present Army plan, is worse than useless because these will invariably be used to beef up the already existing defensive formations, rather than be utilized in offensive/counter-attack operations, by an Army brass habituated to passive- reactive-defensive planning.


India accounts for some 72% of the landmass of South Asia, and nearly 75% of its population and of the wealth produced by the region. China cannot, other than, marginally affect this “dominance”, any more than India, and the US and its allies together assisting Vietnam can change its relative position vis a vis China.

Q: Is Pakistan a bigger threat as a nuclear power or as a failed state or both?

A: The only real threat Pakistan poses is as a failed state. To the extent that nuclear weapons make the Pakistan Army, government, and people feel less insecure, it is a good thing and constitute a net gain for security-stability in South Asia. However, should the Pakistani state itself implode for any or all of the following reasons — (1) the uncontrolled and, possibly, uncontrollable Islamic radicalizing impulses that were set loose in the society during the Zia ul-Haq regime, which are now beginning to crest; (2) the inter-regional disaffection-qua-subnationalist Movements transforming into full-blown civil wars (Balochistan, Baltistan); (3) the violent clash of the Afghan Pashtun aspirations with Pakistan’s traditional Pashtun border problems along the vaguely delineated Durand Line; (4) and, the perennial military-civilian tensions leading to deep social and political fissures within the Pakistani society, then even Pakistan’s carefully guarded and near hermetically-sealed nuclear weapons program, will be swamped. Alarmingly senior retired Pakistani military officers estimate the virus of “extremist Islam” to have infected 30% of the officer corps and around 50% of the NCOs and troops. This makes the situation doubly dangerous.

Q: Is US and NATO policy in Afghanistan a threat?

The threat is from Afghanistan as source of continued strife that will engulf the Pakistani Pashtuns and spread to Pashtun concentrations in Karachi and other Pakistani cities and towns. What is crucial is the intention of the US and NATO policy. If it means to prop up and subsidize the rule by the Karzai cohort in Kabul and assist its military with US Special Forces ’ actions against the Taliban, then things will continue as per present trend line. If, on the other hand, Karzai is persuaded to make peace with the Taliban, initially share power, and this leads to a gradual phase-in of the Mullah Omar-led Taliban team to control the levers of government, on the condition that the Taliban regime guarantees to treat the Durand Line (or any other border negotiated with Pakistan and overseen by US/NATO) as final and unbreachable border between these two countries, thereby quieting the Pakistani fears of a separate and independent Pakhtunistan obtained by conjoining southern Afghanistan and Pakistan’s Khyber-Pakhtunkhwa province, it would be a stabilizing arrangement and seed lasting peace.

Q: Is domestic terrorism a threat to India?

If terrorism arises from Islamic extremism then it a far more worrying threat because it indicates the degree of alienation of the Indian Muslim community from the secular Indian nation, society, and state. The “Hindu terrorists”, on the other hand, fueled by the sentiments of the majority that the Indian state panders to Muslim co-citizens, is a more meaningful but latent threat to domestic order. In both cases, the terrorism-triggered problems will have to be dealt with in a binary fashion – strict but fair policing, monitoring of unaccounted cash flows from wahabi trusts spreading radical Islam based in Saudi Arabia and the Gulf states, intelligence penetration of likely active groups for preemption purposes, and hard counter-measures combined with “softer” means to assuage the hurt of the people.

Q: Does India need security allies, and if so which countries are the most important ones?

Yes, India needs to cultivate close security partnerships (not “alliances”), in particular, with Israel, Vietnam, Philippines, Myanmar, Singapore, Japan, the United States, and Australia – in that order.

Q: What role does US play? Obama has referred to India and the United States as “natural allies.” Are US-Indian relations the key to India’s future in the post-Cold War world, as Indian-Russian relations were during the Cold War?

Are Indo-US relations the key? Yes and No.

Yes, in the sense that the US policy of offshore balancing in Asia with its strengthened military and naval presence in the extended region will always give Beijing pause for thought and is useful from the point of view of India (and other Asian majors, such Japan and South Korea as well), because every little sliver of advantage helps in dealing with the Chinese behemoth.

And No, in that the United States is still an extra-regional, extra-continental, power which can stay on the sidelines by redefining its vital interests in and by agreeing on a mutually beneficial arrangement of power-sharing with China, which arrangement could be at the expense of India and other Asian states and detrimental to their security. It was not all that long ago, it may be recalled, that President Obama mooted G-2. Moreover, there is no chance whatsoever that the US will join India (or South Korea or Japan or Taiwan, or any other Asian country in a running war, even less a land war requiring boots on the ground, against China.

It is unlikely that India’s relations with the US in the 21st century will be anything like the Indian relations with Soviet Union in the Cold War: It will at once be more and less. More, because the ties with the United States are of a peculiar nature, very full in great many respects – the sharing of democratic values, the politically active Indian diaspora in the US, economic and trade interlinks, etc. But also less because, unlike in the case of the Soviet Union in the Cold War, there is a glaring absence of trust, especially where nuclear security and military technology – the basic building blocks of close ties — are concerned. The main reason why, for instance, the Soviet Union enjoyed the confidence of the Indian military and the Indian state, won over the people, and its successor state, Russia, continues to benefit from those historical links, is because Moscow showed no inhibitions in transferring its latest military hardware and that too without conditions and without requiring India having to empty its treasury in the 1966-1990 period owing to favorable rupee-rouble credit arrangements (typically, rouble loans at 2% interest over 17 years – and therefore virtually free!).

Any transfer of even second rate American military technology and equipment, on the other hand, involves unending hassles (end-user verifications, etc), complicated certification requirements, and a slew of do’s and don’t’s the user Services are expected to adhere to Besides, the US has to live down its past record and reputation as a country inclined retroactively to change its laws and disregard treaty obligations (Tarapur fuel), and of generally being motivated, at every turn, by calculations of its other interests (nonproliferation, Pakistan, China) and, above all else, the desire to maximize its advantage. May be all this is changing, but not fast enough to modify the wariness in India about the US as reliable friend, strategic partner, and high-technology supplier.

Q: Should India pursue a balance of power in Asia (China)? If so, how does India offset a China-Pakistan alignment or a Russia-China alignment?

Given the emerging correlation of forces, an Indian balance of power policy will, willy-nilly, obtain, however it is publicly presented. The China-Pakistan alignment is the current state of affairs, but to treat it as an unchangeable configuration is the wrong policy tack for India.

Pakistan, hived off from the Indian broadcloth, is eminently co-optable and should be vigorously co-opted by India with generous terms for trade and commerce, open visa regime, and by measures to address Pakistani apprehensions of the Indian “threat” in ways to positively impact the Pakistan army – such as unilaterally rationalizing the Indian armored/ mechanized forces and withdrawing short-range nuclear ballistic missiles from the western border, and initiating “open door” policies in all spheres, such as education, by admitting students from all neighboring countries, especially Pakistan and Bangladesh, who have cleared the difficult entrance tests, into the Indian Institutes of Technology and the Indian Institutes of Management, etc. Distancing Pakistan from China by such and other far-sighted unilateral actions and measures, will begin to normalize ties, and isolate China. This ought to be India’s primary short-term, mid-term and long term strategic goal.

China has to be contained, its military options and space for pol-mil maneuver restricted, by any and all means. This can be done by a security architecture tethered at the two ends by Israel and Japan, and with Vietnam sticking out into China’s relatively exposed gut — its soft under-belly in South East Asia, and backed up actively by Indonesia, Singapore, and Philippines, and even Taiwan. India, in this geopolitical scheme, can be the pivot, and the US do its bit as the offshore balancer, even as Pakistan is rendered inaccessible to China.

Q: In 2008 India and Japan signed a security cooperation agreement. Should security ties be expanded with Japan, as well as other Asian democracies (Australia, New Zealand, South Korea)?

Absolutely.

Q: Should India be part of informal security arrangements to preserve the autonomy of Taiwan?

Yes. In fact, in my writings, I have advocated that close ties be developed with Taiwan in sensitive military technology fields, including nuclear weaponry and missiles, and that India ought to initiate joint naval exercises with the Taiwanese Navy off the Taiwanese coast, perhaps a triangular ‘Malabar’ with the US Navy every couple of years. Some sharing of intelligence on China is already afoot. The intelligence ties should be upgraded and made more muscular.

Q: Is the EU relevant in the security area?

here seems to be a withering of the European will to partake of other than activities directly and immediately relevant to its collective security, which rules out, in most circumstances, out-of-area military deployments and investment in out-of-area security schemes. But the EU wields a joker in the pack – military high technology that China wishes to get its hands on but so far without success owing to US pressure. But France may relent and the European technology floodgates will open for commercial reasons, thereby weakening the effort to deny China easy access to technologies that may help to have in-date military wherewithal.

Q: How important are nuclear weapons for Indian security, compared to stronger conventional, especially naval, forces or overall economic growth through integration in global economy?

It is not clear why – when it comes to other than the five NPT powers – Western strategic communities insist on postulating an inverse relationship between nuclear weapons and conventional military might, that somehow a stronger conventional military obviates the need for nuclear weapons, leave alone advanced, high yield and versatile thermonuclear armaments. Nuclear security and security afforded by conventional military forces are two distinct and separate security and military policy realms, with the interface between them limited to realizing an appropriate tripwire, and coordinated war-planning. In the larger context, it is surely obvious that a strong and hefty arsenal of nuclear and thermonuclear weaponry will minimize the possibility of all out conventional war. And that nuclear weapons per se – however basic and few in number, nevertheless preempt coercive military actions [North Korea] and, for that reason alone, have tremendous utility [as realized by Iran].

A world without nuclear weapons, moreover, is one safe for conventional warfare and, hence, preferred by countries with high-grade conventional military capabilities, and therefore, more damgerous. That said, the best strategy for a would-be great power like India is to have both very strong and credible thermonuclear forces and large, highly effective, conventional land and air forces and navy. These are lines of argument that I have developed at considerable length in my various books.

The connection between nuclear security and economic growth and a globalised economy is even more confounding. In Fiscal 2011 India spent less than 2.24% of its GDP on defense; were the black budget to be included that percentage will rise to some 3%. It is a level of expenditure on national security that is among the lowest for any major power. China ($180 billion) and the US ($708 billion) spend 5%-6% of their respective GDPs that are many times that of India. Meaning, India’s expenditure ($35 billion) on “guns” is the bare minimum and in no way negatively impacts the spending on “butter” unless the case is that India needs no security at all, and that it can always free-ride on security, courtesy friends such as the United States, much as it riding the Soviet coat-tails in the past. However, such a policy of inaction and undue reliance on friendly foreign powers, is not recommended for an aspiring great power such as India nor sustainable in the future. Actually, an Indian economy growing at a fairly rapid clip (over 6% per annum) for the next 20 years, will allow for much bigger defense budgets, and is the predicate for the bountiful capital acquisitions plans of the Indian armed services on the anvil.

Q: What role should India’s nuclear arsenal play in national strategy? Are Indian nuclear weapons designed for deterrence of Pakistan, China, Russia, the United States or all of the above?

The Indian nuclear and thermonuclear arsenal should be large and growing to keep pace with the Chinese the N-force build-up, with no more than 50-75 weapons/warheads separating them, and sufficient to provide cover for distant conventional military and naval tasks in the face of Chinese military opposition.

For Indian strategic nuclear forces to make any sense at all, they have to be oriented touz azimuts, able to retaliate against any comer. But for now they are principally geared for anti-China contingencies. Pakistan unfortunately features in the Indian Strategic Forces Command (SFC) plans but as secondary threat and then in purely reactive-retaliatory mode. Ideally, India should proceed on the basis that Pakistan poses no nuclear threat whatsoever, besides other reasons, because of a really skewed exchange ratio in a nuclear exchange. The exception is the previously sketched scenario of Pakistan imploding and radical Islamists taking hold of fissionable materials to craft radiation diffusion devices for terrorist use, if not whole and ready-to-use nuclear-warheaded missile systems. Both these contingencies are a matter of concern for the SFC and the Indian conventional military, to counteract which they have plans.

Q: Should India spend more on defense, and how does it do so given its relative economic weakness?

Spending more on defense is one thing, but spending smartly is the key. In the late 1990s, the 11th Finance Commission, India, recommended that defense allocations reach the 3% of GDP level by 2005 – something entirely affordable by a country with an economic growth rate that still is in excess of 6%, even with the downturn. Being smart about program expenditure is something the Indian military have not yet learned because money continues to be poured into combat arms, such as the vast armored and mechanized formations, that are growingly irrelevant, and in buying expensive and fast-obsolescing combat aircraft by the Air Force run by fighter jocks, for instance. What was the need for MMRCA, when the more cost- and operationally more effective option would have been to buy more Su-30MKIs, whose development India subsidized in the 1990s? And why, inn any case, are expensive combat aircraft preferred when IAF should be transitioning into, and investing more, in highly versatile and economical drones/RPVs?

Q: To increase economic power for defense, should India “Go Global” like China (WTO) or “Go Regional” like Russia (“privileged sphere of interests’)?

Economics-wise, India should simultaneously run regional and go global – regional by expeditiously promoting the South Asian Free Trade Association, BIMSTEC, and FTA with ASEAN, etc., and global in terms of upscaling the manufacturing sector to service the world-wide market to try and replace China as the world’s “workshop”. This last will require the government to reform land acquisitions laws, make easy credit available to industry, get out of the way of the private sector, and allow the marketplace to determine whether the public sector factories — steel plants, ordnance factories, research institutes, etc sink or swim.

Q: What is relative priority of the army, air force (including nuclear capabilities), and navy in managing India’s defense?

The landbased longer range Agni IRBMs -2s, 3s, and 4s, and especially the soon to be tested 5,000 km range Agni-5 and an ICBM in the near future; seaborne: 2nd and 3rd Arihant class SSBNs, Akula-II SSN, and possible mounting of N-missiles on certain ships, possibly missile destroyers: and airborne – the sequestering of a finite number of Su-30s and Mirage 2000s, and in the future, the FGFA, and MMRCA for nuclear missions — all these assets are meant for deterrence/dissuasion/retaliation against China, and for aggressive posturing to bottle up the Chinese Navy in particular east of Malacca, and landward to neutralize the PLA Second Artillery SRBM and MRBM batteries on the Tibetan plateau and in the adjoining Lanzhou and Chengdu Military Regions.

The current conventional military orientation is shifting from Pakistan to China, alas, glacially. In hostilities involving China, the brief is for the Army’s 2+2 offensive Mountain Divisions to complement the 10-odd defensively deployed Mountain Divisions to hold the prepositioned line behind the Line of Actual Control, for the plains-based Indian fighter-bomber aircraft to strike at hard targets – airfields, military installations, and softer targets – massed PLA forces in the extended Tibetan plateau region, and the Navy’s Eastern Command coordinating with the Andaman Integrated Command to stifle movement of PLAN ships, prevent them from moving into the Bay of Bengal, for the Western Fleet to take out such naval assets as are in its vicinity in the western Indian Ocean basin, and generally shadow, hunt and harass China-bound oil tankers to China and trade-carrying ships from China.

The army’s three Strike Corps reconstituted into eight Independent Battle Groups and numerous independent armored brigades, useable only against Pakistan, are expected to follow on from where the armored elements of the “pivot” or holding corps leave off advancing on the Rahim Yar Khan axis, per ‘Cold Start’ plans. The idea is to capture as much Pakistani real estate as possible as a “negotiating card” in the inevitable end-of-conflict “peace talks”. All of which amount to a lot of useless to-ing and fro-ing across the border by Indian and Pakistani armor for no discernible purpose beyond reinforcing the raison de’etre for these vintage fighting assets in the orders-of-battle on both sides. In the larger context, this is an extra-ordinary and inexcusable wastage of financial and military resources.

Meanwhile, IAF will do some half-hearted strikes on Pakistani airfields, and PAF will return the compliment, and get into a bit of dogfighting so beloved of the AF crowd, but otherwise refrain from bombing each other’s cities or sensitive facilities, as happened in all the India-Pakistan conflicts to-date. The clashing militaries will once again prove the late Major General D.K. Palit, former Director, Military Operations, Indian Army, and incidentally, former Baloch Regiment officer (before Partition) right when he described India-Pakistan wars as “communal riots with tanks”.

Short-duration expeditionary missions can be pulled by the ten battalions of Special Forces and an amphibious army brigade stationed in the Andamans, with appropriate airlift capability.

Q: In July 2011 a Chinese warship confronted an Indian amphibious assault vessel in international waters off the coast of Vietnam. Are India and China destined to compete on the high seas?

Yes. The problem is this: Its oil trade is too vulnerable for PLAN not to establish its presence in the Indian Ocean, and South East Asia and the South China Sea is too strategically critical and the aim to blunt the Chinese main naval force too important for India not to have its navy operate out of Na Thrang in Vietnam, Singapore, and the Philippines. It makes for a naval competition, of course, but also for a possible fight on the high seas, and in the narrows.


Q: How does India counter China’s “string of pearls” strategy to dominate the South China Sea (port facilities or access at Gwadar in Pakistan, Hambantota in Sri Lanka, Kyauk Phru in Burma, Chittagong in Bangladesh, etc.)?

The fact is that while many of the countries in the Indian Ocean littoral are permitting rest and replenishment facilities for the Chinese Navy in peace time, during an India-China war, it is unlikely that the same states, excepting Pakistan, will allow PLAN ships such access, because that would mean alienating India, which they cannot afford to do. So the “string of pearls” sounds good in table-top discussions and looks good on paper, but for China it will be unrealizable in war time, because all PLAN has is conditional access to most IOR ports. In any case, the Indian Navy will have a countering presence in most of the areas PLAN expects to be east of Malacca, and a forward presence in China’s backyard which is easier for India logistically to sustain than it is for China to do the same with its ships in the Indian Ocean, considering the Indian integrated Andaman Command will definitely close the Malacca straits to Chinese military nd military replenishment traffic.

Q: How important is great power status for India? Is membership on the United Nations Security Council the best symbol of that status? Was President Obama’s recent endorsement of an Indian seat on the UNSC a good thing or bad thing?

Great power status is hankered for, seen in many quarters in India as its right, and generally associated with Permanent Membership in the UN Security Council. What is not sufficiently appreciated by even the Indian intelligentsia is that such status is not an entitlement that India can claim but is something, I have argued, India should earn, as other great powers have done throughout history. It is certainly not recognition that the US or a concert of Western countries can bestow on India. So Obama’s or anybody else’s endorsement substantively means nothing.


The fact is it is important that India work methodically and single-mindedly to attain genuine great power. But it is not advisable to mistake great power for membership in UNSC. After all, what has India done, really, to merit even an UNSC seat? Dispatching troops on UN peacekeeping missions is nowhere enough. It cannot continue to be a free-rider on security and grouse it is not getting respect. Were India to act as a great power by implementing proactive foreign, military, and economic policies and become net security provider and economic prosperity spreader for a growing list of Indian Ocean littoral states in Africa and landward and seaward in Asia, match China’s forward stance, have sufficient thermonuclear and conventional military reach and clout to disallow China from pushing it around, and soon then an UNSC seat – with veto – and symbolic positions of great power, such as UNSC seat, will come its way, without Delhi having to beg for it (which is what it is currently doing). It shouldn’t be recognition made available at any other countries’ sufferance – because that will be demeaning and hurtful of national self-respect.

Q: Should arms control and disarmament be a high priority for India?

NO. Absolutely not, if it requires India to, in any way, surrender its nuclear build-up and nuclear testing options, leave alone agreeing to reduce or curtail its extant weapons inventory and fissmat stockpile. Here India has to simply ride piggyback on China’s prevailing stance – that the powers with the largest arsenals – the United States and Russia, ought to winnow them to a point equivalent to where the lesser Nuclear Weapons States are presently at, and begin capping weapons quality, etc., before they can expect countries such as China and India to climb aboard the Disarmament bandwagon, and more immediately, India should encourage Pakistan’s obstreperousness in stalling the FMCT negotiations in the Committee on Disarmament in Geneva, because this will allow India to augment its fissmat holdings.

Q: Should India support the International Atomic Energy Agency (IAEA) and the Non-Proliferation Treaty (NPT)?

IAEA, yes; NPT, absolutely not; this treaty regime is decrepit, if not already dead. India should speed up its burial, but join other Nuclear Weapon States in forming a new, more relevant, international nuclear order.

Q: How troubling to India is the spread of nuclear technology to Iran and North Korea? Can India play a role to secure Russian cooperation on Iranian sanctions and Chinese cooperation on North Korean sanctions?

China and North Korea with their nuclear and missile proliferation to Pakistan have already done the damage where Indian security is concerned. So North Korea’s retaining its nuclear weapons or giving them up, makes little difference to Indian national interests, except insofar as it keeps Japan and US interested in consolidating an anti-China front.

Iran is on the cusp of N-weapons capability and it’ll not be denied. India’s old historical and cultural links with Iran and its shia Muslim population — the largest outside Iran, translate into powerful domestic political constraints on Indian policy. Good relations with Tehran, moreover, are critical in order to (1) maintain access to Afghanistan and Central Asia through the Iranian Chabahar port on the North Arabian Sea, and, (2) retain it as a source of oil. For these reasons, it is counter-productive for India to be front and center on any Iran-bashing measures.

There is no point, therefore, in Delhi expending its political-diplomatic capital in securing Russian and Chinese cooperation to deal with Iran and North Korea respectively.

Q: What role does security and military assistance play in India’s foreign policy – for example, in training the Afghan army, providing equipment for the Burmese army, etc.?

Military diplomacy is something the Indian government has belatedly discovered as a useful diplomatic tool. India has always trained officers from Africa and the neighboring countries and South East Asia in higher military training institutions (National Defense College, etc), but, led by the Indian Navy, in the last decade or so, this activity has taken off, become more purposeful. The Indian military have extensive ties with many countries, that are bolstered by joint exercises (‘Milan’) and with gifts and transfers of military hardware and equipments, armament servicing contracts, permission for neighboring land and air forces, and navies to use Indian air and land space, and naval installations, to train their pilots, tank crews, and submarine crews (Vietnam, Afghanistan, Myanmar, Singapore, Indian Ocean island-nations, etc.)

Q: Are economic sanctions useful to implement security objectives?

Only to a limited extent. Speaking from India’s own experience of weathering sanctions, it motivates countries to go it alone, do more with less, develop critical technologies on their own, etc., with the result that the sanctioned states usually end up stronger after a dose of sanctions! Besides, there’s no such thing as an air tight sanctions regime. There will always be countries that will help the sanctioned countries escape the harshest effects – China in the case of North Korea, and China and Russia where Iran is concerned.

Q: India has supported IAEA sanctions on Iran yet historically has friendly ties with Iran and a large Shi’ite minority in India. How does India balance these interests?

With immense difficulty. It doesn’t help that the Iranian Embassy keeps in close touch with the Indian shia clerics and communities in Lucknow, Delhi, and elsewhere, and enormous pressure is thus brought to bear on political parties and the Indian government, to pursue a “friendly” policy with Iran. But to balance siding with the US led initiative to punish/sanction Iran and maintain warm cultural and trade relations with Tehran cannot be sustained cleanly for too long. What will give is the anti-Iran posture.

Q: Should India support international sanctions on Burma?

NO. Delhi’s choosing to be politically correct (at the behest of the US and the West) cost India its dominant presence in Myanmar. It was the single, most potent, reason, Myanmarese Generals cite for Yangon sliding over to Beijing’s side. It cost India dear, strategically. India cannot afford to ride this Western moral hobby-horse and any longer follow such detrimental policies.

Economics/Ideology/Institutions Topics:

Q: What are most important global economic institutions for India’s foreign policy (IMF, World Bank, WTO, G-20, APEC, Emerging Markets [BRIC, BASIC], NAM, ASEAN, East Asia Summit, etc.)?

SAFTA, ASEAN, East Asia Summit, APEC, Emerging Markets, G-20, WTO, World Bank-IMF – in that order.

Q: Given India’s history of non-alignment, is there a domestic constituency for Indian participation and support of international organizations?

Nonalignment was always a thinly-veiled pretence anyway, but because it provided Third World leadership position, was useful in the Cold War for rhetorically waging South-North wars and punching above its weight-class. As a concept, it is long past its sell-by date. But, like in the Cold War when despite relying centrally on the Soviet Union for security, it provided political cover, in the new millennium too it may help propagate the fiction that India enjoys strategic “autonomy” when, in fact, it is free-riding on the West for strategic security.

Q: Given its new orientation to global markets, should India play an active role in the WTO, and urge a speedy conclusion of the Doha Round?

Well, yes, but if the talks remain stuck in the same old quagmire of differences on agriculture subsidies in rich countries, free movement of labor, etc, developing countries insist on, it would be better for India to carry on trade and economic relations based on Free Trade Agreements with individual countries and regional groupings.

Q: How is India affected by the global financial crisis (now festering in Europe), and what should it do about it?

In terms of diminished exports, yes. But because the Indian economy is mostly inward-turned with industry serving mostly the very large domestic market, the effects of the European crash have been manageable. Prime Minister Manmohan Singh had mooted the possibility of getting BRICS countries to ante up rescue funds for Europe. It is unclear how serious he was in proposing this, but India quickly backed down once China refused to be any part of such effort.

Q: Should India open up its domestic market more?

Yes, but in a phased manner.

Q: What is your position on the recent government decision, quickly retracted, to allow foreign discount retail giants – Walmart, Tesco PLC, and Carrefour S.A. – to set up majority-owned operations in India?

There are no doubts about FDI; it is a must. The recent Walmart decision, however, became hostage to calculations of political gains in the upcoming elections in five states, in particular the largest province, Uttar Pradesh. But FDI will be allowed in, sooner rather than later. The precursor decision to permit 100% FDI in single product retail outlets has already been made.

Q: Should India use its domestic market for commercial airliners and military equipment to gain foreign policy concessions?

Absolutely. It’s tragic that the Indian government has not used this enormous leverage in the main because of the quirky “silo-based” decision-making system in the Indian government, wherein each ministry is autonomous and strongly protects its decision turf, especially where capital acquisitions are concerned. Coordination in this milieu is impossibly difficult, and no PMO has so far undertaken the task to get the ministries to cooperate and collaborate in advancing the national interests in a collective manner. So far, it has been criminally negligent in treating all airline purchases worth hundreds of billions of dollars as purely commercial transactions, and realized little by way of offsets and benefits to indigenous aviation industry, etc. Indian passenger aircraft requirements in the next 30 years alone are estimated as worth a whopping $300 billion-$600 billion. Indian military acquisitions are higher than that in the same time frame, and unless the Indian government begins serious arms twisting and extorting foreign policy concessions, it will be continue to be a story of the fool being separated from his money.

Q: Does India take global free trade for granted?

Perhaps. The bigger economies have too much at stake to let the global free trade regime go under. Hence, India does not feel compelled to do other than make the fullest use of it, while squawking about its extant inequities.

Q: As a leading exporter of services, should India be more active in opening service markets, especially in emerging market countries?

Yes. But its focus should be developed countries – the US and the West, and secondarily emerging market countries.

Q: As a free country, should India take a lead role in defending privacy, internet freedom and property rights in international trade?

Of course.

Q: Is India satisfied with China’s more mercantilist approach to trade? What are India’s options to deal with it?

No. India should respond with strong counter-measures such as raising tariffs on Chinese goods equal to the subsidy component in Chinese exports of manufactures, and even close off the Indian market to Chinese exports, and certainly immediately stop exporting natural resources, like iron ore, to China, which only promotes a neo-colonial trade – natural resources from India, finished goods from China.

Q: Should India be a regional or global player in foreign economic aid? If so what economic conditions or policies should it promote? Should India cooperate with US initiatives such as the Millennium Challenge Corporation?

To avoid being swept away or overwhelmed by US initiatives, India should dispense economic aid and developmental assistance to select countries of potential significance to Indian foreign and military interests – such as Afghanistan, CARs, Indian Ocean island-nations, East African states, countries with oil and minerals in Africa and South America, and of course, its immediate South Asian neighbors.

Q: How important are global environmental issues compared to economic and security ones? Should India exercise more aggressive leadership in climate change talks to universalize carbon emission commitments?

Global environmental issues take a back seat compared to security and economic interests. Recall that the Kyoto Agreement was trashed by the US and its friends and allies for this reason. India showed leadership – at Copenhagen and more recently in Durban. However, if “leadership” means India having to take the lead in making concessions on environmental benchmarks, etc., then it is no go.

Ideology/Self-image

Q: Is India’s self-image primarily one of a “socialist” country, “capitalist” country, “democratic” country, or “exceptionalist” (unique) country?

The adjective “exceptionalist” is appropriated by countries who cannot easily and exclusively slot themselves in any one of the other categories mentioned. It is also a convenient description because it allows a country to do precisely what it wants to do or has to do, whenever it wants to do it. So all great powers that are socially complex and heterogeneous are, ipso facto, also exceptional.

Q: Relatively speaking, should India strive to be an “autonomous” nation (non-aligned), a “developed” nation (great power), a “developing” nation (moral power), or a “globalized” nation (economic power)?

Again, contestable typology! That descriptive-theoretical niggle aside, India should undoubtedly a “great power”, because the other categories encompass inherently limited policy vision, imperatives, resources, and wherewithal.

Q: How important is democracy promotion to India’s overall foreign policy?

Fine, as long as it is confined only to rhetoric, but not if democracy promotion imperils or hurts the national interest or realization of strategic policy goals in any way. Its experience with sticking to human rights, democracy, etc. lost India Burma, and offers a cautionary tale. Moreover, democracy-building is an even more onerous undertaking than nation-building, which lesser task the US has found difficult to manage in Iraq and Afghanistan, and which the Obama Administration has, apparently, sworn off.

Q: What role should India play in democracy promotion and nation building in Nepal, Bangladesh, Sri Lanka, Bhutan, Afghanistan, and China? Should India create its own National Endowment for Democracy?

No such democracy promoting role with any country except China, starting with a campaign to publicize the cultural genocide of the native Tibetans and of the Lama-ist traditions and culture. It is a great means to push China diplomatically on to the backfoot but, otherwise, it makes no sense for India to do other than leave the peoples in all other countries, near and far, to discover the joys of democracy for themselves. And no Indian National Endowment for Democracy; there is no dearth of wasteful expenditure programs in India without adding to that list.

Q: Should India support the recent international effort to bring democracy to Burma, or does it give priority to cooperation with the military regime to counter Chinese influence?

The imperative need is to diminish the Chinese presence, role, and influence in Myanmar. It is a policy the Indian government is now pursuing, but it should do so with greater conviction and vigor, and deploy more resources to achieve these aims.

Q: In India in November 2010, Obama called for cooperation “strengthening the foundations of democratic governance.” Should India and the United States pursue a foreign policy of “values-based cooperation?”

Actually no; it will inevitably lead to needless friction and tension in bilateral relations. The values of democratic functioning and economic liberalism, for example, may be shared, but these and other values are accorded different weightages in the two polities and, hence, “values-based cooperation” may be infeasible and impractical.

Q: Does democracy matter in India’s relations with other democracies in Asia (Australia, New Zealand, Japan, South Korea and Taiwan)?

Sure, in a cosmetic sense, but in substantive terms one should be prepared to sup with the devil if that furthers the national interest, which last is a realpolitik principle one hopes MEA and GOI will begin to internalize.

Q: Should India be an aggressive advocate of human rights?

NO. Because the issue can so easily be turned against India, as has happened in the past.

Q: In his speech to the Indian Parliament in November 2010, Obama chided India for shying away from international condemnation of gross violations of human rights? Was he right to do so?

President Obama spoke from the American perspective and with the US national interests in mind. Not everything that a visiting leader says is taken or need be taken seriously by the Indian government and people.

Q: Should India support human rights organizations such as Amnesty International to assist political dissidents in China, Russia, Myanmar, etc.?

NO, except in the case of China where India should join in every international and regional forum loudly and vociferously to pillory that country’s abominable human rights record.

Q: Drawing from Secretary of State Clinton’s recent women’s power initiative, should India be more active in the promotion of women’s rights?

Of course. Otherwise, it’s a gross wastage of human resources and unrealized of half of mankind. India certainly cannot afford it.

[Audio Record of the actual panel discussion at www.gwu.edu/~sigur/assets/audio/2012%20Audio2012.1.23%20India%20as%20Global%20Power%20Panel%20I.mp3 ]

Wednesday

Honduras Is An Opportunity


For a successful foreign policy, it is not just essential that a nation have clear objectives, but that it can differentiate between crisis and opportunity and manage both. That ability seems to be absent so far in U.S. President Barack Obama's administration, at least regarding its policies toward Latin America. This is particularly obvious when Obama's foreign policy is contrasted with his predecessor Ronald Reagan's. A brief review of the U.S. interventions in Grenada in 1983 and in Honduras in 2009 illustrates the point.

The U.S. actions in Grenada and Honduras are separated by a quarter century and 1,500 miles; they have shared and contrasting characteristics. The United States did not initiate the events that led to the Grenada invasion in 1983, as it did not instigate the removal of the President Manuel Zelaya of Honduras in 2009. In the former, a U.S. president utilized a real crisis to liberate a country and to signal to the world that he would fight for freedom elsewhere. In the latter, another administration demonstrated that it cannot differentiate between the friends and the enemies of freedom.

Twenty-six years ago this week, on October 25, 1983, Reagan made the dangerous and at the time loudly criticized decision to invade Grenada. This marked the first contraction of the Soviet empire in more than 50 years, and helped spur the fall of the Berlin Wall six years later and the end of the Soviet Union and the Cold War two years after that. Seldom in history has such enormous consequence resulted from an unacknowledged event.

Grenada was the high-water mark of the Soviet empire's expansion. In 1979, during the irresolute presidency of Jimmy Carter, Grenada fell into the hands of Maurice Bishop, a Marxist "revolutionary" who -- supported by Fidel Castro, the Soviet Union, East Germany, Libya, and other enemies of the United States -- imposed a dictatorial regime and turned the country into a base for communist expansion in the Caribbean.

Among other hostile moves, Bishop allowed Cuba to build an airbase large enough to accommodate Mig fighters and other military planes. Moreover, Bishop and his allies transformed Grenada into a base for political subversion of the Caribbean. When rival Marxist revolutionaries assassinated Bishop in 1983, the island descended into fratricidal violence. The lives of 800 foreign medical students, mostly American, were in danger. Against the wishes of some of his advisors, who preferred diplomacy, Reagan decided in 36 hours to invade and to remove the Marxist regime.

The invasion was deeply unpopular in the "international community," which denounced the move in a United Nations vote, 122 to 9. Only some neighboring nations in the Caribbean basin supported the United States. Even Reagan's closest ally, British Prime Minister Margaret Thatcher, bitterly protested. Uniformly, U.S. and European media lambasted the White House. Many in Congress angrily condemned the invasion at first, only to support it later (it could be said they were against it before they were for it) when evidence of communist deceit became overwhelming. For example, U.S. soldiers discovered ammunition caches in boxes labeled "Cuban Economic Office, Grenada," demonstrating the danger the island country posed.
With Grenada's liberation, however, Reagan signaled that he was serious about combating Soviet aggression. Grenada was the first major use of U.S. military force since Vietnam; the first successful rollback of a communist state and thus the repudiation of the "Breshnev Doctrine," named after the former Soviet leader who held that no "socialist" state would be allowed to revert to capitalism; and the first military defeat of Castro's army, which at the time was running amok in Africa and supporting terrorists in Latin America.

A quarter century later, in Honduras in 2009, a corrupt and demagogic president distanced his country from the United States and joined ALBA, the anti-American alliance created by Hugo Chávez and Fidel Castro. Zelaya attempted to subvert his country's laws in order to stay in power. But the institutions of democracy foiled him: The Honduran Supreme Court unanimously ruled that Zelaya had violated the Constitution and ordered his arrest. The president of the Congress, Roberto Micheletti, a member of Zelaya's own party, replaced him, a move the elected legislature nearly unanimously ratified. All told, every institution of civil authority and civil society supported Zelaya's legal removal. As with Grenada, the "international community" objected -- in this case, on the grounds that the ouster was really a coup. Inexplicably, the United States joined along in the pro-Zelaya baying.

Simply put, Zelaya's removal was not a crisis; it was an opportunity. Hondurans had simultaneously re-established the rule of law that Zelaya attempted to fracture and broke with the anti-U.S. Chávez and Castro alliance. This was a legal, autonomous, and liberating action by Honduras's political institutions. The United States had no right to intervene against the pro-democracy Hondurans, even if a terrible mistake provided an excuse.

In the chaos caused by Zelaya's arrest, some Army officers put him on an airplane out of the country. This was a violation of Honduran law; the Army has acknowledged it and has attempted to justify it by claiming that leaving Zelaya in the country would lead to violence. Zelaya's many calls since his removal for his countrymen to replace him by force do justify the Army's fears, if not the act of deportation itself. He should have been detained and made to answer to the many crimes with which he has been charged.

But the deportation of Zelaya is no excuse for the Obama administration to join with the hemisphere's leftist despots, even with the cover of international organizations, in calling for the illegal restoration of the ousted leader. To repeat, Hondurans ousted Zelaya legally, in accordance with their constitution. The United States did not have to cut off aid and impose sanctions on one of the poorest nations in Latin America for having rid itself of an autocrat determined to turn Honduras into an undemocratic, hostile state.

Reagan was bold and agile enough to use the unexpected events on Grenada to change the course of history. Grenada was a crisis that Reagan turned into an opportunity. Honduras was an opportunity that Obama turned into a crisis. It is not too late to change course in Honduras and take advantage of an unexpected opportunity.

An African iPhone? There’s No App for That.


Why Steve Jobs should let Africans buy his new toy.
BY DAYO OLOPADE | JUNE 24, 2010

When I touched down in Lagos, Nigeria, this week, the first thing I did was buy a cell phone. The city's Saka Tinubu district hosts dozens of mobile vendors arrayed in small shops, piled high with all the major brands: Nokia, Motorola, Samsung. Among them is Belle-Vista Phone Warehouse, which styles itself as a "Blackberry Outlet." Young professionals stopped by after working hours to scoop up the Storm, the Curve, and other popular smartphones nestled in the display cases. Apple's iPhone -- ubiquitous in American cities, and about to become more so with the release of the product's much-anticipated version 4 today -- was nowhere to be seen.

The best-kept secret about Africa in the last decade is the continent's rapid and creative adoption of modern technology. African countries have for the most part leapfrogged the technologies of the late 20th century to adopt those of the early 21st en masse. There are now 10 times as many cell phones as land lines in sub-Saharan Africa, and since 2004, the region's year-over-year growth has been the highest in the world. When Nokia's billionth handset was sold in 2000, it was in Nigeria.

Africa is a multimillion-dollar mobile market, and plenty of the major technology companies, Western and otherwise, are there already. Multinational telecoms like MTN, Safaricom, and Zain are competing to cover a continent of 500 million mobile consumers, improving connectivity and dropping prices. Low-tech Chinese imports and no-contract, prepaid plans have made the technology easily accessible; Belle-Vista alone sells 500 phones a month. Nokia, which established its first African research center in Nairobi in 2008, has just unveiled a telephone that will allow consumers used to toggling between two or three devices to use multiple SIM cards in the same phone. BlackBerry has likewise responded to explosive demand by opening an office in Nigeria this year. Google, whose Android operating system is the strongest competitor to the iPhone, has had a presence on the continent since 2007 and now operates in 45 African countries, hiring and training African developers to convert its well-known suite of Web applications (Maps, News, Finance) for local use -- often over mobile devices.

These companies and their technologies are opening a line into the flattening world we've heard so much about, creating markets, enabling information access, and building relationships in ways that have changed poor countries from the bottom up. But it's hardly philanthropic work -- market leader Nokia's regional revenues were 1 billion euros in 2009, and Research In Motion, named Fortune's fastest-growing global firm in 2010, sold 1 million BlackBerries last year in South Africa alone.

So where is Apple?

The earlier-generation iPhones are, ostensibly, available on the continent -- Vodacom, a subsidiary of British Vodafone, signed a 10-country distribution deal with Apple in 2008 that included South Africa and Egypt, and the phones do work on local networks. Vodacom has also announced that it will distribute and service the iPhone4 in Africa in the near future. But for the vast majority of Africans, Apple effectively doesn't exist. The iTunes store's music offerings have never been available on the continent; African IP addresses are blocked. The iPhone goes for $1,000 at local retailers -- 10 times the current U.S. price for the same model, a big-enough markup that most iPhones on the continent are purchased abroad instead -- and because of limited bandwidth and apps availability, owning one is "like having a Maserati in traffic," according to Tayo Oviosu, CEO of Pagatech, a mobile banking firm in Nigeria.

This is a shame, considering what even inexpensive, basic cell phones have done for Africa. In poor countries, cell-phone penetration has been linked to positive economic and developmental outcomes. A 2006 study of emerging markets suggests that a 10 percent increase in mobile penetration correlates with a 0.6 percentage point increase in economic growth rates. In Africa, the trend is lifting all boats: A fisherwoman without refrigeration in the Democratic Republic of the Congo can keep her catch on the line in the water, waiting for customers to call; selling access to a mobile phone in poor or rural areas of Uganda has become a viable business model. Professionals stuck in Johannesburg traffic make deals on their BlackBerries; demand for skilled labor in the information and communication technology sector has created 400,000 jobs in Nigeria since 2000.

The advent of mobile money -- the transfer of funds by cell phones, rather than banks or ATMs -- in poor countries has further expanded the reach and value of cell phones. Fifteen-thousand new mobile-banking customers sign up daily in Tanzania, 12,000 in Kenya, and 18,000 in Uganda. Paperless payment creates meaningful efficiencies: Bill-paying has ceased to be a day lost in line at the bank. Rather than sending an envelope full of cash with a bus driver to another town, an individual can text remittances to a distant relative or friend.

Africa has also led the way in putting mobile phones to NGO-like use. Using SMS platforms, organizations can send patients reminders to take medication, offer technical assistance to farmers, and provide mothers simple prenatal checklists. Ushahidi, a Kenya-based start-up, deployed its SMS-based crisis-mapping software in Haiti after January's earthquake, for which it was later honored by the Clinton Global Initiative. These mobile-centric models don't just do good -- they add real value to the sizable investment made by lower-income individuals in poor countries.

What could the iPhone contribute to this ongoing renaissance? The iPhone4 may serve these developmental functions better than anything else on the market, if its features are as described. The new FaceTime feature, for instance, which allows videoconferencing directly from a mobile device, could do much to support the distance education projects being pioneered at the University of South Africa and Makerere University in Uganda. In addition to GPS and access to the mobile Web, geotargeted applications could help traders find market prices, businesses find customers, and make news delivery and political organizing easier. All-in-one video shooting and editing software makes the iPhone4 a powerful media tool that competing smartphones like the BlackBerry or Nokia Nseries just can't duplicate. Even the longer battery life will add value in places where electricity is unreliable.

Most importantly, the iPhone's application development ecosystem would engage the talented, tech-savvy demographic on the planet's youngest continent. According to a paper from the Institute for Development Policy and Management at the University of Manchester, software production is an industry "essential for the growth of the economies of developing countries"; the $1.43 billion iPhone application market, with its low barriers to entry and friendliness to entrepreneurs, is ideal for Africa's burgeoning class of small-scale software programmers. In Kenya -- a country where software tinkering is popular enough to warrant a prime-time cable TV show -- some eager programmers created applications for the first iPhone well before it was even available in the country. "We're going to see people developing applications that solve specific challenges in the African context," says Oviosu. "If the iPhone comes here and catches on, of course we'll build [one]."

It isn't just Africans who are losing out from Apple's disinterest in the continent. As mobile data usage comes to replace traditional computing in Africa, the new unit of engagement for business, government relations, and humanitarian work may be the smartphone -- and it stands to reason that the company with the best local presence will reap the benefits of rising incomes and demand on a continent of nearly 1 billion. If it is Apple, it will reinforce the company's slogan: This changes everything. Again.

Japan's Fake Economic Reforms


Why Tokyo could use a little more creative destruction.

Just before the recently elected Japanese government released its new 10-year growth strategy, two top policymakers locked horns in a sterile economic debate. Heizo Takenaka, economic advisor to former Prime Minister Junichiro Koizumi, said the chief priority should be business-oriented supply-side measures to generate new wealth. Naoto Kan, the new deputy prime minister and finance minister, stressed the need to boost demand and help consumers. Arguing that the Koizumi cohort had failed, Kan said that companies would neither hire new workers nor boost capacity if they couldn't sell their output.

In the end, Prime Minister Yukio Hatoyama took Kan's approach, saying, "[The past government] was biased toward the supply side, and we intend firmly to generate demand." His government set goals of 2 percent GDP growth per year for the next decade and the creation of 4.76 million new jobs in fields like elderly care, health, the environment, tourism, and exports. The problem is that his "growth strategy" includes neither growth nor strategy. It lists targets but offers no means to achieve them.

Moreover, the goals themselves are off base. Hatoyama set a target of 2 percent per year GDP growth, starting from a 2009 baseline. But from 2007 through early-2009, the recession slashed GDP by a remarkable 9 percent. If the Japanese government based its goal from the pre-recession GDP levels -- as it should have -- its GDP target for 2020 works out to just 1 percent growth per year, a truly dismal rate. The targets on the jobs side are equally off. Over the next decade, the country's working-age population will plunge by 7.6 million people, or 10 percent, and the number of retirees will rise by 6.5 million. How can the Hatoyama administration promise 4.8 million additional jobs when Japan won't have the workers to fill them? No one expects a rush of immigrants or women into the workforce to counter this trend.

For Japan to revive, it has to move beyond Kan and Takenaka's false supply-side, demand-side dichotomy. As famed economist Alfred Marshall pointed out more than a century ago, scissors need two blades: supply and demand. Japan has trouble growing because both blades are so banged up that neither cuts very well. Plus, each blade's dullness worsens the other.

For 30 years, Japan has been afflicted with a chronic shortfall of demand, a kind of economic anorexia. Consumer spending is too low, mostly because household income is too low. Over the last decade, real wages per worker have fallen every year but one. The only reason consumption has risen is that households have slashed their once-legendary savings rates: from 17 percent in 1980, to 10 percent in 1997, to 2.3 percent in 2008. If people earned more, they'd spend more.

To make up this shortfall, decades of Liberal Democratic Party (LDP) governments used artificial stimulants: mammoth budget deficits, rising trade surpluses, and monetary steroids to gin up often-wasteful business and infrastructure investment. The unsustainability of this strategy came home to roost in the recent recession, when a collapse of exports and accompanying investment sent GDP southward. This collapse abruptly erased 70 percent of the recovery eked out since late 2001.

With the economy now operating 7 percent below capacity and economists worried about a relapse in 2010, the newly elected Democratic Party of Japan (DPJ) turned immediately to measures to increase demand. It proposed a good initial remedy: boosting household disposable income, partly by measures making it cheaper to have children. Instead of building more of the LDP's notorious "bridges to nowhere," the DPJ proposed spending around 21 trillion yen, 4 percent of GDP, on measures such as an annual rebate of $3,250 per child, reimbursement for high-school expenses (which even at public schools can amount to $5,000 per year), free child-age medical care, and tax cuts.

Unfortunately, the DPJ evaded the issue of financing its largesse. Its talk of cutting wasteful spending to come up with the funds proved hollow. As a result, the DPJ has already cut back or postponed some of these measures. Moreover, the DPJ has not offered a remedy for the structural defects in private labor and capital markets that produce such low household income in the first place.

The DPJ's difficulty in financing its programs brings up the supply side of the scissors. Japan will never find the resources to boost household income, support the elderly, and address its gigantic government debt unless it accelerates per capita GDP growth, hikes the tax base, and increases returns to investment.

With the number of workers declining, the only way to boost GDP is for each worker to produce more. At the moment, unfortunately, long-run productivity is growing only 1.5 or 2 percent per year. If the labor force declines 1 percent a year and productivity rises 1.5 to 2 percent, the math makes it clear: over the long haul, GDP can only grow a meager 0.5 to 1 percent, maximum -- which is just about what the Bank of Japan, the OECD, and other authorities estimate will occur after a few years of higher growth as the economy recovers.

Thus, Japan cannot achieve healthy long-term growth without a productivity revolution. Unfortunately, neither the DPJ nor the LDP has seriously addressed this need. There is lots of talk about more research and development spending and economic exotica like nanotechnology. But Tokyo should take a look at the United States' recent productivity revolution, where real improvements lay in old-line sectors such as retail and rust-belt manufacturing. Under the pressure of stiff competition, companies in these industries adopted new technologies and more efficient ways of doing business. Aside from a few world-beating sectors, like the automotive industry, Japan is so far behind world benchmarks of efficiency that it could enjoy a huge leap in growth just by catching up. Even in manufacturing, Japan is 30 percent below U.S. productivity levels.

The key is what economist Joseph Schumpeter called "creative destruction," or, as a South Korean minister once put it, "You can't have competitiveness without competition." In a healthy economy, jobs come and go. Companies come and go as newer, better ones beat them. At the same time, a healthy social safety net aids workers in their transition from firm to firm and job to job. Competition, plus a government-financed safety net, is the combination that best produces growth, high employment, rising wages, and income security, as Sweden and Denmark demonstrate.

Japan has neither condition. It preserves incumbent firms and jobs by stifling competition, meaning it has one of the lowest rates of labor mobility and company turnover among rich countries, and correspondingly low potential growth. The LDP claims as one of its alleged supply-side reforms to have aided labor flexibility by increasing the use of part-time and temporary workers, who now represent one-third of the labor force. In reality, by paying these "irregular" workers meager incomes, businesses have lowered real wages for everyone, thereby crippling consumer demand and creating an anti-reform political backlash. Rather than addressing the problem by providing safety nets and wage equality for "irregular" employees, the DPJ has promised to ban their use in some sectors, focusing on a futile effort to restore the old lifetime employment paradigm.

Some in the DPJ understand that genuine flexibility, better wages, and strong consumer demand are interdependent. But the party's political tacticians, especially Secretary-General Ichiro Ozawa, understandably do not want to alienate constituents in weak sectors or allies in the unions. Therefore, the DPJ has punted on the question of the economic fundamentals Japan needs to change.

Fortunately, there is a way out. These days, party loyalty and traditional political machines are weaker than ever. Voters are increasingly choosing on the basis of the economy. Hence, though it may seem in the short-term that there is a political need to placate assorted interest groups at the expense of economic growth, in the long-term that is the road to electoral defeat. That's what brought down the LDP in a landslide rejection in 2009. This new political equation will put pressure on the DPJ to come up with some genuine reforms.

Many in the DPJ already recognize this. Several members, for instance, have argued for allowing in cheaper food imports while giving income support rather than production subsidies to the dwindling ranks of aging farmers -- something that could have been political suicide in the LDP era. And younger Diet members -- many of whom came from the bureaucracy, business, or academia -- seem to understand that in the long run effective politics requires effective policies.

Hopefully, the new growth strategy announcement will prove nothing more than a disposable campaign pamphlet for this July's pivotal upper house elections. The DPJ needs to get a single-party majority in that chamber so it can rid itself of dependence on two small retrograde parties and focus on hashing out the tough economic issues. The things it had to say to win the lower house in 2009 and thinks it has to say to win this July are very different from what it needs to do in order to retain power. If it fails to revive Japan, it too will fall from power. More political realignments will ensue. Japan will have no political stability without prosperity, and no prosperity without serious reform.

Thursday

Tracking the growth of India’s middle class


BY- Eric D. Beinhocker, Diana Farrell, and Adil S. Zainulbhai
Source: McKinsey Global Institute

Over the next two decades, the country’s middle class will grow from about 5 percent of the population to more than 40 percent and create the world’s fifth-largest consumer market.

India’s rapid economic growth has set the stage for fundamental change among the country’s consumers. The same energy that has lifted hundreds of millions of Indians out of desperate poverty is creating a massive middle class centered in the cities. A new study by the McKinsey Global Institute (MGI) suggests that if India continues its recent growth, average household incomes will triple over the next two decades and it will become the world’s 5th-largest consumer economy by 2025, up from 12th now. (The full report, The ‘Bird of Gold’: The Rise of India’s Consumer Market, is available free of charge online.) Along the way, spending patterns will shift significantly as discretionary purchases capture a majority of consumer spending. India’s potential should make it a high priority for most consumer goods businesses, but to succeed in this complex market they must overcome major challenges.

Private consumption has already played a much larger role in India’s growth than it has in that of other developing countries. In 2005 private spending reached about 17 trillion Indian rupees1 ($372 billion), accounting for more than 60 percent of India’s GDP, so in this respect the country is closer to developed economies such as Japan and the United States than are China and other fast-growing emerging markets in Asia. Our study shows that aggregate consumer spending could more than quadruple in coming years, reaching 70 trillion rupees by 2025. Higher private incomes and, to a lesser extent, population growth will encourage this rise in consumption. Changes in savings behavior will play only a minor role.

With such growth on the horizon, it is unclear which companies will win in most product categories. Opportunities will blossom as millions of first-time buyers step up to cash registers and as the bulk of consumer spending moves from scattered, hard-to-reach rural areas to more concentrated, accessible urban markets. Indian consumer spending will shift substantially from the informal economy, with its individual traders, to the more efficient formal economy of organized businesses. That transition will lower prices and further boost demand.

But neither incumbents nor attackers will have an easy time. Bureaucratic hurdles and well-recognized infrastructure shortcomings will frustrate many strategies. In addition, while aggregate spending will rise tremendously, it will be spread across hundreds of millions of households, many with very modest incomes (by the standards of developed countries) and high sensitivity to price and value. Finally, in many consumer markets both Indian and multinational companies already compete intensely for customers. While the opportunities will be enormous, the challenges will force companies to be more dynamic by adapting their products, services, and business models to the rapidly changing needs and incomes of Indian consumers.

We examined the way India’s consumer market will likely develop under a set of reasonable economic assumptions (see sidebar, “About the research”). In particular, our model assumes that real compound annual growth will be 7.3 percent over the next two decades and that economic-reform efforts will continue. If these conditions are met, the life of the average Indian will change vastly by 2025.

A market rising from poverty
India’s economic reforms, begun in 1991, have substantially improved the country’s well-being, and our analysis shows that further improvements are to come. In 1985 93 percent of the population lived on a household income of less than 90,000 rupees a year, or about a dollar per person per day; by 2005 that proportion had been cut nearly in half, to 54 percent. By our estimate, 431 million fewer Indians live in extreme poverty today than would have if poverty had remained stuck at the 1985 level. We project that if India can achieve 7.3 percent annual growth over the next 20 years, 465 million more people will be spared a life of extreme deprivation.

Contrary to popular perceptions, rural India has benefited from this growth: extreme rural poverty has declined from 94 percent in 1985 to 61 percent in 2005, and we project that it will drop to 26 percent by 2025. While the progress has been substantial—even historic—significant challenges remain. First, there are large regional disparities in growth and in the reduction of poverty: India’s southern and western states prosper, while the northern and eastern states (with the exceptions of the capital region, Haryana, Himachal Pradesh, and Punjab) lag behind. Second, while India has been slowly urbanizing over the past two decades, it remains the least urbanized of the emerging Asian economies. Today only 29 percent of Indians live in cities, compared with 40 percent of the Chinese and 48 percent of Indonesians, and we project that the level of urbanization will increase to only 37 percent by 2025.2 Finally, while more Indians are completing secondary and higher education, the educational system remains severely strained and the quality of and opportunities for schooling vary widely.

In rural areas life may become less desperate thanks to continued growth and to government investment in infrastructure and development. But it will likely remain a struggle, particularly for subsistence farmers in the north and east and for others with little education. For India’s urbanites, especially educated ones, the future looks promising. Many of these households will make the jump not only out of poverty but also into the new and aspiring middle class.

The birth of a new middle class
The growth that has pulled millions of people out of poverty is also building a huge middle class that will be concentrated in India’s urban areas. While urbanization isn’t proceeding as quickly as it is in other Asian economies, rapid population growth means that in absolute terms the country’s urban population will expand significantly, from 318 million today to 523 million in 2025.

Urban growth will bring several important consequences. First, it will put tremendous pressure on the urban infrastructure, which is already heavily overburdened. (Our projections assume that infrastructure investments will at least keep pace with urban growth and that problems with transportation and utilities won’t worsen to the point of hampering growth.) Also, in India—unlike China, where urban growth is spread across a large number of cities—the economy will continue to be dominated by the megacities (Delhi and Mumbai) plus the six next-largest urban agglomerations.3 Nevertheless, a handful of smaller places, such as Chandigarh and Ludhiana, will have per capita incomes rivaling those of the major cities and emerge as attractive markets. The shift in spending power from the countryside to the cities will place the bulk of India’s private consumption within easier reach of major companies. Today 57 percent of private spending is spread across rural areas, but by 2025 cities will command 62 percent of the country’s spending power.

Along with the shift from rural to urban consumption, India will witness the rapid growth of its middle class—households with disposable incomes from 200,000 to 1,000,000 rupees a year.4 That class now comprises about 50 million people, roughly 5 percent of the population. By 2025 a continuing rise in personal incomes will spur a tenfold increase, enlarging the middle class to about 583 million people, or 41 percent of the population. In 20 years the shape of the income pyramid will have become almost unrecognizable.

The Indian middle class has already begun to evolve, and by 2025 it will dominate the cities. By then about three-quarters of India’s urbanites will be part of the middle class, compared with just more than one-tenth today. The expansion will come in two phases, with the lower middle class peaking around 2020, just as the growth of the upper middle class accelerates (Exhibit 4). About 400 million Indian city dwellers—a group nearly 100 million people larger than the current population of the United States—will belong to households with a comfortable standard of living. For many companies, the sheer scale of this new urban middle class will ensure that it receives significant attention.

What’s more, companies shouldn’t underestimate the market presented by the country’s most affluent consumers: those earning more than 1,000,000 rupees a year—$21,890 in real 2000 dollar terms, or $117,650 in terms of purchasing power parity (PPP). They will remain a small portion of society: about 2 percent of the population in 2025, up from 0.2 percent today. But in absolute numbers, by 2025 India’s wealthiest citizens will total 24 million, more than the current population of Australia. By that year too, India’s affluent class will be larger than China’s comparable segment, projected at about 19 million people.5 Affluent India’s share of national private consumption will increase from 7 percent today to 20 percent in 2025, which helps to explain the recent rush into the Indian market of luxury goods such as Louis Vuitton bags and Jimmy Choo shoes.

These “global” Indians live mostly in the eight largest cities, so they are very accessible to large domestic and multinational companies. Further, they have tastes similar to those of their counterparts in developed countries: brand name goods, vacations abroad, the latest consumer electronics, and high-end cars.


Changes in consumption
As Indians continue to climb the economic ladder, the composition of their spending will change considerably. In a pattern witnessed in many other developing countries, discretionary expenditures, such as mobile phones and personal-care products, will take up more room in the nation’s shopping basket.

This shift from necessities, defined in our analysis as food and clothing,6 is already under way—and taking place at lower income levels than we have seen in other countries. We expect that discretionary spending in India will rise from 52 percent of total private spending today to 70 percent in 2025. South Korea went through a similar transformation in the 1980s, when its per capita income levels were about twice those of India now.


Food (including beverages and tobacco) will post the sharpest decline in relative consumption, even as overall spending in the category rises. The fall in the share of food expenditures during our forecast period—to 25 percent, from 42 percent—is linked closely to the growth of the middle class. Despite this relative decline, food will remain the single largest category of expenditure, and we expect that growth in consumption will accelerate to 4.5 percent annually, from 3 percent over the past 20 years.

That growth, however, will appear tepid compared with the rise of other categories. In particular, spending on purchases that improve the economic prospects and quality of life of a person or family—health, education, transport, and communications—will soar and eventually command a greater share of consumption than they do elsewhere. The inadequacy of India’s public-health system, for example, means that private health care is a high priority for many Indian families when their incomes grow. This imperative will drive growth in private health care spending by almost 11 percent a year, so that it will account for 13 percent of the purchases of Indian households by 2025, a larger share than current levels in all of the countries we examined except the United States.

In another remarkable shift, spending on education will grow by 11 percent over the next 20 years, to 9 percent of household consumption, higher than today’s levels in any of our benchmark countries. In rural areas, households emerging from poverty will make educating their children a priority, while higher-income urbanites will be spending more on better-quality education, university degrees, and study-abroad programs. Meanwhile, despite India’s fondness for cricket and “Bollywood” movies, recreational products and services will take a smaller slice of household spending there than in other countries.

Transportation, already the largest category of expense after food, will take a bigger portion of household budgets in coming years, exceeding its share in all of our benchmark countries. The highest growth will come from car purchases. Categories such as clothing and household goods are expected to post slower annual growth relative to overall consumption—6.4 percent and 6.9 percent, respectively—and thus to lose share of wallet. Yet even in these categories, growth rates will remain highly attractive as compared with those in other markets around the world.

What it means for businesses
Three-quarters of India’s consumer market in 2025 doesn’t exist today—about 52.6 trillion rupees a year in future purchases will be up for grabs. Also, India’s rapid upward mobility means that many of India’s households will be new consumers, enjoying significant discretionary consumption in the organized economy for the first time in their lives. Incumbents and challengers alike face a sea change. India’s incumbents, mostly domestic companies, will start with many advantages: existing relationships with customers, an understanding of their needs, and recognized brands.

The incumbents also have established distribution channels—very important in a country of vast geography and limited infrastructure.

But growing incomes and consumption will pressure incumbents from two directions. First, such companies must adjust to the pace and magnitude of change, for as consumers rise through the income brackets, their needs, tastes, aspirations, and brand loyalties will evolve along with their lifestyles. Second, India’s growing consumption will attract a raft of challengers, and ongoing economic reform will significantly intensify competition in many markets. New competition will come from multinationals entering the Indian market, from established Indian companies looking for expansion opportunities, and from entrepreneurs. Indeed, if the country’s policy makers create the conditions for India’s entrepreneurs to succeed, major new companies could be built on the back of consumer growth.

Many incumbents haven’t prepared enough for this discontinuity. They will have to develop a deep understanding of how the consumer’s needs and aspirations will change as incomes grow and find ways of creating innovative products that meet those changing needs. In addition, they must think about how they should introduce new consumers to their products, whether their brands are appropriate for those consumers, and what prices and cost positions will help them compete most effectively for a share of this new middle-class market. Nor is that all: incumbents will have to keep a wary eye on the actions of their current competitors and on new market entrants. That’s a full agenda, and companies that begin preparing today will be in the best position to benefit from the changes.

For attackers, the challenge will be to spot the gaps and opportunities that arise as India’s income and class structure change; they might, for example, ask themselves where small markets or limited competition, or both, have served middle-class consumers poorly. Attackers could also turn to other emerging economies to seek lessons on how tastes and needs will likely evolve in India, perhaps looking in particular for categories in which spending shifted from local products and brands to international ones as aspirations rose. Attackers seeking to exploit these changes should consider what new needs will be unique to Indian tastes and the market as the middle class grows.

In India, as in many emerging markets, multinational companies will find themselves squeezed between the desire of the country’s consumers for a modern middle-class lifestyle and the realities of their limited budgets. In 2005 the average middle-class family spent just over 300,000 rupees annually—roughly $6,600—a very modest sum in real terms, but in PPP terms equal to around $35,000. As one multinational executive noted, however, “You can’t put PPP dollars in the bank, only real dollars.” Multinationals must innovate to deliver an aspirational middle-class lifestyle to families on an Indian budget. Companies that can develop new business models, design products with carefully targeted features, and create brands that appeal to India’s upwardly mobile people will attract huge numbers of eager consumers.

The future we have described assumes that India will continue on its recent path of strong growth. There are many reasons to believe that this assumption is realistic, most notably the scope for improved productivity in the economy. But India’s outlook depends strongly on continued long-term economic reforms that are needed to address serious deficiencies in the country’s infrastructure, modernize the financial system, and promote investment in human capital through better education and health care.

India’s emergence as the world’s fifth-largest consumer economy will bring significant benefits to the country and the world. Growth will pull hundreds of millions of people out of poverty and into the world’s middle class. With rising incomes, Indians will have the opportunity to realize comforts and pleasures enjoyed by middle-class families around the world. In addition, rising domestic consumption will create further economic growth and employment as companies work to meet the new consumer demand. For the world’s businesses, India represents one of the largest consumer market opportunities of the next two decades. During the first millennium, merchants referred to India’s glittering and dynamic market as the “bird of gold.” That bird is preparing to take flight again.


About the Authors
Eric Beinhocker is with the McKinsey Global Institute, where Diana Farrell is director; Adil Zainulbhai is a director in the Mumbai office.

The Chinese invasion in Latin America


The economic growth that many countries in Latin America have gone through in the past few years has brought many positive aspects. Besides the obvious aspects, such as an improvement in the social condition, economic stability and planning capacity, among others, the economic expansion also brought new issues for which Latin-American countries should find a standpoint.

Historically, as an extension of Europe in the New World, Latin America became commercially (and several times politically) tied to the USA and Europe. Also in an important scale, countries depended on their neighbors to keep certain strategic sectors of their economies actively functioning.

The economic success the last decade brought to some countries, like Brazil, Chile, Peru and Colombia, among others, has enlarged the commercial view of each one of these countries. Previously, the economic dependence on the USA and Europe would restrict and decrease the negotiation power of any Latin American country. That was the main "fuel" to turn the useless rhetoric that "we are exploited by the imperialist yanks and colonizers Europeans" into something permanent among the pseudo-intellectuals that did not recognize the incapacity of our negotiators, but only the advantage foreigners took from us.

Today, this situation is pretty different. The world has diversified its production capacity and its group of consumers. Brazil, for instance, has increased its sale of products (and diversified the set of exported products) in Latin America, maintained the USA and Europe as important consumers and has China as a potential "customer" with capacity of causing a com a tsunami in the Brazilian trade balance.

Commercially and economically all of us already know about the benefits brought by the market diversification and how this generates a sensational potential of production growth. Politically, the coming of new players changes a bit the geopolitical perspectives in Latin America:

1. The coming of a new player increases the production demand, maintaining the economic growth in a virtuous circle that is in expansion;

2. The Latin American countries' capacity to bargain with older buyers increases, since a new buyer is the guarantee that product can leave a destination and find another;

3. Thus, the USA will need to check their negotiation policies with countries like Brazil and Peru, for example, for they demand interesting counterproposals so that this continues to be the destination of choice for certain products;

4. Trade negotiations, such as the Doha Round, for instance, have a new dynamics, once viable and interesting alternatives may come without the presence of big economies, such as the USA and Europe.

Naturally, the biggest of these players is China. Still weak in terms of perception, but statistically giant, the presence of the Chinese in Latin America offers an alternative that implies a total change of conduct by those Latin American countries that wish to have strong ties with China. The region, particularly Brazil, may abundantly provide vital items for the survival of a country throughout this century: food, energy and water.

The food issue is already pretty active. Brazil exports a considerable quantity of rice, soy, corn and other products to China. Peru and Argentina are also increasing their exports to the East. If previously the big markets were divided between the USA, Europe and national market, a country with the population and appetite of China completely changes the perspective of negotiations. We already see the Chinese interest in buying land in Latin America to manage a production here and, little by little, take hold of shipment logistics to China. This is both dangerous and counterproductive for Latin Americans. The logistic chain must always be in the hands of local governments, so that the negotiation power is not lost.

Energy is still as important as food for the Chinese. This may be a great opportunity to attract direct investments for the infrastructure of each country. It is worth remembering that the "energy" issue has put Latin America in the map of the global geopolitics, both by the positive points, such as the pre-salt and Hugo Chavez's adventures financed by petrodollars. In this sector, we will see a stronger and more evident Chinese presence. China will present projects of plants and companies to explore oil and natural gas fields. Once again, if the logistic process is lost and stays totally in the hands of the Chinese, the China of tomorrow will be interpreted as the USA of yesterday in Latin America. Biofuel is the "apple" of the Brazilian Government's eyes and, if properly used, it will be the main object of bargain and negotiation Brazil will have to obtain what is convenient not only from China, but also from the USA and Europe. For this, there must be a domestic regulation, which should be transparent from production to distribution to the end customer abroad. Only by doing this there will be trust and foreign mass investment in the area.

Finally, water is a sensitive and highly strategic point. However, this is a sector that will have a dominant role in the future. The world recognizes the need for drinkable water grows by the day, but it is not enough to actively act in the political relations among countries yet.

Nevertheless, the protection of the environment and ecosystems where this asset is found is far from being well done. Thus, the world does not trust Latin America as a safe region to manage this resource in the next years.

Relations with China must be carefully considered. If there is a total opening for the coming of the Chinese in form of investments, physical presence of companies and specially control of the strategic logistics in some sectors, we run the risk of regressing and become dependents on one country once again. We must give China and other countries the opportunity to invest in the country, as partners and never as vital players. Thus, Brazil, Mexico, Argentina and Colombia may diversify and increase their productions and have as their vital buyers not only the Chinese, but also the North Americans, Europeans, Russians and Indians.