My op-ed in Mint: Leverage in Sri Lanka

A stable balance between Sri Lanka’s ethnic groups better serves India’s interests than a partitioned island

In an op-ed in Mint I suggest how India might acquire greater leverage over the Sri Lankan government and use it to shape post-civil war situation.

Excerpt:

New Delhi’s half-apologetic, half-embarrassed attitude towards providing military assistance to Sri Lanka pushed Colombo into the arms of China, Pakistan, Iran and Libya. India was too timid to support, or oppose, any one side. As a result it not only finds itself little more than a bystander, but grasping for ways to avoid the consequences of the Sri Lankan civil war from destabilizing its domestic affairs.

It is possible to arrest this loss of leverage and, indeed, to reverse it. First, New Delhi should restate its position—to Sri Lankans as much as its own citizens—that it does not favour an independent Tamil Eelam. A stable political balance between the two main ethnic groups will better serve India’s interests than a partitioned island. Those who contend that an Eelam will be more sympathetic to India should contemplate the lessons of Bangladesh. Neither gratitude nor ethnic-cultural links will prevent a sovereign state from pursuing its interests. For India’s smaller neighbours, this means playing India against China, Pakistan or the US. Moreover, if an independent Eelam were ever to come about, its Sinhala counterpart is likely to align with China.

Second, New Delhi should signal to Colombo that it will calibrate bilateral relations to progress in rehabilitating the Tamil minority. Even as Colombo has sought to engage distant benefactors, it is aware that rebuilding its war-ravaged economy is impossible without good relations with India. Colombo needs urgent assistance from the International Monetary Fund. Given Western criticism over its human rights record, it will need India’s support to tide over even its short-term difficulties.

Third, India must play a constructive role in rebuilding Sri Lankan Tamil politics. In this regard, instead of merely grandstanding on behalf of a terrorist organization, politicians in Tamil Nadu would do well to cultivate ties with moderate Sri Lankan Tamil political formations. This would not only serve India’s interests, but also help secure peace and stability in Sri Lanka.

The LTTE’s defeat is an opportunity for India to re-craft its approach towards Sri Lanka. Unless New Delhi acts decisively, it risks its strategic frontiers being shrunk by Colombo’s wartime benefactors.[Mint]

Getting Colombo to listen

Post-war Sri Lanka can’t do without strong bilateral ties with India

Western countries are considering blocking an US$1.9 billion IMF load to Sri Lanka, not least due to pressure from human rights groups and Tamil diaspora groups. The Sri Lankan government, whose public finances and balance of payments are under pressure both due to the war expenditure and the global economic crisis cannot hope to entirely rely on China, Pakistan, Iran and Libya—countries that have provided military and economic assistance in the last few years. Colombo knows that it needs a good bilateral relationship with India not only to drag its economy out away from the approaching rough weather, but for long-term prosperity.

Many analysts lament that New Delhi has lost its leverage over Colombo. Here’s the way to regain it: the new Indian government must calibrate its bilateral relationship with the manner to the extent it listens to India. That includes encouraging President Rajapakse to rapidly move towards reconciliation, face down triumphal Sinhala chauvinism and deliver on his manifesto promise of equal rights for all Sri Lankans.

Indian knickers, Chinese twist

China, Arunachal Pradesh and the politics of an ADB loan

And now it is at the Asian Development Bank (ADB). A few days ago Financial Times reported that China had used procedure to delay the approval of ADB’s new multi-year financing plan for India. Because a small part of it, around $60 million, is for “flood management, water supply and sanitation” in Arunachal Pradesh (read ‘disputed territory of South Tibet’ in Chinese). This twisted the usual knickers: some commentators pointing out that China’s upstream damming of the waters of the Brahmaputra is one reason contributing to Arunachal Pradesh’s need for the water management project. Thanks to the elections, the politicians’ knickers remain untwisted. But what should you make of it?

First, it’s important to recognise that China’s actions are both pro forma and theatre. It is to be expected that China will signal the existence of the territorial dispute at every opportunity. At the ADB while it postponed a board meeting that was to have approved the financing package for India, it is highly unlikely that it will go to the extent of completely sabotaging it (expect the plan to be approved at the next meeting). To wreck it would be too direct, too brazen a signal that it puts politics before economics at multilateral fora. It can’t afford that at a time when the G-8 is making way for the G-20 and increasing China’s clout in global economic governance.

It is unclear if China’s neurotic reaction to the word Arunachal Pradesh was due to its ADB delegation playing safe, or indeed a well-considered position approved by the higher authorities in Beijing. If it is the latter, then it stands to reason that India, and the rest of the world, must recognise—and respond—to the politicisation of multilateral institutions like the ADB.

Second, for its part, the ADB must realise that it is, in the end, a bank. And a bank that bases its lending policy on the basis on non-prudential considerations—not least with its largest and best customer—is asking for trouble. This is something that the ADB’s governors must keep in mind at their future meetings.

Finally, there is the question why the Indian government needs the ADB to borrow $3 billion for development projects? One explanation is that borrowing comes at relatively easier terms. Fair enough: but to the extent that such terms act as crutches, weaken or rule out market discipline and crowd the private sector out, such financing is a curse in the longer term. Herein lies the tragedy—the UPA government not only frittered away five years of unprecedented opportunity, but actually crippled India’s public finances. If it had not done so, India would be less reliant on multilateral loans…and better resist unfriendly actions like the one by China.

New words for a new world

If they don’t exist, they have to be invented

Regular readers will be familiar with The Acorn’s distaste for hyphenation and conjugation of China and India. Sung Won Kim, David P Fidler, and Sumit Ganguly have come up with a better way to describe the emerging geopolitical salience of India and China—they call it the “Eastphalian geopolitical order”. Of course, you need to have a little bit of a background in history or international relations theory to get it.

Niall Ferguson, on the other hand, has invented a literally ghastly word to describe “the partnership between the big saver and the big spender”—“Chimerica” is a grotesque reminder of how the global financial crisis was born out of geo-economic imbalance.

A debtor’s capacity to project military power

…hinges on the support of its creditors

Lending money to governments to fight wars has a very long history, giving creditors a degree of influence over debtor monarchs or governments. But at least four factors make the situation in the early twenty-first century different. First, the global economy—and not least global financial markets—are connected in an intricate sense. Second, the creditors are not only sovereign but in several instances also from countries where the state-owned companies are entrenched economic players in their own right. Third, the individual and combined size of the sovereign wealth holdings is unprecedented. And finally, the geopolitical relationships between the principal debtors and creditors is competitive and adversarial, if not antagonistic.

In this light, the Council on Foreign Relations has published a special report by Brad Setser on the sovereign wealth and sovereign power. It argues “that the United States’ current reliance on other governments for financing represents an underappreciated strategic vulnerability.”

The willingness of foreign central banks—which remain a far more important source of financing for the United States than sovereign wealth funds (SWFs)—to build up dollar reserves has long provided a stable, but limited, source of external financing. But the United States increasingly relies on financing from central banks that already hold far more reserves than are needed to assure their own financial stability. It is true that foreign central banks have an interest in keeping the dollar strong. But the United States might have more to lose from a disruption of this relationship: financial flows create mutual interdependence, but the interdependence is asymmetric. The longer the United States relies on central banks and sovereign funds to support large external deficits, the greater the risk that the United States’ need for external credit will constrain its policy options. [CFR]

While much of the recent analysis on sovereign wealth has been from an economic standpoint, Dr Setser’s report provides directions for a realist appreciation of the issue. To the extent that they give rise to a balance of terror, it is possible to see excess foreign reserves holdings of central banks and large sovereign wealth funds as strategic weapons. How these ‘weapons’ work, how they might be employed and how they might be deterred or defeated are all questions that should concern geopolitical strategists.