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Thesis & Antithesis

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greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

21 July 2005

India’s moment?

It bodes ill for a country that used to be the non-aligned state par excellence to be defined by its opposites—think about Indian economics and China comes to mind; think about Indian security and there stands Pakistan. On one hand, this highlights India’s challenge—how to stop seeing itself through the eyes of its neighbors and think about India as India and not as China or Pakistan’s rival. But on the other, it speaks to India’s promise: bridging the two non-Western centers for security, energy, and industry—the Middle East and Central Asia with East Asia—it has a vital geopolitical role. Its course will make a big difference for India, for Asia, and for the world.

What is staggering about India is that it is a democracy—the largest in the world too; it is also the world’s second most populous Muslim country (after Indonesia), its economy is growing at 6%, and though it is still a developing country with a large rural population (60%) and plenty of people below the poverty level (26%), its firms in IT and pharmaceuticals are industry pioneers. It is not hard to see, then, that there are many bets placed on India: how Muslims can interact with non-Muslims, whether developing countries can grow economically with democratic politics, how firms from poorer countries can jumpstart the productivity cycle, and many more.

DOMESTIC POLICY

India’s democratic politics are a source of pride, especially when contrasted with China’s authoritarianism. That India is a democracy also works well for its soft power—the idea of an English speaking democracy in South Asia excites many Westerners who find in that much that is familiar in a region where the unfamiliar reigns. Yet this foreign stereotype has created expectations and realities that have affected India’s course. India is an English speaking country that Westerns feel comfortable working with; but when foreign investors need to make money, they choose China over India, by a factor of ten to one (1). India’s English speaking status has translated into a lot of outsourcing of Western services to India, but the West continues to manufacture products in China (2).

The synthesis of foreign expectations with a strategic rivalry with China has led India to focus on industries such as pharmaceuticals and IT, where it has a clear advantage over China and where its success is bound to increase (3). But this is not a development strategy; there is good reason to think that India has understood globalization all too well, while forgetting the basic lessons of Economics 101. Living standards, any economist will tell you, come from two places: increased productivity and a reallocation of resources to more productive uses.

Instead, India seems caught into the rhetoric of globalization heard in Western circles—that survival depends on international competitiveness (4). Hence, India has firms that compete internationally, while it remains unable to make structural changes that really matter—to foster entrepreneurship, to transfer labor from agriculture to industry or services, and to move people out of poverty. And if there is any doubt about this failure, ask Atal Behari Vajpayee, the former prime minister whose Bharatiya Janata Party (BJP) lost the elections last year, a result interpreted by his failure to spread the fruits of economic growth.

At the same time, democratic politics often stand in the way of change. India faces a critical shortage of electric power—11% short of demand if you believe Manmohan Singh, the current prime minister (5). But local politics dictate that many farmers get electricity for free (as they do in Maharashtra), meaning that Indian companies have to pick up the tab in order to make electricity companies somewhat solvent. Even India’s privatization efforts seem driven by politics rather than economics, and are meant to fulfill a government promise to reduce the 5.4% fiscal deficit to a promised 4.8% (6). And inflexible labor laws also reflect political rather than economic needs; as Arvind Panagariya, a professor of Indian Political Economy at Columbia, wrote, “under a key law enacted in 1982, firms that employ 100 or more workers in India cannot fire them under any circumstances. This law has understandably deterred multinationals as well as large domestic firms from entering labor-intensive manufacturing” (7).

On the path to development, there is no need to think that democracy is an obstacle; but to be sure that it is not, India will have to acknowledge that democracy’s strength is that it offers a useful outlet for public discontent; hence, India is better equipped than, say, China to deal with a downturn in economic growth. Democracy can be productive when it includes people whilst not catering unconditionally to their whims. In other words, India needs to upgrade its technocracy and ensure that its political system remains democratic without turning into mob rule where unreasonable demands (such as that electric power has to be provided for free) will be catered to.

FOREIGN POLICY

Indian foreign policy just scored a huge diplomatic victory: it was finally recognized by the United States as nuclear power. In practical terms, this means that India will have access to civilian and military technology that it did not before (8). This forms a major strategic shift in America’s thinking; as George Friedman, of Strategic Forecasting Inc., writes,

“The United States, which until a few years ago regarded the Indian naval build-up—based on Soviet technology—as a threat to U.S. control of sea lanes in the Indian Ocean, has now completely reversed its posture. … This, by the way, has the Pakistanis worried. Islamabad clearly understands that its status as Washington's ally in the U.S.-jihadist war will go only so far in terms of duration and dividends for Pakistan. In other words, while India gets a long-term strategic relationship with the United States, Pakistan's relationship is viewed as short-term and tactical.

“U.S.-Indian collaboration began intensely shortly after 9/11. Part of it consisted of a mutual interest in manipulating Pakistan; part of it had broader implications. As the United States began to view the Muslim world as an unreliable and threatening entity, it started to see India in the same light as Israel. It was a potentially powerful ally that, in spite of its hostility to the Islamic world, or perhaps because of it, could be extremely useful” (9).

There is no doubt that India is privileged to be a democracy and an English speaking country, exuding a confidence in Americans that it can serve as a reliable ally in the region—an ally driven by more than a mere commonality of interests. But there is also no doubt that America’s thinking is very much driven by its increasing perception of China as a strategic rival instead of partner. India is fortunate that it’s economic rise has not provoked any backlash in America—last year’s frenzy over outsourcing can hardly be compared to the constant American popular demonizing of China for issues ranging from its currency peg (recently re-valued) to the bid by CNOOC for Unocal.

Geography dictates that India and China will be rivals; they have already warred with one another in 1962 over a border dispute. Their increasingly insatiable appetite for natural resources will translate into a scramble for accessing resources in Central Asia. India has already courted Iran, and is looking into getting gas from Myanmar and Turkmenistan (10); it also has longer term plans to build a pipeline through Pakistan to bring Iranian natural gas into Northern India. China too is looking for allies in the Central Asia region, hoping it can outmanoeuvre the Indians (and others) in pursuit of new energy sources.

Energy aside, India and China are likely to engage in a naval competition (11); the Straits of Malacca, between Malaysia and Indonesia, are one of the world’s most vital geo-economic routes—a quarter of the world’s maritime trade goes through there (12). They are also a prime target for terrorist attacks, which have been growing in the past few years. India and China’s ambitious are likely to include a long-term plan to secure their vital sea lines, including the Straits; what makes this worrisome is that the Straits lie at the natural boundary of the areas that India and China would aspire to control—the seas that surround the Straits are the Indian Ocean and Bay of Bengal on the one side, and the South China Sea on the other.

India’s strategic cooperation with America, thus, is a key development in the region, and in particular for China’s thinking—there is no worse feeling for a country, superpower or not, than to feel encircled. Looking around, China sees India, South Korea and Japan, and its sees America too. India, on the other hand, fears Pakistan and it fears China; this is likely to cause a zero sum mentality where both countries will perceive their neighbours as either with them or against them, spurring a diplomatic race to court them to their side before the other country does.

The likely geopolitical trend in the region, therefore, is an increasing energy and security competition between China and India—a competition that will likely spill over into what economic strategy works best for a country, what politics should developing countries have to grow and so on. From this competition, it is hard to know who will triumph, and it is harder still to predict whether the triumph will be settled in war. The only sure thing is that America will be watching from the sidelines and will be very pleased for the agreement that it made with India this week.

References:
(1) Arvind Panagariya, “A Passage to Prosperity,” Wall Street Journal, 14 July 2005
(2) “Whereas the share of industry in China’s GDP rose from a high level of 42% in 1990 to 51% in 2000, it remained virtually stagnant in India. By contrast, Indian service grew rapidly, expanding its share from 41% in 1990 to 48% in 2000. This trend has continued in the last five years,” quoted from Panagariya, “A Passage to Prosperity”
(3) “Ranbaxy, the largest Indian pharmaceutical firm, now derives nearly half of its business from America and, says Davinder Brar, its chief executive, it is on the prowl for acquisitions in France, Germany and Italy. One day last month, shares in Pfizer, an American giant, fell by 3% after an analyst's report drew attention to Ranbaxy's patent challenge to its anti-cholesterol drug, Lipitor.” “Patently Ambitious,” The Economist, 4 September 2003
(4) Paul Krugman’s “Competitiveness: A Dangerous Obsession,” from the March / April 1994 issue of Foreign Affairs remains the authoritative take on this idea.
(5) “Powerlessness,” The Economist, 2 June 2005
(6) “Selling minority stakes, [the Ministry of Disinvestment] notes, give the impression ‘that the main objective of the government is to obtain funds for reducing its fiscal deficit, and not to improve performance or governance’. Especially, it might have added, if the fiscal year ends on March 31st, an election is due on April 20th, and the offers for sale are bunched in an unprecedented splurge between February 20th and March 13th.” “Cashing in,” The Economist, 4 March 2004
(7) Arvind Panagariya, “A Passage to Prosperity,” Wall Street Journal, 14 July 2005
(8) “For example, India will be allowed to purchase Aegis technology, which is designed to protect naval vessels -- and battle groups -- from anti-ship missiles. So far, only Japan has acquired the technology, partly because of its cost. In addition, New Delhi will be able to purchase anti-submarine patrol aircraft.” George Friedman, “US-Indian Relations and the Geopolitical System,” Geopolitical Intelligence Report, Strategic Forecasting Inc, 20 July 2005
(9) George Friedman, “US-Indian Relations and the Geopolitical System,” Geopolitical Intelligence Report, Strategic Forecasting Inc, 20 July 2005
(10) “Aiyar’s Dream,” The Economist, 24 February 2005
(11) George Friedman believes otherwise; he writes, “A not-so-hidden issue at the summit in Washington was China. Sino-U.S. relations are deteriorating fairly rapidly. There was much speculation about India being an Asian counterweight to China. We have no idea what this means, since geographically China and India occupy two very different Asias. The United States doesn't need a nuclear counterweight to China, and China is very far from becoming a major naval power capable of projecting force outside of its regional waters. By that, we do not mean sailing into these waters, but fighting, winning battles and sailing home. The nuclear technology agreement that Singh obtained in Washington increases the likelihood that China is not going to project force west of Singapore. On the other hand, it was never likely to do so.” Friedman, “US-Indian Relations and the Geopolitical System,” Geopolitical Intelligence Report, Strategic Forecasting Inc, 20 July 2005
(12) “Going for the jugular,” The Economist, 10 June 2004

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2 Comments:

Anonymous Sanjay said...

Yet another lame divide-and-conquer post about China vs. India. There is not one damn good reason that India and China "must" or even "should" be enemies. They have a very long history of amicable trade and only a very tiny (1962) history of a minor war. In contrast Britain has a 150-year history of brutalizing and murdering Indians to the tune of 40 million Indians killed (read up on "Bengal Famine" sometime, you might learn something), up until they were kicked out in 1948. Oh, and the British were also infamous for the divide-and-rule strategy to divide
Indians against each other, and set Indians against other enemies of the British (e.g. the Afghans in the Anglo-Afghan Wars in 1800's). This India-vs-China crap is just that-- crap, steamed up and repackaged.

"That India is a democracy also works well for its soft power—the idea of an English speaking democracy in South Asia excites many Westerners who find in that much that is familiar in a region where the unfamiliar reigns." "India is an English speaking country that Westerns feel comfortable working with"

Yet another ignorant reference to India as an "English-speaking country." We are not a damn Anglophone country-- please get that into your head!!! There are perhaps around 40 million English-speakers in India, a very small proportion of the population, and these days people are increasingly studying non-English languages (like e.g. Chinese-- go figure) in Indian schools, while strengthening India's indigenous languages like Hindi, Tamil, Kannada, Malayalam and Bengali for important business. People from Britain and the US (and others who don't know better) think that, "Oh, India was a British colony, so it must be English-speaking." In fact almost none of the British colonies (aside from the white-settler colonies) became English-speaking-- all of us have returned to embrace and build up our indigenous languages. Some Brits and Americans still seem to fancy that they're special in India's history (yeah, maybe special in the sense that the British committed the worst mass genocide in history against the Indian people after the national uprising in the 19th century), but they're fantasizing. We have NO LOYALTY whatsoever to the British culture or language; just like Japan or China, we use English to the extent that it's useful for us economically (or if we immigrate to the US or Britain, as many of us have). But Indian history stretches back millennia before the British, and India had a mature, advanced civilization while British people were still picking lice out of their hair in the forest. The British period was a short and insignificant one for us, except in the number of Indians that the British managed to kill.

"India’s English speaking status has translated into a lot of outsourcing of Western services to India, but the West continues to manufacture products in China (2)."

And now Indians are scrambling to learn Spanish, French and Chinese more than English since outsourcing to English-language companies is declining, while it's on the rise for other countries.

"The synthesis of foreign expectations with a strategic rivalry with China has led India to focus on industries such as pharmaceuticals and IT, where it has a clear advantage over China and where its success is bound to increase (3)."

Both China and India are strong in these areas (maybe you missed the memo about all the US pharmaceutical companies moving to China?), and on the converse side India is much stronger in manufacturing (traditionally China's bailiwick) than many people think.

"India will have to acknowledge that democracy’s strength is that it offers a useful outlet for public discontent; hence, India is better equipped than, say, China to deal with a downturn in economic growth."

Both India and China are rent with corruption at all levels, but we both have mechanisms to ride out storms. You're naive to assign either of us an advantage in this area.

"Indian foreign policy just scored a huge diplomatic victory: it was finally recognized by the United States as nuclear power. In practical terms, this means that India will have access to civilian and military technology that it did not before (8). This forms a major strategic shift in America’s thinking; as George Friedman, of Strategic Forecasting Inc., writes,"

One of the most vastly overrated news events of the past year. Every major country has de facto accepted as a nuclear power, and the US's main interest is ensuring that our nuclear buildup stays within a limited zone, and is used mainly for peaceful uses (which IMHO is a pretty decent idea in any case).

"As the United States began to view the Muslim world as an unreliable and threatening entity, it started to see India in the same light as Israel."

Horseshit. While I like many other Indians froth at the stupidity of Pakistan and a fringe subset of the Muslims in India, the vast majority of India's Muslims (outside of Kashmir at least) are actually pretty well integrated and not radicalized as they are in Europe. And when it comes to Israel-Palestine we're neutral at best-- we're not particularly thrilled at the way the shitty lot the Palestinians have gotten, and we're not happy at all at American manipulations in Iraq, since this gives fodder to bin Laden to stoke things up in Kashmir. Don't get fooled by superficial similarities-- we're not about to join some US crusade here.

"There is no doubt that India is privileged to be a democracy and an English speaking country,"

You keep repeating this idiotic line. First of all as I said we are not an English-speaking country and never will be, and second there is nothing "privileged" about being an English-speaking country. Zimbabwe, Nigeria and Pakistan actually are English-speaking countries (Musharraf can hardly even speak Urdu), yet this obviously hasn't helped them much, has it?

"exuding a confidence in Americans that it can serve as a reliable ally in the region"

We are *not* a US ally-- we have our own interests and we will serve them, whether that means alliance or tensions with the US. Why should we ally with the US when the US has hardly shown itself to be reliable as an ally to us? We contribute more to the UN than any other country, get our sons killed in the peacekeeping forces and pay more than our dues, yet when it comes time for us to get a rightful seat on the UN Security Council, the USA turns around and puts the kibosh on it. The USA's attitude is that it's fine to feign alliance with us so long as they think they can extract something from us, but when it comes time for us to assert some power for ourselves, the US turns around and screws us. Do you think we're that stupid???

"But there is also no doubt that America’s thinking is very much driven by its increasing perception of China as a strategic rival instead of partner."

Translation: "We neocons jerk off to fantasies of Westernized, still mentally colonized Indian coolies doing our bidding for us and fighting proxy wars for us against the Chinese." Forget about it! We are not falling for the divide-and-rule plan again.

"India is fortunate that it’s economic rise has not provoked any backlash in America—last year’s frenzy over outsourcing can hardly be compared to the constant American popular demonizing of China for issues ranging from its currency peg (recently re-valued) to the bid by CNOOC for Unocal."

You really are an idiot, aren't you??? No backlash!!??? Then what's with all the hatred being directed India's way by angry Americans and Brits who accuse Indians of stealing their jobs via outsourcing? Indian call center workers have to quit because of the daily abuse they get from callers in the US and Britain. The animosity against India is as bad or worse than that directed against China.

"Geography dictates that India and China will be rivals; they have already warred with one another in 1962 over a border dispute."

No, it does not dictate anything. Sweden and Finland are geographically close and drawing on the same resource pool, but somehow we don't hear much about angry Swedes preparing for war against Finland. Same with e.g. Argentina and Chile. That 1962 war BTW was little more than a minor skirmish, compared to the many rebellions and bloody people's wars against Britain in the 1800's.

"India’s strategic cooperation with America, thus, is a key development in the region, and in particular for China’s thinking—there is no worse feeling for a country, superpower or not, than to feel encircled. Looking around, China sees India, South Korea and Japan, and its sees America too."

Using China's neighbors like this is every American neocon's wet dream. Wake up fools! India will not be doing your bidding for you. In fact, India and China have recently been collaborating on aspects of a trade alliance, and China (as it haltingly institutes its own local democratic forms) is in fact using India as a mentor. So in fact, India and China will soon be the world's two biggest strategic ALLIES. Must make you quake in your shoes, huh? (And BTW-- WTF does Korea have to do with this? Korea is very friendly with China, and even Japan has been investing heavily there, with relations much better than they occasionally seem at the surface. By your analogy, the US should fear being encircled by Canada and Mexico.)

"The only sure thing is that America will be watching from the sidelines and will be very pleased for the agreement that it made with India this week."

Bullshit. If the US tries any of the divide-and-rule bullshit used by the British, the US will very much be drawn in and push China and India further together. The fact is, we're onto you-- we know the divide-and-rule strategy and we're not falling for it. Don't think you can set us against each other, and if you try, you're gonna see both of us tell you to get lost and stay out of our business.

9:32 PM  
Blogger Nikos Tsafos said...

Sanjay—

There is no reason to accuse me for a British policy that lasted 150 years or for neo-conservative designs coming from the White House today. Nor is there need to remind me that India is an independent country that will pursue its own interests and will not play Washington’s game.

It is not an endorsement of divide and rule to say that Americans are much attracted to it; but neither is it a stretch to think that the potential for China and India to clash exists irrespective of what the West does. That both countries are modernizing their militaries (and navies in particular) is worrisome, as it the fact that both have increasing energy needs that are to be met in Central Asia. If you can’t see the difference between Sweden and Finland sharing common resources and India and China allying with dozen of regimes in Central Asia, the Middle East and South Asia for access to energy, then our perspectives are just too divergent to meet.

Now about India as an English speaking. To begin with, your claim that none of the British colonies are English speaking is inconsistent with your assertion that Nigeria, Pakistan, and Zimbabwe are English-speaking countries. Your argument that having English speaking confers no economic advantage to a country is groundless—as your own country shows, and as Ireland’s experience shows. As a person who tried to work on a business deal with the Chinese, I can assure you that the level of English in a country concerns foreign investors very much.

To be honest, I have not found reliable statistics about how many people in India speak English; Michael Dertouzos, director at MIT’s Laboratory of Computer Science, believes India has some 50m English-speakers (The Economist, 3 May 2001). Even if your estimate of 40m is correct, this is a big number. Given a labor force around 500m (482.2m by the CIA’s Factbook), and with 60% of that occupied in agriculture, then 40m is a good number. If you add that there are about 380m native English speakers in the world, and “two thirds as many speak it as their second [language],” then the numbers in India are high. (The Economist, 20 December 2001). I am not paying with numbers; all I am saying is that 40m seems small compared to a population of around 1.1bn, but when looked at in context becomes more significant.

Two more things. That India is a democracy does confer an advantage—you say that “both have mechanisms to ride out storms.” True. But that does not mean their mechanisms are equally good. The Tiananmen riots broke out in part because China was experiencing rampant inflation—evidence of a political mechanism that cannot absorb shocks as well as a democracy can, when people can protest more easily or vote their representatives out of office.

As for the backlash against India over outsourcing, it is indisputable that it was real and important; but my point is that this backlash was miniscule in America’s strategic thinking (and in the press) compared to what people have lashed at China over the past six months (over the Yuan peg, Unocal, the EU arms embargo, the new Chinese law threatening force if Taiwan moves towards independence, and so on).

In the end, it is anyone’s guess if China and India are destined to fight. That they have an amicable past, and that they have increased trade are poor predictors of whether they will fight in the future. Even a casual reading of world history tells us that when countries grow, they become ambitious and are often led to conflict with other powerful countries. I can’t predict the future, but I believe there is enough in the making to suggest that this pattern could repeat.

NT

5:18 AM  

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