Fattening the Pakistani elite

…might work

In today’s Viewfinder at Yahoo! India columns Amit Varma says he sees “three distinct kinds of forces in Pakistan.”

One, the jehadi groups, which grow larger and more extreme because of self-perpetuating feedback loops, but are by no means the whole country. Two, the military establishment, whose incentives, as I wrote in a column three years ago, are aligned towards continuing the conflict with India. They have supported the jehadis, and have waged proxy wars through them, but are now under pressure to withdraw this support. And three, civil society, which wants what people everywhere want: peace, prosperity and a good future for themselves and their children. This, I believe, is most of Pakistan.

The stronger civil society gets, the weaker the support for extremism, and the more tenuous the military’s hold on the country. This is why I support increased trade and cultural exchanges with Pakistan (which is mutually beneficial anyway, as it’s a positive-sum game). I don’t think it’s contradictory to take a hard line towards Pakistan’s terrorist infrastructure and a soft line towards their artists and businessmen. Both have the same end in mind. [Yahoo! India]

Like Amit, I too support increased trade and cultural exchanges with Pakistan. But for a very different reason.

Far more than civil society, trade—more than culture—will benefit Pakistan’s elite society. To the extent that it does, and further, to the extent that this creates vested interests among Pakistan’s rich and powerful to prefer stable bilateral relations, better trading relations will be good for India.

Since there is no direct empirical evidence, this is only a hypothesis. But it is verifiable, involves modest risks and is reversible. Which is why I have argued that India should consider unilaterally dropping trade restrictions. Cultural exchanges might not work the same way because they won’t fatten up the Pakistani elite as commerce is likely to.

So you do not need to believe that a Pakistani civil society will rise, will challenge extremism and dismantle the military-jihadi complex to consider the merits of the trade argument. But it’s important to recognise that better trading relations will, at best, reduce Pakistani attacks against India. Destroying the military-jihadi complex is an entirely different and a much more important project.

It was wrong to leave Pakistani cricketers out

It is in India’s interests to be the subcontinent’s talent magnet

If you have been reading this blog for some time you might have noticed that The Acorn has consistently been against any measure that falsely conveys an impression that Pakistan is no longer a sponsor of international terrorism in general and proxy-war against India in particular. That is the reason why this blog has opposed using a cricket series in Pakistan to initiate a ‘peace process’. And that was the motivation behind the April 2005 online banner campaign against inviting General Musharraf for a cricket match.

No to Musharraf - April 2007 campaign
The "No to Musharraf" campaign - April 2005

India must resolutely work towards the dismantling and eventual destruction of the Pakistani military-jihadi complex. Well-meaning but strategically unsound moves—from officially contrived ‘peace processes’ to grotesque media campaigns—are counterproductive towards this end. Even serious diplomatic dialogue with the Pakistani government is unlikely to lead to anything productive, given the chronic powerlessness of the civilian government and the unremitting hostility of the military establishment.

But does this mean India should close its doors to individual Pakistanis who might wish to travel, trade, work or study in India? Not at all.

It is in India’s interests to be a magnet for the subcontinent—and the world’s—talent. This has historically been a source of India’s civilisational strength, and will continue to enrich the country in the future. Indeed, like it is for the United States, openness to foreigners can be a competitive advantage for India, because China will find it much harder to do so. Also India is the only nation that has the capability to remain open to victims of cultural illiberalism and persecution (even if competitive intolerance has diminished its capability to do so). Now, given the nature of the threat from Pakistan, there is good reason to be extremely careful in issuing visas, but it would be strategically counterproductive to close doors indiscriminately.

That is why it was wrong of Indian Premier League teams to drop all Pakistani players from the competition—if there was a risk of their not turning up due to bilateral tensions, then that risk could well have been reflected in the price during the auction. [Note: I am only interested in cricket when India wins by a large margin. But my INI co-blogger Dhruva Jaishankar is a genuine cricket fan. Read his take at Polaris]

Just as it is wishful thinking to believe that the Pakistani military-jihadi complex is interested in a settlement with India on anything other than its own terms, it is self-defeating to turn away influential and talented Pakistanis from developing vested interests in India’s success. Unilaterally dropping trade restrictions and unilaterally allowing Pakistani cricketers to play in India is entirely consistent with weakening the military-jihadi complex.

The world’s punching bag

The fault, dear Mr Naik, is not across the Himalayas

Mint has a very good editorial in response to the accusation that China is “systematically killing” Indian manufacturing.

Admittedly, there are geopolitical considerations at stake for India. But as the trade deficit with China widens over the last few years, it’s giving vent to populism, not some concerted strategy…
And if India wants its domestic manufacturing to compete at comparable costs, it should stop trying to block outside firms, and ask how it can better internal conditions. But that would mean a concerted policy that improves financing conditions, not to mention land acquisition clarifications and better regulations. Protectionism is just so much easier, no? [Mint]

Urban Indians lead the world in support of free markets


Ajay Shah draws attention to some very interesting findings from a Pew Global survey. To the question “whether you completely agree, mostly agree, mostly disagree or completely disagree with the following statements: Most people are better off in a free market economy, even though some people are rich and some are poor“, 81% of the (mostly urban) Indians said they agreed. As Dr Shah writes “In 2002, India was halfway in the list with 62% support. In 2009, India is at the top of the list, with 81% support.”

Similarly, to the question “What do you think about the growing trade and business ties between (survey country) and other countries – do you think it is a very good thing, somewhat good, somewhat bad or a very bad thing for our country?” 96% of the Indian respondents said that it’s a good thing, compared to 88% in 2002.

A few years ago (circa 2005), an India Today survey showed that the urban middle class wanted the job security of the public sector but the income and opportunities of the private sector. Are urban Indians changing their mind?

Dr Shah believes that a combination of demographic change (the median Indian is 29), experience of sustained economic growth and the absence of the need to protect a welfare state might be the reasons why the urban Indian ended up on top of the table.

Raging in Beijing

Rio Tinto is the latest of a series of mistakes that China has made recently. Why, and why now?

“Drawing that direct link” the Wall Street Journal says “between the fortunes of (Chinese) steel mills and the interests of the Chinese state has alarmed foreign officials and businesspeople.” It refers to the arrest—on espionage charges—of four employees of Rio Tinto, a British-Australian mining company, amid tense negotiations over the price of iron ore. Coming as it does a few weeks after Australian shareholders rebuffed an attempt by China’s state-owned aluminium company to acquire a bigger stake in Rio Tinto, the possibility exists that China’s move was in part motivated by a sense of retribution.

It is not uncommon for big commercial negotiations to involve an element of trying to find out what the other side’s positions are. Sometimes, the methods used can cross the line of legality and become criminal acts. But to term such acts as stealing “state secrets” and assert that they harmed China’s “economic interests and economic security”, while being technically correct, are clearly the use of state power in the service of the commercial interests. By implication, the commercial interests of China’s state-owned firms are in the service of state power.

One key risk for Beijing is that its actions will set back years of efforts to persuade the world that Chinese state-owned enterprises are independent, commercially run entities, lawyers say. Cash-rich Chinese state companies, scouring the world for deals, must present themselves as profit-driven independent entities to overcome suspicions that they are fronts for the Chinese government.

But the Chinese government’s argument that these companies’ interests are identical with that of the state could now be undermining that effort. [WSJ]

That’s bad news for those who took that argument at face value, and there certainly were many of those. But the reality is, as fellow INI blogger V Anantha Nageswaran has argued, “right now, China has neither a command economy nor a market economy. It has a political economy.” Or Greg Sheridan, one of the most perspicacious Australian commentators, puts it baldly: “One of the most important lessons to come out of this mess is the absolute shattering of the myth that Chinese government-owned commercial entities are not part of China Inc.”

The Rio Tinto case should sensitise the Australian government to the folly of a natural resource exporting economy depending on one big buyer.

But the more important question is: why has China shed the pretence now? It is unlikely that China’s leaders would want the “peaceful rise” theory to be shattered over relatively trivial matters as the price of iron ore. Or for that matter, over an ADB loan programme to India. China cannot aspire to topple the US dollar as the world’s reserve currency unless it has the support of countries such as India and Australia.

One explanation is that it’s gone into their head and the Chinese leadership is flexing its muscles ignoring Deng Xiaoping’s advice to “keep your head down” (of course, his aphorisms were a lot less prosaic).

The other is that the balance of power within the ruling Communist party has become unstable—the factional intrigues within the leadership have resulted in several embarrassing or self-defeating incidents in recent months: making the ADB a platform to push a bilateral dispute ended in China’s total isolation; a poorly-conceived, poorly executed internet monitoring policy that ultimately ended up sparking a trade dispute with the United States; Pyongyang’s belligerence has killed the six-party talks, and undermined China’s regional standing; ethnic rioting in Urumqi and Hu Jintao’s absence at the G-8 summit prompted renewed concern over China’s political stability; and, of course, haggling over the price of iron-ore has successfully alienated the most China-friendly Australian government in more than a decade.

So much bungling in such a short period of time—from a regime that is seen as a deliberate, strategic player—rules out mere incompetence. While an outright leadership struggle is be unlikely, it could well be that a fratricidal war of succession is raging in Beijing.

The absurdity of restricting Basmati rice exports

Why is the UPA government helping Pakistani exporters at the cost of Indian farmers?

Imposing an export tax on rice was a bad idea; the Indian government should never have done it. It only hurts India’s rice farmers. (see these posts)

And in the international market for the high-end Basmati rice, the Indian rice tax gave a competitive edge…to Pakistani rice exporters.

The Indian government lifted the absurd export tax today. It also lowered, but still retained a floor price on Basmati exports. It is inexplicable why there should be an export restriction on a premium variety of rice. And it is unfathomable why the UPA government should think that hurting Indian exporters and lending a hand to Pakistani ones is somehow a wise thing to do.

The time to drop barriers to trade with Pakistan

…is now

Pakistan’s economy is in a tailspin. Since the second last thing that the international community wants in Pakistan is an economic meltdown, Friends of Pakistan are coming together to provide emergency foreign aid.

Now how Pakistan’s western and Middle Eastern ‘friends’ want to spend their money is their call. For India’s part, this is an excellent opportunity to liberalise bilateral trade, unilaterally if necessary. That’s why the Manmohan Singh-Asif Zardari meeting falls short: it just doesn’t go far enough on free trade.

Just how is Pakistan going to ‘export more’ and ‘import less’ in the medium term unless it expands trade with India? While there is some awareness in Pakistan that it will always need to rely on the charity of its ‘friends’ unless it normalises its relations with India, the fact that such charity comes rather easily creates disincentives for Pakistan to drop its self-defeating approach to bilateral trade. Perhaps some ‘friendly’ advice is in order.

One China Policy

There isn’t one.

This post was first published in November 2006. As it is pertinent to the current situation it is reproduced here, almost in its entirety

In the debate over China, many of those with any experience actually dealing with China on political issues had advised caution. Many of those whose primary experience of China has been through trade and investment advocated closer ties. The oversimplified question on everyone’s lips was a cliche: Is China a friend or foe? That, though, is a wrong question to ask. The inherent anthropomorphism in the framing of this question confuses the issue, for relations between states are not like relations between people.

The essential fact is that on a fundamental level two powers as large and as proximate as China and India cannot rise without competition. And in most spheres of this competition, it is India that is catching up.

Three games
There is competition for regional and global influence: China is taking leadership in regional groupings where it has been a member, and entering groupings where it has not. It is now the most important member in East and Central Asian groupings. It has secured a good foothold in South Asia. And it is knocking on the doors of Africa. India, on the other hand, has secured a greater role for itself in South East Asia, where it has been welcomed because it can help balance China’s influence. Japan too has recognised that India will be a necessary element of the balance of power in East Asia. [See Harsh Pant’s piece in the April 2008 issue of Pragati]

Then there is competition in the quest for energy sources and, soon, natural resources. Here too, China is ahead, but India has begun to up its game in energy diplomacy. The two are already competing in securing fossil fuels. With the India-US deal bringing India into the nuclear mainstream, the competition will extend to securing nuclear fuel too. This decade will also see the two countries on a worldwide hunt for natural resources as their economy develops.

And of course, there is competition for investment and trade, which will only intensify as China becomes proficient in the English language and India gets its manufacturing act together.

…three strategies
So yes, there’s a contest going on all right. This does not, however, call for visceral hostility. Each competition has its rules. They cannot be wished away. This is a moment of profound change in the global balance of power and India would do well to play the game according to what the rules are (and not, as in the past, according to what the rules ought to be). China’s objective—couched as it may be in the language of ‘peaceful rise’ and ‘harmonious world’—is to become the pre-eminent power in Asia. It is a game that requires China to improve its relative power. There are two strategies for winning: one, for China to develop its own power; and two, for China to contain its competitors. The principal challenge for India will be to counter this. Nuclear weapons have made it unlikely that the contest will escalate to war. It is necessary to invest in maintaining the conventional and nuclear deterrence to keep it that way. They may be important in their own right, but Tibet, Tawang (i.e. the border issue) and Taiwan are both instruments and shock absorbers in this geopolitical game.

On the surface, the energy and resources game is zero-sum, and for that reason, the prudent strategy for both parties is to compete with each other. There may be scope for co-operation; but such co-operation will not be in India’s favour until it is able to negotiate with China on a peer-to-peer basis. At this time, India should focus on closing the gap, though not necessarily taking the same route as China.

It is a matter of basic economics that greater trade and investment will leave both countries better off. The rules of the game here are entirely different from the rules of the geopolitical or the energy game. There is no good reason—not even ‘national security’—for restricting trade with and investment from China. Those concerned with national security must adapt to the contemporary era of information abundance. Although this is changing, the Indian government is playing the geo-economic game according to geopolitical rules (and perhaps, vice versa).

The upshot is that India will have to counter China’s geopolitical moves, keep pace in the quest for natural resources and engage China in trade. There is, in the end, no simple one China policy.