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Himalayan Crossings: Explaining the Rise of China and India

Selected Insights on US Foreign Policy and on Political Economy, Security, Finance, and Information Technologies in and between South Asia and Greater China


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Thistle and Drone

August 25th, 2015 by Gurbinder

In his new book, The Thistle and the Drone: The United States, Islam, and the War on Terror, American University’s Dr. Akbar Ahmed undertakes a meditative exploration of tribes and of center-periphery relations in the US “war on terror”.  The book brings into focus to something that those unfamiliar with the zones of drone activity should learn more about.

Ahmed’s argument should be considered seriously by an American audience because that audience should be more aware of the nature of the tribal societies where drones attacks mostly occur.

Ahmed writes, “Only by recognizing the true source of the violence and the nature of the tribal society which produces it can the U.S. begin to provide lasting solutions.”

Ahmed himself certainly is aware that tribal societies are not now and have never been, static.  There is therefore a risk to caricaturing or “reifying” (i.e. making a complex, dynamic concept and phenomenon into an oversimplified and static stylized fact) “tribes”.  Ahmed’s role as Political Agent could (but not necessarily) put him in long line of external or internal colonial producer of such reified knowledge about “tribes”.

The center-periphery argument is not clear to me without further reading, but I’m skeptical there.  It is as much intrusion into once live-and-let-live zones as “breakdown” in center-periphery relations, that is the cause of unrest in Pakistan’s tribal areas.  Moreover, it is the presence of outsiders, both carpet-bagging militants and NATO/US forces, and the presence of technologies and new channels of connection that disrupt these areas and make them and their long-time and recently-arrived residents more capable of disrupting the old center-periphery relations.These places were not “ungoverned” before 9/11, they were just “differently governed”.

 

 

 

Indian economic reform from the bottom up

April 1st, 2012 by Matthew Rudolph

Madhu Kishwar has a piece on East Asia forum drawing attention to the difficulties facing the 92 % of Indian workers in the unorganized and informal sectors.  The controls that effect these sectors, she points out stifle dynamism.  These controls includes regulations on agricultural goods (no national market), land (transfer and property rights need clarification), and small-scale merchandise (limited access to national and international markets).

Her point about small scale industry applies to the area of handicrafts where Ubuntu at Work is seeking to help.
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She writes:

Similarly, the poverty of India’s traditional artisans and technologists cannot be eradicated by treating them as ‘backward’, while roping them into government jobs as clerks and peons as a panacea. They need access to national and international markets without exploitative intermediaries. In addition, they should be welcome in appropriate institutions of higher learning such as textile engineering, departments of metallurgy and schools of architecture, as well as in institutions for training artists and performers — both as teachers and students — so that they are able to build on their traditional skills.

via Indian economic reform from the bottom up | East Asia Forum.

"Vodafone" clarification and off-shore India-related capital gains tax

March 28th, 2012 by Matthew Rudolph

I’ve been hoping someone well informed would assess this issue.

The issues are laid out nicely here.

If readers know of any good analysis, please let me know.

It seems like the right call by the government, but I’m still puzzling over it.

The obvious question is which upcoming deals would be effected?

M.K. Gandhi’s Three Legged Stool vs. the Nehru-Gandhi Dynasty’s Tippy Stilts

March 25th, 2012 by Matthew Rudolph

The UP elections compel us to reflect on an enduring question of democratic politics — are individuals more important than organisations?

Ashutosh Varshney’s recent oped on the meaning of the UP election had me wondering though if the Nehru-Gandhi Dynasty can or should ever rebuild a solid Congress organization.

UP, long having put the nation first, may have learnt to look out for itself

The UP elections compel us to reflect on an enduring question of democratic politics — are individuals more important than organisations?

Consider Mahatma Gandhi’s classic answer to this question. Individuals are necessary, he said, but not sufficient. Without organisations, big political campaigns cannot be launched, let alone victories achieved, but without individual drive, energy and leadership, organisations cannot be created.

Dynastic charisma and organization building may not work for them. There may be an inherent conflict between the legal and mundane elements of organizational strength and legitimacy that can’t ever grow in the shade of the Nehru-Gandhi family’s long shadow.

I remember back in the mid-1990s when there was still hope that Madhavrao Scindia and Rajesh Pilot might rebuild or at least renovate the Congress edifice.

Jagdish’s comment that Manmohan and the reform team may now be relatively stronger suggests the actual absolute weakness of both sides of the Congress dyarchy.

Akhilesh’s laptops, referred to in the piece, suggest some inklings of venturesome policy in the SP, it seems to me from a normative perspective, that the sad thing about the trend in the regionalization of party politics is the absence of wide and deep fresh policy ensembles for the things that really matter such as education, infrastructure and health.

Libya: How will it be viewed?

August 30th, 2011 by Matthew Rudolph

Much will be learned from this campaign and much discussed.

Discussed will be how the humanitarian costs balance against the benefits of the post-Qadafi dispensation.

Also I suspect that discussion will lead in a decade’s time the grouping if of this campaign by experts with the use of force in the former Yugoslavia as successful and effective use of force and outside intervention.

Likely to0 will be that that this will spur the modernization and improvement of non-US NATO military capabilities.  The severe limits of the European’s own capabilities were painfully revealed.

She Doth Protest Too Much: China’s Banks, Energy Firms, and Global Energy Diplomacy

August 30th, 2011 by Matthew Rudolph

Erica Downs and other have been trying for some time to persuade those interested in Chinese foreign policy and global energy politics that China’s energy companies and associated corporates in finance and infrastructure are “relatively independent” of central control.  Others include, Bo Kong, China’s International Petroleum Policy.


Why does Erica Downs keep insisting that the corporate actors in China’s energy sector are increasingly independent?

The objective may be to disarm aggressive, un-nuanced anti-Chinese actors in the US who regularly point to China’s energy diplomacy as yet another facet of Chinese malign grand strategic intent.

As if American energy companies have been any less central to US grand strategic intent and that the various tax and other benefits such firms enjoy do not reflect “coordination” (to use Downs’ terms) within the US political system.

This is an important goal for Downs.  Yet, HC wonders if her analysis helps the case, since her conclusions fail to prove that the actors in overseas Chinese energy engagement are not controlled by China’s central leadership.

Here are the relevant passages from Downs recent report.

First, each of the state-owned firms involved had its own interests, including profitability, to pursue. This conclusion is especially true for CDB, which has a proven track record of advancing its own objectives, including its long-standing commitment to profitability, in tandem with those of the government.The EBLs did not simply further the State Council’s objectives of enhancing access to energy, supporting the international expansion of Chinese firms and diversifying China’s foreign exchange reserves. They also promoted CDB’s own agenda of increasing profits, expanding its overseas business portfolio, and protecting its privileged position in China’s banking system. In addition, the loans also dovetailed with the NOCs’ strategic priority of expanding their international exploration and production portfolios.

All of these indicators of autonomy, except “protecting its privileged position in China’s banking system.” are consistent to the interests of the state and the leadership and I don’t know how Downs can assert with any confidence that they ‘prove’ the independence of CDB.

Second, coordination is not synonymous with top-down decision- making. The loans to energy companies in Brazil and Russia demonstrate that cross-border deals that advance both national and commercial interests can originate with any of these actors. Whereas CDB developed the deal with Brazil, the State Council and China National Petroleum Corporation (CNPC) drove the transaction with Russia.

Top-down decision making or coordination;  what is at stake in the distinction?  Is Downs implying that Chinese banks and state-owned energy companies are able to act independently of China’s central government state council?  Or, even that CDB is taking the initiative?  One does not have to impute dark or sinister motives, or even grand strategic intent to Chinese global energy policy if one accepts the obvious truth that China’s banks and energy companies are some of the most important instruments of state power used by the Chinese leadership.  Coordination or top-down decision making are a difference that makes hardly any difference.

HC Political Risk Monitor: China’s Arab Analogy, India’s Advantage?

March 25th, 2011 by Matthew Rudolph

Might India benefit from the discrimination of global businesses now looking for relatively less risky countries?

Events in the Arab world have awakened global business to the ever-present, but often underestimated, dangers of political risk. New analysis in The Wall Street Journal, The Economist, and elsewhere warns of “contagion” and of a renewed sensitivity to political risk.

There are a number of countries with authoritarian political profiles akin to the Arab world’s, China’s most prominent among them. Chinese censors have shown themselves in recent weeks to be aware of this risk. The Wall Street Journal wrote recently of China’s vulnerability to “Nile Fever. “

In February, RBS polled emerging market fund managers about global business risk and prospects for emerging economies. The answers to three of the questions seemed to HC* to militate in favor of India being a relative beneficiary of current risk assessments, and a potential beneficiary (that is quasi-hedge against) of the potential shocks that these analysts are probabilistically forecasting (see below).

Mind the Gap!

Francis Fukuyama has even weighed in with an analysis based on a re-warmed version of Huntington’s classic “Gap” theory of political change (Political Order in Changing Societies, 1968). The argument goes like this: the rising expectations of ever more educated and dynamic aspiring classes are not met by the political institutions and leadership in their countries those aspiring classes will seek to change the system.

Fukuyuama and others think the CCP and the Chinese government are now able, and will be able in the future, to mind the Huntingtonian gap.

We will see. HC suspects that global investors and business will consider the Arab revolts as information that will cause them to revise upward their risk assessment of China.

China Uncertainty, India Risk

That risk assessment by China watchers is driven by uncertainty, not quasi-calculable risk of things like macroeconomic variables, electoral competition-driven policy changes (or persistence), or climate. These risks that can be calculated with probabilities are what shape Indian outcomes. And, while things like inflation, policy stasis, and corruption are high on the list of India-watchers, they are “normal” politics and economics. Fundamental change in India will always, now, be slow.

Everywhere in Asia, forecasters see “shades of grey.“ As direct and portfolio investors reevaluate, the question is not whether they will pull back (they will), but: where are political risks relatively lower?

Below is a table from a February, 2011 RBS research report called “EM Equity Flows by Country”, that shows recent equity flows from emerging markets. It shows that India has suffered along with the rest of the emerging economies. However, this also suggests that India is becoming less expensive for foreign buyers. As discussed below, domestic investment will pick up after early June and, if the monsoon is reasonable, it may pick up significantly.

Global businesses face a host of risks in India; some are national, many are sub-national or sectoral. But the scale of risk, while significant, is always mitigated by the multitude of channels for managing conflict and seeking resolution. Democracy, common law legal practice, jurisdictional arbitrage, and an increasingly pervasive business-friendly culture (as India’s inherent entrepreneurialism sheds its Nehruvian business constraints) provide a tedious, if predictably tedious, environment.

Rapid, traumatic Arab world-like events that would transform the entire national business environment in India are significantly less likely to occur in India for the reasons described above. Compared to China, Vietnam, Cambodia, or Malaysia (to take a few analogous emerging markets), the costs of tedium in India are offset by the banality of a slow-grinding, wide and deep federal democracy.

A good example of how this works is the November 2008 terrorist attacks in Mumbai or, sadly, the February 2002 massacres in Gujarat state. Short-term disruptions in the nation’s financial capital (2008) and in its most commercially dynamic state (2002) were soon followed by a return to the banal, steady state of commerce and growth.

If we take portfolio investment as the best proxy for risk, HC will be looking in the coming weeks and months to see how outflows of portfolio funds from India compare to those of China and the other countries mentioned above.

The drafters of India’s budget carefully weighed the measures they can take to send signals that will exploit the fears of “Nile Fever” in areas such as infrastructure, insurance and — surprisingly for the Indians — manufacturing. Explicit measures were announced in the budget to expand infrastructure investment through foreign portfolio investment into infrastructure bonds (supplemented with tax benefits and efforts to make investment and turnover more attractive by building a market for interest rate swaps).

The problem of inflation — a real but low-level risk for global business in India — is not one that can proactively be addressed in the budget. Fuel and agricultural subsidies will probably see less liberalization then would have been the case in a low-inflation year. Same for labor market reform.

India is not vulnerable to some of the key risks facing major emerging markets. HC has culled some key points related to India from the recent RBS informal survey on the debates about emerging markets in 2011.

Shocking! There is Corruption in India?

Corruption is the big issue on the minds of investors after revelations following the Commonwealth Games, the 2G Telecommunications scandal surrounding a minister in the ruling coalition, and stretching back to the Satyam accounting scandal of 2009.

The corruption itself is not a major new issue for growth and commerce as a first order issue. India has survived and persisted despite high levels of corruption for a long time. The effects on the process of governance (the Cabinet’s hours spent considering “real” issues, parliament’s passing of legislation, and possible major political instability in Delhi — is a second order issue that could provide a significant short-term shock to growth.

Indian Corruption ~ Compared to What?

But the question is: compared to what? Again, China and Indonesia are useful points of comparison. Corruption in India is regularly revealed and litigated, and there is sometimes even new policy devised to mitigate parts of it in the future. Investors with no appetite for corruption and the risks it involves should be even less willing to invest in countries with fewer political, media, and institutional mechanisms for dealing with corruption (even if, as is true for China, they have better scores on corruption from evaluators such as Transparency International).

As major new sectors grow as a percentage of the economy in India (or in any developing and transitional economy for that matter), the scale of business-as-usual graft will accord with the amount of money involved in such new sectors. Such is the case with the railway boom in China and the revelations regarding corruption there. Did anyone think that there was not corruption in the railway construction process? Economist Barry Naughton has long argued that corruption as side payments to “keep the development pace going” can be a tolerable and not fatal part of Chinese growth.

The 2G and other corruption cases in India recently are not a surprise and should not, as The Economist recently argued, be considered a producer of business- and investment-related uncertainty. Indeed, HC is arguing precisely the opposite, as a relative matter—that is, compared to China or, say, Indonesia.

What Canaries in the Chinese Coal Mine?

How will we know if the risk of a major disruption is building in the Chinese system? As always, HC will look for financial indicators.

 

Political Scientist Pei Minxin proposed a rough and ready model of regime decay and collapse for China.

If Chinese elites detected a threat to their monopoly on power, Pei wrote:

“Such a realization would prompt the agents of the regime to increase their discount rate for future income from the monopoly and, consequently, intensify their efforts to maximize current income while maintaining a high level of repression to deter challengers. In addition, the collapse of a foreign regime with similar characteristics may make fears of losing one’s own power even more acute and real. The net effects of the combination of a growing sense of long-term insecurity and the demonstration effects of a fallen fellow autocracy may be those akin to a run on the bank, with agents rushing to cash in their political investments in the regime, quickening the collapse of the regime’s authority.”

It seems that it will be hard to spot indicators of insiders “bets” on the demise of the regime, but I think that we should still try.

So, where would we look for evidence of Pei’s “run-on-the-bank theory”? If elites were “cashing in”, or making bets on the increasing probability of regime change in China, where would it be most likely to be observable?

I put this question to Victor Shih (Northwestern University) and William Hurst (UT Austen), whose suspicions are in agreement with some of my initial thoughts on this.

Bill Hurst: “First, there is the question of whether owners of capital are trying to move their money out of China because they think the Chinese economy may be in danger of decline or collapse. I agree with Victor’s original point that it is very hard to tell the difference between diversification and capital flight. What makes it harder in China’s case is the difficulty firms and individuals face in moving any money out of the country. Add on phenomena like roundtripping and “hot money” and I am not sure I can see a good easy way to trace or measure this.”

But, as Victor added, some are things we may want to track, such as listing of Chinese firms in the US (or at least off the mainland); reverse mergers (much the same as US listings); and real estate purchases in places like Hong Kong, Vancouver; and Sydney. All of this has been going on intensely for several years before the Arab revolutions, however. Will it intensify in the coming year?

This will be a test of how well the Chinese elite (particularly the Party and the government) can discipline its own members. The “cash out” conduits listed above will also be obvious to Party managers and it is as yet unclear if they are still capable of calibrating a constriction of these cash-out conduits (I think Pei should have turned the phrase around). HC’s sense is that there is still such capacity and that a good indicator, a “canary in the Chinese coal mine”, will be measures to constrict these “cash-out” conduits. So, where will the “run-on-the-bank”, “cash out” efforts turn to after the ones described above are constricted?

Back to India – May (or June) Flowers?

In May, there will be state-level elections in four Indian states (Kerala, Tamil Nadu, West Bengal and Assam). Three of those states are consequential contributors to GDP and commercial output in the country. Domestic investors are waiting to see that the dispensation in those states will be and what the state-level results mean for political stability in Delhi. HC predicts that domestic Indian portfolio investment (and domestic direct investment) will pick up after the elections. Already, in late March of 2011, UBS proprietary “Leading Economic Indicator” suggests a “mid-cycle” recovery in Indian industrial production.

HC is suggesting that mildly risk-acceptant investors may wish to reconsider their worries about “run-of-the-mill” issues in India such as corruption, labor-, insurance-, and retail-market reform. Those concerns should be put in context against the deeper uncertainties in China and the broader flight from other, smaller, and less-deep emerging economies.


China’s Trapped Transition: The Limits of Developmental Autocracy

 

To boost rural incomes, Beijing could ease micro-finance rules

March 23rd, 2011 by Matthew Rudolph

Tom Holland. South China Morning Post

China’s leaders talk a lot about lifting incomes for the country’s rural poor.

Their talk is unconvincing. In many cases the ground-level implementation of government policies hinders rather than helps wealth creation among the 54 per cent of the population who still live in the countryside.

Just consider how mainland banking regulations have obstructed the development of China’s micro-finance sector.

Despite recent criticisms comparing some micro-lenders in India to loan sharks, experience around the world shows that institutions which specialise in making miniature loans to very small businesses can play a big role in creating wealth and reducing poverty, especially in areas where small-scale entrepreneurs have little or no access to conventional financial services.

Yet micro-lenders are almost non-existent in China. Although the authorities have approved 1,000 micro-finance licences, the regulatory deck remains stacked against the emergence of the sort of lively small loan markets that have grown up in other developing economies.

For a start, would-be micro-lenders are burdened with onerous capital requirements. They must put up 100 million yuan (HK$118.6 million) of capital before they can open their first branch, with a further 50 million yuan required for every additional branch they open.

Worse, whereas conventional lenders can gear up their capital eight times over, micro-lenders may only gear up 0.5 times. In other words, a micro-finance company with 100 million yuan in capital may make at most only 150 million yuan of loans.

On top of that, micro-lenders in China are extremely constrained in the interest rates they can levy. Under the current regulations, they are not allowed to charge more than four times the benchmark lending rate.

At the moment that means they can charge an interest rate of up to 22.4 per cent on a six month loan. That sounds steep – until you consider it is only around half the interest rate currently imposed by credit card issuers in Hong Kong. As a result, micro-lending in China is barely an economic proposition.

Even so, some are prepared to try. For example, not-for-profit organisation Accion International opened a pilot branch in Chifeng, Inner Mongolia, in December 2009. Just over 15 months later, Accion has around 900 loans outstanding.

Customers are typically small businesses like shops, restaurants, farmers and small-scale hauliers, who borrow an average 30,000 yuan for terms of six to nine months to fund their working capital needs.

With no credit data available, Accion’s 30 staff are forced to gauge borrowers’ ability to service their loans by estimating their likely cash flow.

The assessments are time-consuming and labour-intensive. Credit officers will typically sit in a restaurant all day to count the number of customers coming in. As a result, says Accion’s US-based managing director Roy Jacobowitz, “Breaking even on first loans is almost impossible.”

Still, with a healthy increase in the number of new borrowers and a high enough level of repeat business, he hopes Accion’s Inner Mongolian pilot will be able to break even by the end of its third year in business.

That’s not an attractive enough prospect for most commercial lenders. As a result, says Jacobowitz, most micro-credit licensees in China have restricted themselves to making larger loans of 500,000 yuan or more to bigger, more established companies to finance stock purchases.

And that’s a shame, because there is evidence that the sort of small-scale investments Accion is looking to finance can yield big gains in rural income levels.

According to a new survey by rural development institute Landesa, since new land tenure laws were passed in 1998 some 22 million farm households in China have invested nearly 950 billion yuan – 43,000 yuan each – in diversifying their income, for example by building greenhouses on their land.

Almost all that investment was financed by personal savings together with money borrowed from friends and family. Fewer than 12 per cent of projects involved formal financing, whether from rural credit unions or agricultural banks.

Yet these investments have had a huge impact on earnings. According to the Landesa survey, in 2009 income directly attributable to these investment projects came to 454 billion yuan.

That’s 12 per cent of total rural income for the year and nearly four times the income from the government’s much-vaunted rural subsidies.

Clearly small investments can generate big increases in rural income. So it is surprising, if not perverse, that the authorities continue to obstruct the development of the sort of micro-lending needed to fund more of these small-scale projects.

The most common reason given is that the authorities are anxious to prevent the rural debt boom and bust they fear could follow liberalisation of the micro-lending rules.

Such a boom and bust scenario could well be a danger if the authorities were to embark on wholesale deregulation.

But weighed against the potential increase in rural incomes that could follow, the authorities’ concerns should not be allowed to prevent a partial easing of the current, overly-restrictive regulations.

Helping the poor, after all, is supposed to be a key objective of government policy.

Tom Holland. South China Morning Post

US Defense and Foreign Policy Planners are Learning to Deal with India, Slowly

March 13th, 2011 by Matthew Rudolph

The process of trying to sell Medium-Range, Multi-Role Combat Aircraft (MMRCA) to the Indian Ministry of Defense will be an important learning process for the American foreign policy establishment.

It may be possible that some smugness, or even hubris, crept into that establishment after concluding the Indo-US nuclear deal several years ago.

The trickiness of the nuclear liability issue in the wake of the nuclear deal should have been a corrective.

America and key departments of its executive branch such as the State Department and the Defense Department (as well as Commerce and eventually Treasury) will have to learn how to conduct relations with an India whose Grand Strategy and policy-making process is entirely unfamiliar.  Few in Washington understand the drivers and constraints of Indian foreign policy.

The recent events surrounding the Indo-US strategic dialogue make this clear.

The Telegraph – Calcutta (Kolkata) | Nation | US friendship faces ‘St Antony’ test.

Those events also present further evidence for HC’s theory of Indian Grand Strategy and foreign-policy-making as geographically, structurally, culturally and politically inclined toward “equipoise”.