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Expanding Arsenal, Unsafe Nukes; “Pakistan’s Nuclear Weapons”; report — US Congressional Research Service

Pakistan’s nuclear arsenal probably consists of approximately 110-130 nuclear warheads, although it could have more. Islamabad is producing fissile material, adding to related production facilities, deploying additional nuclear weapons, and new types of delivery vehicles. Pakistan’s nuclear arsenal is widely regarded as designed to dissuade India from taking military action against Pakistan, but Islamabad’s expansion of its nuclear arsenal, development of new types of nuclear weapons, and adoption of a doctrine called “full spectrum deterrence” have led some observers to express concern about an increased risk of nuclear conflict between Pakistan and India, which also continues to expand its nuclear arsenal.
Pakistan has in recent years taken a number of steps to increase international confidence in the security of its nuclear arsenal. Moreover, Pakistani and U.S. officials argue that, since the 2004 revelations about a procurement network run by former Pakistani nuclear official A. Q. Khan, Islamabad has taken a number of steps to improve its nuclear security and to prevent further proliferation of nuclear-related technologies and materials. A number of important initiatives, such as strengthened export control laws, improved personnel security, and international nuclear security cooperation programs, have improved Pakistan’s nuclear security.
However, instability in Pakistan has called the extent and durability of these reforms into question. Some observers fear radical takeover of the Pakistani government or diversion of material or technology by personnel within Pakistan’s nuclear complex. While U.S. and Pakistani officials continue to express confidence in controls over Pakistan’s nuclear weapons, continued instability in the country could impact these safeguards. Furthermore, continued Indian and Pakistani nuclear weapons development could jeopardize strategic stability between the two countries. For a broader discussion, see CRS Report R41832, Pakistan-U.S. Relations, by K. Alan Kronstadt.
Nuc-Pak-Wpns-CRS-Report-Jan16Nuc-Pak-Wpns-CRS-Report-Jan16

India and Japan : A Symbiotic Mutualism Relationship

By Somindu.S.
Ahmedabad, 12 December 2015

The short yet most path breaking Abe’s visit inspired me to look at some of the parallel developments and how Modi-Abe partnership is transforming the bilateral relationship and who are the key people to watch for.

Modi is fond of PPP model and incidentally Prabhu, Parikaar and Piyush (PPP) are cornerstone of ‘Make in India’ through their respective portfolio. Coupled with Modiplomacy led by Sushma Swaraj, the team is working hard to transform India. Unfortunately our friends in mainstream media do not even find amusing to focus on this. Let us take case of Railway Minister Suresh Prabhu and Japan.

Prabhu’s Japan Visit

Suresh-Prabhu

When Suresh Prabhu visited Japan in low profile short September visit, he was surprised how Japan received him. While everyone knows Japan was keen for Shinkansen project after losing out one in Indonesia, what Prabhu wanted was more than that. He was very candid in his interactions with his Japanese counterparts. He clearly told them, if I see you as partner then I want you to be my partner in many other things also not just Shinkansen. In his one daylong interaction with various stakeholders he shared his vision on India-Japan rail cooperation. The meetings ranged from industry heads to financial institutes to Government heads and R&D departments and with his counterpart ministers. Everywhere Prabhu presented his ideas as per the positions of counterparts.

Japanese sides were all keen ears. In normal old days, they would be polite not to confront nor agree but would tell him what more India had to do and then things would remain status quo. Indian officers would then blame it on over cautious Japan and minister would return.

Speed of Bullet Train:

Shinzo-Abe-Japan

But this time, something spectacular was about to happen. Next morning, Railway Minister went to meet PM Abe and to his surprise he saw many of the familiar faces by the sides of Abe. The same people with whom he had long discussion yesterday. Abe made his team read out what Japan would be willing to offer. To Prabhu’s pleasant surprise it enlisted all the points shared by Prabhu in such beautiful way that he never even thought of. Starting from tech transfer on existing Rail infrastructure to R&D cooperation to extremely attractive loan.

To put the things in perspective not only this was unprecedented but also would be path changing. Elated Prabhu told Abe. “Mr. Prime minister there is a race of speed now. I am not sure, what is faster, speed of Bullet Train or Indo-Japan relationship”. Abe could only smile and it conveyed that besides speed Japan is also known for reliability and safety. Prabhu told his counterpart which echoed both Modi and Abe’s vision on India-Japan relationship. In bilateral relations globally, there are no two countries that can claim a bond that India and Japan shares. Prabhu emphasized this point and explained that many a time when you negotiate with other countries, you initially have to spend energy in negating some past negatives before you can move to work on positives. With Japan and India there is zero negatives and hence we can put our energy on constructing the positives.

The Crisis of Past

JaiShankar

Having said that, it is a time to look at another aspect of India-Japan relationship.

To people who have been following Indo-Japan relationship know that all was well on surface but if you dig deeper, India was a very far country for Japan.

While there were no negatives, there were no common positives as well. The relationship hit the lowest nadir and suddenly India looked bad for Japanese leadership in 1998 just after Vajpayee government did the Pokhran test. Japan being only country in the world to be have gone through the horrors of nuclear attack are always sensitive. But what surprised the world especially Indian authorities was reaction of Japanese PM Hashimoto (a known Sinofile, or China sympathizer). He condemned India in most stern words and also joined sanctions. This was the toughest time for India-Japan relationship. There was one officer in Indian Embassy in Tokyo the Deputy chief of Mission. He worked arduously behind the scene with officers in Delhi. While Vajpayee Govt was busy in bringing America in tune with changing world geo political reality. The Japan team was busy in dousing the unexpected fire.

The man on Mission The deputy chief of mission then was Mr. S. Jaishankar. The quiet upright man with impeccable understanding of Japan, (his wife’s home country), was working hard to restore the normalcy in India-Japan relations.

While India was getting USA on her side, political wind in Japan was also flowing differently. Hashimoto had to resign and subsequently Mori faction of Liberal Democratic Party won the mandate, let by Mori himself. India by the time realized to have friends across political spectrum to keep bilateral relations not getting hijacked. Jaishankar worked very hard behind the scene to do the same. New breed of young politicians and some old who were scared of China’s might saw sense in India’s resurgence. Current PM Abe then was young politician but like Modi he was also post war born leader and had a very different idea on India. Jaishankar had found a good friend in him. Jaishankar and his team finally succeeded when PM Mori landed in Delhi in year 2000 and told Vajpayee that India and Japan were now strategic partners. Interestingly today in Joint press conference Jaishankar as India’s foreign secretary was in the midst of action where Modi and Abe announced that India-Japan strong relationship is unparalleled in the world now. He must be happy to know how far the relationship has travelled and he now as foreign secretary has to build on a strong foundation.

The Author Diplomat

Vikas-Swarup

In 2012, Narendra Modi as CM of Gujarat, on July 26 visited Kansai region and was received by extremely energetic Consulate General of Osaka. The pleasant diplomat was one of the few who had a very good command over language and was popular among both Japanese and Indian community. Vikas Swarup the Oscar fame author and wonderful communicator was in charge as consulate general (CG) of Osaka. Modi landed in Osaka in afternoon from Nagoya. In short time available to him at Kansai, CG Swarup had arranged plentiful. The first program was round-table interaction with Industry captains of Kansai region (whose economy is bigger than Canada). So impressed was Modi with this program that he spoke out of turn in the end to thank profoundly CG and organizing bank that gave him an opportunity to meet investors directly and learn few things from them. The stay in Kansai was very different from Tokyo and very warm for Modi. A town hall meeting with Indian community to next day official visit to Hyogo Prefecture, CG had done his job to the perfection. Now as a chief Spokesperson of India, Vikas Swarup is close to PMO, and he remains India’s finest communicator. His credentials were so high with Japan that even previous PM Manmohan Singh entrusted him to negotiate successfully for historic visit of Emperor couple’s visit to India. No doubt when it comes to Japan, he is another person Modi can lean on.

And the Gujju Connection:

Sujan-Chinnoy

Gujarat and Japan has deeper connection when it comes to student exchange. Gujarat university and Osaka’s Otemon Gakuin University has one of the oldest student exchange program running for last 46 years now. Every year two students from India and Japan spend three months in respective countries. The program has produced many Indofile and Japanofile over a long period. Early 80s, a student named Sujan Chinoy visited Japan under the exchange program and did exceedingly well. Later he joined foreign services and has been India’s one of the best diplomats with versatility in many sports, arts and language. His closest stint to Japan came, when he was Consulate General of India in Shanghai.

December 3, 2015 he took position of Ambassador designate to Japan. (he is yet to go through the credential formalities, due to PM Abe’s visit). Long back, there were two other ambassadors from India Dr. Seth and Dr. Asrani who went to Japan as a student. H. E. Chinoy will actually be the first from India to have deep understanding of both Japanese and Chinese. In fact he is the only Indian diplomat with hands on experience on national security and China of more than two decades. He is man of action and has left lasting impression wherever he has been posted. His last posting was in Mexico. Not only it will be easier for him to communicate with Japanese in their own language, he will be able to do the same smooth and candid talking with Indian PM in his own mother tongue. The next 2-3 years are very crucial as Japan breaks out of old mold and makes unprecedented exception for India. India will have to equally flexible. Be it defense cooperation or civil nuclear technology, something totally unthinkable even five years back is taking shape. I would say Ambassador Chinoy’s posting has indeed come at a right time. Considering his counterpart in India H. E. Hiramatsu is policy veteran and security expert, India and Japan would be looking to break many status quo within their own policies and push governments from both ends to do more.

I would like to conclude by quoting PM Abe’s words. “A strong India is good for Japan and Strong Japan is good for India”. There is nothing that describes better a symbiotic relationship of mutualism than this statement. The two nations complement each other in perfect ways. Both Japan and India have common problem in China. Both the nations have one neighbor respectively who is source of nuclear weapon. On economy front, Japan’s ageing population needs India’s young talent and huge pile of Japan’s underutilized Capital needs a better deployment option such as for India’s Infrastructure needs.

For many years, Aid from Japan was single point in Indian diplomacy. In recent years, Investment joined Aid. Now as we Usher in Modi-Abe Era, the relationship has truly become multifold. From make in India to Malabar exercise, From Defense cooperation to DFC, from UN reforms to Uniting against Chinese hegemony in Ocean routes. A lot is on the plates. I can only say the Symbiotic relationship of mutualism is only going to go stronger.

Courtesy: Desh Gujarata Website

Defence Minister’s One Year Positive Record

By Brig Gurmeet Kanwal, Visiting Fellow, VIF

During his first year in office, Defence Minister, Manohar Parrikar gave a free hand to the army to act pro-actively on the LoC. He led from the front and worked closely with the leadership of the armed forces, the bureaucracy and his counterparts in the other ministries to put defence preparedness back on the rails and give a fillip to the stalled process of military modernisation. He put to use his management skills to set the right priorities for the Ministry of Defence (MoD) and the armed forces and the results have been good. However, defence preparedness and military modernisation continue to need his urgent attention.
The foremost item on the Defence Minister’s agenda for the NDA government’s remaining years in office should be to hasten the process of addressing the ‘critical hollowness’ plaguing defence preparedness – a term used by General V K Singh, the COAS, in the letter he wrote as COAS to the then Prime Minister in May 2012. Major operational voids in the war establishment of the three must be made up early in order to optimise combat efficiency.
Large-scale deficiencies in ammunition and important items of equipment continue to hinder readiness for war and the ability to sustain operations over anticipated time periods. The army reportedly has some varieties of ammunition for barely ten days of conflict and it will cost Rs 19,000 core to replenish stocks. It will be recalled that during the Kargil conflict in 1999, as many as 50,000 rounds of Bofors ammunition had to be imported from South Africa. The occurrence of such a situation during a time of crisis must be avoided through a prudent replenishment and stocking policy.
Modern wars are fought mostly during the hours of darkness, but most of the infantry battalions and many of the armoured fighting vehicles – tanks and infantry combat vehicles – are still ‘night blind’. Warships, submarines, fighter aircraft, light helicopters, artillery guns, ground-based air defence, command and control, surveillance and reconnaissance systems, are either held in inadequate numbers or bordering on obsolescence.
Among the structural reforms that need to be implemented in an early time frame the most important issue is the appointment of a Chief of Defence Staff (CDS). This appointment was first recommended by the Arun Singh committee on defence expenditure in the early 1990s, and then by the Group of Ministers led by Mr. L K Advani that reviewed the recommendations of the four task forces on the management of national security, assembled following the submission of the Kargil Review Committee report. This crucial appointment has been hanging fire due to the want of a political consensus and differences within the armed forces. Recently, the Naresh Chandra committee has recommended the appointment of a permanent Chairman of the CoSC as a more acceptable alternative.
The appointment of a CDS should be followed a few years down the line by the raising of tri-Service integrated theatre commands so as to ensure the ‘joint’ formulation and execution of operational plans. It has now been accepted by all modern militaries that ‘jointness’ or ‘jointmanship’ leads to the optimisation of single-Service combat capabilities. Also, the Army, Navy and Air Force HQ have been only notionally integrated with the Ministry of Defence (MoD) and are still ‘attached offices’ for all practical purposes. The civil-military heartburn and the consequent weakness in functioning caused by this lacuna must be removed forthwith.
Modernisation of the armed forces has been stagnating due to the inadequacy of funds, the black-listing of several defence manufacturers and bureaucratic red tape. The Defence Minister has taken positive steps on these issues. Approval of necessity (AON) has been accorded to defence acquisition projects worth approximately Rs 100,000 crore. Though only a few contracts have actually been signed, including the purchase of Apache attack helicopters and Chinook medium lift helicopters, the process has been set in motion.
The issue of black listing has been addressed by instituting a system of penalties for the infringement of rules. A committee led by Dhirendra Singh, former Home Secretary, was appointed to review the Defence Procurement Procedure (DPP). The Minister has begun to implement its recommendations in earnest. For example, the policy on offsets has been reviewed and several pragmatic amendments have been made.
The armed forces are now in the fourth year of the 12th Defence Plan (2012-17). It has still not been formally approved with full financial backing by the Cabinet Committee on Security (CCS). The government has also not formally approved the long-term integrated perspective plan (LTIPP 2007-22) formulated by HQ Integrated Defence Staff. Without these essential approvals, defence procurement is being undertaken through ad hoc annual procurement plans, rather than being based on duly prioritised long-term plans that are designed to systematically enhance India’s combat potential. These are serious lacunae as effective defence planning cannot be undertaken in a policy void. The government must commit itself to supporting long-term defence plans.
The government must relinquish its monopoly on defence research and development (R&D). The DRDO should undertake research in strategic technologies that even the closest strategic partners are unwilling to share; e.g. ballistic missile defence technology. The MoD should progressively move away from its excessive reliance on the inefficient public sector for defence production. The defence PSUs should be gradually privatised to make them more efficient and quality conscious.
The private sector must be encouraged and incentivised to contribute to the national quest for self-reliance in defence production. Through the implementation of the Prime Minister’s vision to ‘make in India’, plans for military modernisation must lead to substantive upgradation of India’s defence technology base and manufacturing capability, or else the country’s defence procurement will remain mired in disadvantageous buyer-seller, patron-client relationships. No new defence acquisition should be undertaken without insisting on the transfer of technology (ToT).
The NDA government has done well to announce its intention to allow defence exports. Formal instructions to give effect to this policy should be issued early and it should be ensured that India abides by the provisions of the Arms Trade Treaty even though it is not a signatory to the treaty. The national aim should be to make India a design, development, manufacturing and export hub for weapons systems and other defence equipment in the next 10 to 15 years in conjunction with the country’s strategic partners.
Financial management too needs a major overhaul. The defence budget has dipped 1.74 per cent of the country’s GDP despite the fact that Parliament’s Standing Committee on Defence and the armed forces have repeatedly recommended that it should be raised progressively to 3.0 per cent of the GDP if India is to build the defence capabilities that it needs to meet future threats and challenges and discharge its growing responsibilities as a regional power in Southern Asia. The budgetary allocations earmarked on the capital account for the modernisation of the armed forces will continue to be surrendered unless the government sets up a rolling, non-lapsable defence modernisation fund of about Rs 1,00,000 crore under the Consolidated Fund of India.
The relatively softer issues that can adversely affect the morale of soldiers, sailors and airmen have also got the Defence Minister’s attention. Approval has been accorded for the construction of a National War Memorial at India Gate in New Delhi and for the long-pending ‘one rank, one pension’ (OROP) proposal, though not to the satisfaction of the Veterans. To his credit, the Minister has taken steps to reduce the number of cases that the MoD is fighting in various courts against retired armed forces personnel, especially those against disabled Veterans.
Key personnel issues that merit the Minister’s attention include the large-scale shortage of officers and the grossly inadequate availability of accommodation for married personnel. The Defence Minister must also make certain that the Seventh Pay Commission resolves all the anomalies of the last two pay commissions that have led to disaffection in the armed forces and have added to the civil-military divide.
Overall, in his first year in office, the Defence Minister has gained the confidence of the armed forces, shaken the MoD bureaucracy out of its decade-long slumber and initiated several policy measures that will enhance defence preparedness. He has also succeeded in giving a much needed fillip to military modernisation. He follows an informal approach, consults widely, encourages discussion and is quick at decision making – hallmarks of good leadership. He is likely to continue to strive towards enhancing defence preparedness and giving the highest priority to undertaking military modernisation.
The writer is Visiting Fellow, VIF, and former Director, Centre for Land Warfare Studies (CLAWS), New Delhi.

Courtesy: VIF Website

The Game Changer

A look at DTTI, an important element in building deeper Indo-US defence ties

By Brig. Arun Sahgal (retd)

Defence Technology Transfer Initiative (DTTI) has emerged as the centrepiece to build deeper Indo–US defence cooperation. The initiative, which is part of a recently signed Defence Framework Agreement 2015, is aimed at assisting India in creating a strong defence industrial base and concomitant ecosystem. The broad objectives are:
• Strengthen bilateral relationship to strategic levels, given the converging strategic interests of both the countries in Asia-Pacific.
• Assist India in developing credible military capability to support both countries’ regional interests.
• Help strengthen Indian defence industrial base through technology transfer or sharing on the basis of co-development and co-production.
Both India and the US are committed to push this unique initiative that aims at moving bilateral relationship to a higher strategic trajectory. As mentioned earlier, the overall objective is to provide cutting edge defence technologies that include both co-production and more importantly, co-development. Both sides have taken nascent steps in identifying some path-breaking technologies essentially aimed at pushing the process forward. Based on interactions with stakeholders on the Indian side, there is a clear commitment to move forward. Despite these positive developments there, however, exist some perceptional gap both in terms of understanding what DTTI means in practical terms and future roadmap.

Indian perspective is being shaped by the growing asymmetry against China and declining conventional edge vis-a-vis Pakistan, primarily owing to lackadaisical modernisation and complete lack of transformational effort.

Capability development is suffering on account of acquisition oriented decisions based on long-winded and dodgy qualitative requirements, and excruciatingly time-consuming processes, hampered by corruption. Seen in broader strategic construct, this is taking its toll in denying Indian military the capabilities required to emerge as a net regional security provider. It is against this backdrop India looks at the initiative in addressing India’s critical ‘technological’ needs.

Indian Perspective of DTTI
Indian defence ministry remains committed to the concept of DTTI as a means of gaining critical strategic technologies from the US that will help propel India’s defence industrial ecosystem towards self-sufficiency, addressing critical technological needs, what with India emerging as an arms developer and exporter from being arms acquirer over a period of time.

For the Indian ministry of defence (MoD), DTTI represents a commitment by the US in assisting India build a credible defence industrial base and capability through hi-technology infusion. Thus, it looks upon DTTI as the route to getting critical technologies that they are finding difficult to indigenise, or time consuming, for e.g. up-gradation of GE 414 for Tejas Mk II.

This thinking is driven by the core ‘Make in India’ perspective, the sole purpose of which is to ‘manufacture or assemble’ big-ticket projects in India with technology absorption from abroad. Hence, the interest in critical game-changing technologies like gas turbine engines for aircraft, nuclear propulsion technology, Electro Magnetic Aircraft Launch System, etc.

In working the DTTI initiative, nonetheless, there are apprehensions with regard to technologies on offer and the constraints of the US arms control laws. In the perception of the MoD the whole initiative appears to be US industry driven and not so much as an American government initiative. This perception is based on the fact that out of earlier 17 technologies on offer 12 were industry driven, four by the US government and only one joint R&D and subsequent production. Whereas there is acceptance that the majority of technologies are incubated in the private sector, however, it is argued that for development of credible bilateral relations, the US government would need to push these companies for technology transfer co–production initiatives. Simply put, the perception that the US government has no hold on these MNCs is not bought, as a large number of development funding are provided by the US government which also decides on export control laws.

(Courtesy: Force Magazine)

Global Financial Crisis, Contagion and Grexit

By Arvind Virmani

Introduction
The worst Global crisis since the “Great depression”, hit the World in 2008. The “Great recession” triggered by the Global Financial crisis(GFS) fundamentally changed the external environment, while the Euro countries continued to believe that the World was undergoing just another cycle like the dozens they had seen & dealt with in the post-war period. Thus in our view (as ED IMF 2010-12), their economic approach and solution to the fiscal problem, of putting overwhelming emphasis on austerity was fundamentally flawed and highly likely to fail in the absence of a quick return of the World economy to high growth and moderate inflation. A speedy return to higher growth, was however, made impossible by the flawed emphasis of the governments/politicians of the Euro Area, UK and the US on hard & immediate fiscal squeeze on their own economies, thus reducing global demand and exacerbating the global excess capacity in tradable goods and services. On the supply side China, continued to create new capacity in manufacturing by pumping credit into the economy, offsetting the natural process of depreciation and obsolescence that would have gradually reduced total capacity.
Greece Loan
A number of High Income European Countries including Greece, were among the worst affected by the GFS & associated recession. The IMF changed its rules, to make loans to Greece that were > 10 times the ratio limits applicable to loans made to developing countries during the previous 50 years. The only argument for making such an exception was to minimize the risk of contagion to other vulnerable European countries such as Portugal, Ireland and Spain. An IMF ED(a professional economist) pointed to the flaw in the economic analysis and projections underlying the Greek loan: “The scale of fiscal reduction without any monetary policy offset is unprecedented… (It) is a mammoth burden that the economy could hardly bear. Even if, arguably, the program is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment, and falling fiscal revenues that could eventually undermine the program itself. In this context, it is also necessary to ask if the magnitude of adjustment…is building in risk of program failure and consequent payment standstill… There is concern that default/restructuring is inevitable.”
Austerity or Fiscal Reform
Our experience of the Asian & Latin American crises, had taught us that that the domestic private and international sovereign debt overhang had to be dealt with quickly and effectively, to stave of a “Balance sheet recession” and give the economy a chance to recover. Further, that growth recovery depended critically on offsetting required Govt. expenditure compression (austerity) by expenditure switching (real depreciation and/or monetary easing). Clearly both the global demand situation and domestic supply side had to be conducive to produce a sustained increase in net exports and investment to stimulate and sustain growth. In the absence of exchange rate flexibility in Greece (PIIGS), austerity could only work by reducing the real wage rate. Given the deflationary post crisis situation, austerity would reduce not just the nominal wage rate(w) but also the price level(p) thus having (at best) a small effect on the real wage rate(w/p). We concluded that restoration of Greek competitiveness within the euro zone would require a level of austerity that was socially and politically infeasible. We therefore argued that in Greece(& contagion candidates) the focus should be on fundamental fiscal (tax and expenditure) reform, which would put it on a sustainable fiscal path through a gradual reduction in expenditures and increase in tax ratios, which follow from such reform(e.g. of Pensions). Instead of an immediate reduction of government expenditures, the focus should be on limiting and reducing the growth of expenditures, perhaps in some cases to zero and not on cutting everything drastically. The overemphasis of the Trioka on “austerity” distracted attention from more fundamental fiscal reforms that still remain unimplemented by Greece.
Lender of Last Resort
There were three other issues critical to success of Greek macro adjustment. The immediate problem for Greece and other Euro zone countries in danger of contagion was the absence of a normal Central Bank or lender of last resort. The European Central Bank was hemmed in by rules and constraints that kept it from acting like a normal Central Bank (FRB, USA; BOE, UK; RBI, India). We argued that contagion couldn’t be stopped unless the ECB got complete freedom to lend to illiquid but solvent Euro area Banks and financial institutions (Virmani(2011) This problem was gradually solved after the appointment of Mario Draghi as the Head of the ECB in November 2011 and the risks of contagion have been largely eliminated due to ECB empowerment and tightened financial regulation. However, subsequent to the No vote in the Greek referendum, the ECB has raised the collateral requirements for providing liquidity support to Greek Banks. Greece is therefore effectively without a Central bank to fulfill the lender of last resort function for its Banks and payment system. If this support is not restored, Greece has no option but to reintroduce its own currency (Drachma) and Central Bank.
The introduction of currency has two parts: Bank deposits(financial deposits), which can be converted instantaneously into Drachma, and by letting the market set a Drachma-Euro exchange rate. If a one to one conversion is done and the market exchange rate is 1.3 Drachamas to the Euro, say, then the implicit haircut on all deposits is 30%. The second part is for the Greek Central bank to get Drachmas printed and then offer to exchange Euro cash held by the public for cash in Drachmas, at the market exchange rate. To minimize disruption, the Euro would continue to be legal tender in Greece, but all prices would have (gradually) to be specified in Drachmas.
Debt Sustainability
The second important problem was Greece’s Sovereign debt. It was very clear to us in 2010, that Greek debt was unsustainably high i.e. there was no credible time path of nominal GDP growth that would result in a sustained & continuing decline in the Debt-GDP ratio (Virmani (2011) op cit). Without a substantial debt restructuring, resulting in an effective reduction in the present value of outstanding debt, any delay in debt reduction/restructuring would worsen the debt problem. Thus we argued that IMF, Euro and other sovereign loans would merely result in repayment to private lenders and a substitution of private by public debt. Those who facilitated Greek government profligacy would get away without bearing the consequence of their bad decision or sharing in the pain of adjustment. This is precisely what happened. The debt crisis reappeared as predicted and a partial debt write-off occurred in 2012, with a Trioka mediated agreement between private lenders and the Greek government. It was too little too late. The Debt-GDP ratio moved back to its earlier peak, triggering the loan default to the IMF and the latest crisis of 2015.
Structural Reform
Finally there was and still is the problem of broader economic reforms to improve the competitiveness of the Greek economy. It is often alleged that the Greek economy is riddled with monopolies and oligopolies. The policy & regulatory structures that encourage monopolies and oligopolies must be reformed urgently to encourage new entrants and promote competition. Whether Greece remains in the Euro or leaves it, fiscal and economic reforms will be essential for restoring economic growth.
Effect on India
The Greek crises, being a mixture of economic and political factors (dozen Euro countries) has created great uncertainty in the investing community. This uncertainty affects most of the World including India, and is likely to continue for the duration of the crisis. Normally such financial uncertainty leads to heightened liquidity needs in Europe, the sale of Indian equity and an outflow of capital and exchange rate depreciation. This time there is an offsetting factor. If the crises slowed EU recovery, as is likely, the expected outflow of capital from India to the EU could be inverted. Thus as I predicted a week ago, India could have a rise in equity markets cum capital inflow on one day and the opposite another day, for the duration of the Greek crisis.
From a medium term perspective, the conventional Wisdom is that the Greek economy is too small a part of the Euro area, the EU and the World to have any effect on the economy. In my contrarian view the Greek crisis, is likely to slow Euro recovery and thus affect India’s exports to it. Further a setback to EU recovery would also affect its exchange rate with USA and other countries. This could be a factor in the US FRB’s decision on the QE program in September. If Euro growth slows sharply, leading to capital inflow into US and USD appreciation (indicating a natural tightening of monetary policy) the FED could effectively moderate the anticipated rise in interest rates. This would offset any negative effects on Indian exports and growth from the Euro slowdown.
The main long term lesson of Greek crisis for India is to eliminate its revenue and fiscal deficit and thus eliminate the major policy driver of the increase in net external indebtedness. Cyclically adjusted revenue deficit should be reduced to zero by 2020 and the cyclically adjusted fiscal deficit should be reduced to zero by 2025.

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A version of this article appeared on the editorial page of the Indian Express on Thursday July 9, 2015 under the banner, “Trojan Loans,” http://indianexpress.com/article/opinion/columns/trojan-loans/

India Hardens Stand On Boundary Issue With China – Analysis India Hardens Stand On Boundary Issue With China – Analysis

By Brigadier Arun Sahgal, PhD (Retd)

Introduction

There are multiple interpretations of Indian PM recent visit to China. Fundamentally while there has been significant movement on the economic side in terms of trade, investment and opening of markets, there has been little progress on major irritants impacting relations such as the boundary, water issue or the Chinese – Pakistan economic corridor passing through POK which India claims as its territory. There remains an unmistakable shadow of lack of mutual trust and unwillingness on the part of the Chinese to address any of these irritants. In fact during the visit an attempt was made to vitiate the atmosphere by showing an Indian map exclusive of Kashmir and Arunachal Pradesh.

The vast gulf in perceptions forced the Indian PM to highlight these differences twice during the visit. Once during the Joint Statement, which specifically states early settlement of the boundary question serves the basic interests of both countries and should be pursued as a strategic objective by the two governments. This was followed up during his address at Tsinghua University, by stressing the need to clarify the LAC as means to maintaining peace and tranquility on the borders. He emphasised that the non resolution of outstanding issues leads to hesitation, doubts and even distrust in our bilateral relationship.

From the Prime Minister’s candor two quick inferences can be drawn. One: the Chinese were obviously not very forthcoming for on early resolution of the boundary dispute, harping on standard narrative of historical legacy. We had an inkling of this during Track II Dialogue with Chinese counterparts, in late January 2015. The overriding Chinese position was that political determination for boundary resolution with India had not yet been made, the outcome of the visit highlights that the period of sizing up new Indian government continues.

What is however more significant is the fact that an Indian PM standing on a podium in Beijing was telling his Chinese counterparts that the “historical narrative” has outlived its utility and lost its shine. If the two countries have to have normal relations, the boundary issue can no longer be put on back burner. From the editorials in Global Times and Xinhua it appears that message has gone home, with Global Times editorially praising Modi’s strategic insights and pragmatism; which could be a game changer like that of Richard Nixon’s 1972 visit to China.

There is yet another context to PM Modi’s assertions for early resolution of boundary disputes. He was holding a mirror to the Chinese leadership that attempts at creating an China centric Asian century will be in jeopardy if it persisted with assertive behavior and put off boundary resolutions (both continental and maritime) on specious grounds. He was in a way reassuring strategic partners in Asia of the emergence of India as a benign regional balancer whom they could look up to?

CBM’s in Context

As brought out by the PM in Beijing, the existing border disputes between the two countries is a major impediment not only to bilateral relations, but for broader peace and security in Asia. CBMs or Confidence-Building Measures between the two countries are essential for reducing tensions, preventing escalations of hostilities, maintaining peace and tranquility along the disputed border, and building mutual trust and confidence. CBMs can be broadly defined as “measures that address, prevent, or resolve uncertainties among states. They are particularly pertinent in addressing and working towards the resolution of long-term political stalemates.” The main objective of these CBMs is to provide a framework within which border security confidence can lead to the eventual settlement of the boundary issue. It calls for reduction of troops deployed along the border region and military disclosure when either of the parties is undertaking major military exercises.

India has two major outstanding border disputes one with Pakistan and the other with China. The Line of Control with Pakistan is clearly defined but despite this, there are regular instances of firing at the border and incidences of cross border infiltration leading to casualties and turbulence. On the other hand, the Line of Actual Control which is un-demarcated marks the disputed boundary between India and China; which has, witnessed reasonable peace and tranquility with no major instances of firing or skirmishes since the Sumdorong Chu valley incident of 1987.

Boundary Issue: State of Play

Since the 1962 conflict and tensions between India – China remain high despite years of attempts to resolve the boundary issue with no signs of early resolution. The border runs along an imaginary line called the Line of Actual Control (LAC), which complicated by its myriad and differing perceptions.

Since Rajiv Gandhi’s breakthrough visit to China in 1988, significant attempts have been made for the restoration of friendly relations. The India – China CBMs, unlike other CBMs, is not a knee-jerk response under some possible threat of an impending nuclear apocalypse, but instead have put in place an elaborate mechanism that represents several areas of interest for bilateral relations. The main objective is to construct a framework that focuses on the resolution of the boundary question. Additionally, it also provides a platform for dialogue regarding other areas of bilateral and mutual interest. The strategy is essentially, threefold. The first step is laying down the foundation of the political principles which are to guide the process of settlement; the second step involves ensuring a framework for the implementation of these guiding principles; and the third and the most important step is to demarcate and delimit the boundary.

The first CBM in 1993 was path-breaking in its arrival at the Agreement on the Maintenance of Peace and Tranquility along the LAC which was a virtual no-war pact. What followed in 1996 was the Agreement on Confidence-Building Measures in the Military Field along the LAC. The primary objective of these measures was the commitment to the maintenance of peace and tranquility along the border. The Declaration of Principles for Relations and Comprehensive Cooperation was signed in 2003 in which The Joint Working Group that was set up and functional at a purely bureaucratic level was upgraded to a meeting of Special Representatives, thereby providing much desired political impetus for resolution. These agreements led up to the adopting of the ‘Political Guidance Principles for the Settlement of Boundary Question’ signed in 2005.

Additionally, it was responsible for the establishment of border meeting points at Kibithu-Damai in the Eastern Sector and Lipu Lekh Pass in Uttaranchal in the central Sector, together with the facilitation of exchanges between commanders of the respective India and China military regions. The exchanges between training institutions, and sports and including cultural formed other CBM’s.

A comprehensive push on promoting bilateral military relations remained on track following the visit of the then Indian Defence Minister Pranab Mukherjee, to China in May 2006. The visit led to the signing of a Memorandum of Understanding (MoU) that called for the institutionalization of frequent exchanges between the officials of the Defence Ministries and the armed forces through an Annual Defence Dialogue, in addition to developing an annual calendar for joint exercises and training programmes. In April – May 2013, following three week long confrontation at Depsang valley in Ladakh, two sides signed Border Defence Cooperation Agreement to address tactical problems and to prevent their escalation. To further enhance mutual cooperation and promote understanding between the two armed forces, the two sides have also conducted low-level tactical military exercises whose scope is being increased to naval and air cooperation.

The several measures adopted as part of the CBMs can be broadly categorized into declarative principles, information exchange and constraining measures. The inhibiting factor with regards the effectiveness of these CBMs is that most of the current measures undertaken fall primarily under the first two categories, with less importance being given to the third category.

With regards the boundary issue, the CBMs that were adopted followed a two-track policy with the twin objectives of maintenance of security along the Line of Actual Control and the permanent resolution of the border dispute. The tackling of the boundary issue was always viewed from the perspectives of border management and not border resolution.

Despite effective border management measures some more of which have been suggested in the joint Statement following PM’s recent visit the reality is that incursions by the Chinese are on the increase. According to Union Ministry of Home Affairs’ figures, China has transgressed into Indian boundary over 1600 times during January 2010 to August 2014. Two most recent and serious violations were the Depsang incursion of 2013 and the Chumar incident of 2014; later took place during Chinese President’s maiden visit, to India. Main question is what is provoking China? What does it gain from these, is it an attempt to creep forward and occupy vantage points along the LAC useful for future operational contingencies, gaining better intelligence or for trade of during eventual settlement?

However, as far as boundary resolution is concerned, a broad framework for settlement has been defined but nothing more concrete has been achieved. The fundamental perception of threat and the security outlook which has its roots in hostility and suspicion has not changed. In spite of progress in economic and political relations, the wide security gap remains un-bridged. Development attempts undertaken by the Chinese in terms of communication technology and infrastructure upgrades in the Tibetan region is also a cause of worry for India.

Another major limitation of the framework for resolution as achieved by these agreements is the lack of clarity regarding the principles on which talks of resolution are to be defined – whether it is the demarcation of the Line of Actual Control that is the objective or the definition of the area within it or is it concerned with the exchange of maps which till date has not been done for the eastern and western sectors?

Differing Approaches

India and China have differing approaches on the boundary issue. The Chinese approach has been to ensure peace and tranquility along the borders and prevent major flare up which could draws its attention from internal political consolidation, reigning wayward economy and dealing with tensions in South China Sea and in North East Asia. Thus peace and tranquility along the India – China border allows Chinese a period of strategic consolidation without compromise. This also allows time for executing its new Silk Route policy of “one belt one road” aimed at consolidating its economic, trade and political influence in SE and South Asia and the sea lanes of Indian Ocean. In Chinese calculations next 5 to 10 years are critical for execution of these plans and undermine India’s strategic interests in the region creating a sense of isolation in Asia – Pacific and containing its Act East Policy. If the above hypothesis has validity then China is unlikely to agree to border resolution any time soon.

India until now i.e. the PM’s recent visit to China was sanguine to make haste slowly on the resolution of boundary dispute. It was content with maintenance of peace and tranquility along the borders while concentrating on building strong economic relations. The new government in Delhi is attempting to shift the discourse from this gradualist approach to the boundary question by pushing China for early resolution. Their concerns from the face of it are less geo strategic i.e. allowing China period for economic and political consolidation but are more driven by recent events of border intrusion underscoring the tenuous nature of peace and tranquility. An underlying calculation being given India’s improving relations with the US, Japan, Australia, Vietnam etc provides India with a leverage to push China on the boundary issue – a sort of classic opportunity?

Path Ahead

It has been more than 50 years since the Indo-China border war. The CBMs have been successful in providing a framework for the continuation of talks and friendly relations, especially, economic relations and preventing military conflict; but is that sufficient? For all the border management that the CBMs have achieved, they have barely accomplished anything tangible with regards the permanent resolution of boundary disputes and long term security along the LAC.
Chinese approach to CBMs and border resolution indicate a clear rhetoric for political resolution of the boundary issue. However this sentiment hasn’t been translated into political action nor is it clearly decipherable how the Chinese intend their long term relationship with India to be developed. There is a lack of clarity regarding whether the approach to be adopted should be one of co-engagement or co-competition. The resolution of this dilemma would be crucial in furthering political, strategic and economic interactions between the two countries.

From the Indian perspective, there are further challenges that present themselves. The main question that one needs to address is whether we want to push for an early resolution or allow the issue to fester. Apart from the factors discussed earlier, there is the consideration of growing asymmetry, of power which will get only accentuated over time. Feeling one gets is that China looks upon this growing asymmetry as a strong leverage to seek favourable resolution and draw India into its circle of influence. Added to it is the issue of Dalai Lama. As long as a closure on next Dalai Lama on terms favourable to China does not take place the two issues will always remain linked.

The Indians and the Chinese differ in their approaches towards each other. The question of perception also plays a huge role. Differences in value systems, worldviews and strategic objectives are also factors to be considered. The Chinese are largely concerned with the development of a China-centric and China-dominated Asia and in keeping with its revisionist tendencies, considers India as the status-quoist and militarily weaker state. The Indian narrative till now has emphasised relationship based on friendship, sentimentalism, wishful thinking and engagement. PM Modi during his recent visit has sought to change this discourse by clearly pointing to the Chinese the festering border issue as a crude coercive tactic aimed at keeping tensions alive which India will not countenance.

Courtesy: Eurasia Review

CHINA – PAKISTAN ECONOMIC CORRIDOR: CHANGING DYNAMICS OF SOUTHERN ASIA – ANALYSIS

By Brig. Arun Sahgal, Posted on: 27.04.2015

The strategic landscape in Southern Asia is witnessing three major strategic shifts; most important from Indian point of view is the unveiling of China – Pakistan economic corridor linking landlocked Xinjiang region of China to the warm waters of Arabian Sea and further to Middle East, Europe and East Coast of Africa. In many sense it is game changer with long term strategic consequences for the region in general and India in particular.

Second is the prospect of Iran’s integration with international community as a normal nation a process that has already begun. This has made number of regional actors most predominant being China and Russia and to limited extent even Pakistan initiate serious commercial and security dialogue, given the possibility of opening number of geo political and economic opportunities.

A third element is the growing Eastern orientation of Russia and the emerging possibilities of Russian – Chinese détente. This needs to be seen within the context of Eurasian competitive geopolitics represented by the Chinese continental power construct backed by supportive Russia, attempting to leverage; continental and maritime space in Central and SE Asian periphery and IOR as the future zone of influence.

China – Pakistan Economic Corridor

Chinese moves to develop the China – Pakistan Economic Corridor is part of Silk Road Economic belt and Maritime Silk Road initiatives aimed at transforming its immediate region and extended neighbourhood thru fashioning strategic corridors that enable a free flow of commerce and energy. This is part of larger geo strategic and economic moves attempting to seek favourable balance of power in Asia through economic engagement, defence co-operation and by its expanding maritime capabilities particularly in the IOR.

The foremost driver of unfolding Chinese strategy is to create an overarching zone of influence in Eurasia at a time and moment when both its main protagonists US is on the defensive having exited substantially from Afghanistan ceding space to China with Pakistan as the proxy. Secondly by clever out pouring of aggressive assertiveness in East Asia particularly in South China Sea it is keeping the US attention focused in Asia – Pacific. Developments in Middle East and Iran have further allowed China strategic space to leverage its development agenda with Chinese characteristics.

Russia on the other hand although a strategic collaborator is under too deep an economic stress consequence of crippling sanctions, faltering economy to be able to create any significant unease to Chinese attempted influence or garner strategic space in Central Asian to its advantage. Consequently it is forced to harmonize its moves with that of China under the rubric of SCO. Nonetheless going by evolving trends in the near term scenario Russia is not only leveraging its influence over Central Asian leaders but Iran as well, this is signified by the sale of S-300 anti ballistic missile system to Iran. Similarly Russia has a formidable energy card in its arsenal, in terms of gas supplies to Europe and China. Thus in near term Sino – Russian etente is likely to prevail with both collaborating to secure their own interests. An interesting manifestation of this is recent agreement between Russian and Pakistani defence ministers to hold first ever joint military exercises as indeed reaching out to national unity government in Afghanistan. Common cause of these developments appears to be is to incrementally deny strategic space to the Americans in the continental Asia.

Apart from geopolitical factors another major driver is to enhance China’s economic connectivity and strategic influence both in IOR and Europe so very important for its regional and global role. China is attempting to preserve its influence and investments in Eurasia,and advance its regional agenda through three important corridors emerging from Urumqi and Kashgar namely the Northern Corridor to Moscow and Germany, Central Corridor to Europe via Iran and Southern Corridor to Arabian Sea and Persian Gulf.

China geo-strategically restrained by high mountains of Tibetan Plateau looks upon the Southern corridor as a gateway to the Indian Ocean and the Middle East in concert with its Maritime Silk Road. It looks upon this corridor as a strategic necessity to breakout from Eurasian land mass and to assert regional and global influence and secure its primary energy and trade interests in the middle east and beyond to Africa and Europe. It continues to psychologically suffer from Malacca Dilemma from which nearly 80 percent of energy imports flow dominated by American led Asian alliance.

Another important perspective is the stability of restive Xinjiang region and its linkages with Af – Pak seen as inherently destabilizing. The perceived Chinese hope therefore is that such a corridor with its obvious economic benefits will help stabilize Pakistan. China look upon leveraging its close relationship with Islamabad to do more in reigning in terror and radical outfits. Signs of this can be seen in ongoing Pakistani counter terrorism campaign not only in FATA but other parts of the country most noticeably Karachi and Swat Valley. Forcing Pakistan to shun the path of religious radicalization and militancy and force it down the path stability and development created by large scale investments in network of roads, railways, energy is yet another driver.

The corridor per se represents largest single foreign direct investment in Pakistani history that has the potential to lift the country from its current social and economic morass to the path of development. The Proposed economic corridor to be built over next 15 years include 3000 Km four lane highway that will link Kashgar (Xinjiang) – Khunjerab to Gwadar,a1060 Km six lane Karachi – Lahore motorway (alternate route appears to be Punjabi manipulation, as also risk insurance vis a vis Baluchistan), proposed railway line thru Wakhan corridor that will run via Shaksgam Valley (POK territory ceded by Pakistan to China). In addition to communication links a number of power projects are being planned which will see 10,400 MW of power generation added to its grid.

These include; three hydro power projects of which two will be in POK, five coal based power plants, two solar and one wind. Projects also include building a gas pipeline from Gwadar to Nawabshah linking it to national pipe grid.
While proposed infrastructural investments no doubt are impressive, fundamental issues are two; what will be the impact of obtaining security situation on fructification of these projects? It needs to be noted that locations have been carefully selected; nonetheless those in POK will need to be protected as also those in Punjab and Thar from TTP and other militant organizations active in Sind. Interestingly there are no projects in Baluchistan accept for Gwadar – Nwabshah pipeline but large amount of roads and rail infrastructure will pass thru the restive province, enhancing insecurity.

The Pakistani Government has given an assurance to the Chinese that all Chinese personnel and equipment will be secure in Pakistan. As part of this assurance a 12,000 strong special military division backed by civil police wings with highly trained commandoes are to be created. Thus Pakistan will be forced to improve internal security situation in the country and intensify its counter terrorism and counter insurgency operations. Will Pakistan maintain present selectivity in terms of going after TTP and its fringe groups while continuing to protect its strategic assets? Can it afford to adopt the strategy of hunting with hounds and running with hare it successfully adopted with the Americans?

A second issue is absorption capacity in terms of human resources, industrial infrastructure, and capacity to execute mega projects. Going by example of India all most all projects prone to time and cost overruns. In order to speed up things China will most probably induct its own workforce as part of standard model it follows, this in turn will impact local job creation apart from making Pakistan increasingly dependent on China. Some Pakistani analysts are already alluding to lack of policy and administrative capacity together with political resole to undertake such projects.

No doubt infusion of such a huge amount of FDI infusion is music to the Pakistani political and financial establishment, for a country that accounted for mere $ 1 Billion of FDI, management of such a large package of FDI is no doubt a formidable challenge.

Implications for India

These need to be looked from three differing perspectives; first China in Weiqi like moves is cleverly creating tributaries by weaving a web of influence based on economic and trade corridors all around Indian periphery. These include strategic land bridge connecting Yunnan province with West coast of Myanmar in Bay of Bengal thru oil, gas and rail line connectivity. It is proposing to extend this to Bangladesh as part of BCIM project. India has remained reluctant to join this grouping largely on account of its impact on the North East.

Then there are Chinese forays in Nepal, which include a highly publicized project of railway tunnel under Mount Everest, Sri Lanka and the Indian Ocean littorals later being part of Chinese Maritime Silk Road. Thus as the Modi government aggressively pursues its peripheral engagement policy it is being countered by Chinese belt and road policy creating its own zones of influence.

Second an assertive China and economically strong nuclear Pakistan have the potential of extending their bilateral cooperation into Afghanistan and subsequently central Asia with Pakistan emerging as the Southern pivot of the “One Belt and One Road” Eurasian connectivity for both the road and maritime silk routes. Attempts to resurrect Iran – Pakistan pipeline and extend it to China no doubt by connecting to the proposed new pipelines in Pakistan will draw Iran into this new concert of political and economic alignment; leaving India with little options.

A third issue is the serious security implications of this development. If in the mind of Indian security planners collusive threat from Pakistan and China is a reality, the infrastructural and arms sales agreement emerging as a result of President Xi visit will make it even more credible. Further in case China is able to prevail on Pakistan to deal with the issue of cross border terrorism and stop using Taliban as a strategic asset (guarantees sought by Xi), it could over time result in greater defence and security cooperation between Afghanistan and Pakistan which could be leveraged for developing trade and commerce relations by an economically effervescent Pakistan, drawing Afghanistan securely into its sphere of influence.

With China developing credible road, rail and infrastructure corridors to be used for trade and transit on its Western and Eastern flanks India will be hemmed in, leaving only the maritime domain as the main route for operational maneuvering. The extension of Maritime Silk Road to Pakistan, development of Gwadar as also sale of advanced Qing Class submarines apart from earlier naval armaments, china in the garb of protecting its Southern pivot together with developing strong naval base facilities in the Arabian Sea appears to be a strategy to constrain maritime space as well.

Linking these with proposed ‘Lily Pods’ in the IOR littoral by 2020 and beyond will provide China strong naval base to project its forces astride strategic SLOC’s in the IOR. India thus will find strong Chinese presence in the East Coast (Bay of Bengal) exhibited by Chinese naval and nuclear submarine patrols to Myanmar and Sri Lanka as also the Arabian Sea (Gwadar).

Conclusion

The above brief analysis highlights that were the Chinese Silk Road plans to fructify and there appear to be little reason they will not these will have serious strategic implications for India which it needs to think thru and in fact raise during PM’s forthcoming visit to China. An important positive development of forthcoming could be winding down of cross border terror, particularly as Chinese breathe down on Pakistani’s to rear its deep state and spoil an economic opportunity of the life time. Were that to happen then linking India to this economic corridor would be a win – win situation; albeit strategic interests would continue to be undermined till such time India develops credible dissuasive capability. Plans to downsize strike corps and delay border infrastructure development will be at Indian peril, unless credible alternatives are developed.

Courtesy: Eurasia Review

 Building a New Global Financial Institution: Equity-Vote Share in A South-South Development Bank  

Arvind Virmani

March 2012

 ntroduction

The potential creation of a South-South development bank (SSDB) provides us with a unique opportunity to devise governance and voting structure for a multilateral institution on the basis of principles and current & emerging economic reality.  The focus in this note is on the key aspect of governance, the voting rights as determined by equity shares and the formula determining them.  The distribution of power within a multilateral economic institution, the way it is governed, the rules, regulations and policies that it follows and/or recommends and the way these are applied depends (directly or indirectly), on the distribution of vote shares.[1]   An equation of vote shares with quota shares balances rights and responsibilities of countries. A good formula ensures an equitable sharing of power among different countries. An alignment of the institutions power structure with global economic realities, is a prerequisite for institutional credibility and legitimacy in playing an active role in the global economy.

Motivation and Objectives

The starting point for any analysis of the governance structure is the motivation for setting up such a multilateral institution and the objectives it is designed to achieve.   What is the need for another Development Bank, when we already have the “World Bank” and “Regional development banks” such as the IADB, the AfDB and the ADB?  The answer is in two parts.  Firstly, the World Bank is neither able (due to lack of funds) nor willing (because it has reached its “exposure limits”) to fund the increasing requirements for medium-long term infrastructure finance in emerging and developing countries (EMDCs).  The EMDCs have been asking for an increase in the capital of the World Bank for years.  The Developed Countries (DCs) have after many years of foot dragging, reluctantly agreed to a minimal increase in this capital.  This increase is however totally inadequate to generate enough loans to meet the infrastructure needs of the EMDCs.  The developed countries neither have the fiscal space nor the political support/desire/will to provide more funds for economic development of the EMDCs.  Further they are unwilling to consider any arrangement, such as increased equity contribution by emerging economies themselves that will increase the latter’s vote share in this institution.  The second part of the answer is that there are now enough surplus funds in the emerging economies themselves (Current account and fiscal surplus countries) that could be channeled directly to other emerging economies (rather than through NY/London/Washington) if the institutional structures could be created.  The South-South bank is one such institution that could help channel funds from Surplus countries to Deficit countries in the South.  The funds would include a combination of equity and debt.  A South-South Bank would help facilitate flows across different Geographical regions for instance from Asia to Africa.[2]  Finally, a new global development bank can and must be designed to have a governance structure and developmental approach that is more credible to both providers and users of funds.

Possible Formula

    The basic objective of the South-South Development Bank (SSDB) is economic development that is to improve Global Social welfare through economic growth and increased supply of public goods and services.  This in turn identifies the two key variables that are relevant to the governance of the SSDB, namely the ‘economy’ and ‘people’ of the World.  The key variables for determining the equity share cum voting rights in the new institution must therefore be Economic size measured by Gross Domestic Product at Purchasing power parity and Population. The country share of GDPppp in world aggregate output correlates with the potential demand for loan funds for economic development, the funds that must be contributed for the equity of the institution and the voting rights that they deserve in a global economic institution.  The country share of population in world population reflects the composition of the Worlds’ public/people in whose interests the SSDB and the country governments are supposed to act and the mix of experiences, cultures and attitudes that must be reflected in the policies, rules and decisions that SSDB and the governments’ make.[3]

The SSDB is relatively irrelevant to the people and economies of the DCs as they are already developed.[4]  Thus to be consistent with the motivation for and objectives of the SSDB, the formula that is designed to make use of these two variables must be such that it reduce their role relative to the formulas that they have used in the World Bank.  A simple way to do this would be a simple formula (Fmin) that does this is as follows: Assign to each country ( j) a share that is the minimum of its share in World GDP and share in world population, then proportionately adjust (multiply all initial shares by the same factor m) that makes the final equity shares sum to 100%, i.e.

Sharej = Min (GDP sharej, Population sharej).

Sharej (adj) = m * Sharej ,  where m is such that Sum (Sharej(adj)) = 100%.

                                                                                             j

A more conventional formula would be an averaging formula (Favg) that weights the GDP shares and the population shares equally (i.e. 50-50 weights).  This provides a direct way of excluding the “North” from the equity of the bank, by assigning them a zero share in the equity and then using the average shares of the “South” to allocate equity shares (Favgo).

When the Breton-Woods institutions were set up, the USA was in such a strong position that it would have dominated both institutions.  It chose not to base the shareholding on country shares in GDP, so as to reduce its own share. This however, also had the negative fallout of creating an incredibly complicated formula that continues to bedevil rational reform efforts.  The best way to address this issue is to explicitly limit country shareholding to a maximum of 15% (say).[5]

The calculated equity shares would be based on the previous year’s data on GDPppp and population and be automatically recalculated every year. The actual adjustment could be made every two years through addition or subtraction of equity contributions.  The equity determined by the formula would not be an obligation but a maximum equity that any country can hold in the SSDB.  Individual countries do not have to take the equity if they do not have the money or the inclination to do so, but would have their vote share correspondingly reduced!  The unsubscribed equity would then be reallocated to participating governments using the same method as used in the formula, with a corresponding increase in their vote share.

A potential borrower does not have to be a share holder to borrow funds for development.  There would be no link between the equity share contribution and the maximum permissible borrowing though there may be prudential limits based on GDP and population and perhaps other variables.

Illustrative Calculations

Tables 1 and 2 summarize the equity cum vote shares arising from the different formulas using 2011 data from IMF WEO.  The first formula (Fmin) reduces the equity/vote  share of High income countries by a larger amount than the second formula (Favg).  However most of the gain accrues to the Upper middle income countries whose equity/vote share becomes higher than its share in GDP or population (table 1).  The second formula (Favg) in contrast results in a somewhat lower reduction in the share of the High income countries to 35.8%, but distributes the gain more evenly among the other categories of countries.  The low income countries receive a higher equity/vote share of 6.6% compared to 2.4% (in Fmin). If the “North” does not participate in the SSDB (Favgo), the lower and middle income countries  get a share higher than the best of the two base cases, Fmin and Favg (table 1).

Table 1: Equity cum vote Shares resulting from different allocation Formulas

Country Equity/vote shares using formula Unadjusted Share in World Share in South
Income Groups Favgo Favg1 Fmin Favg Favgo Fmin Favg GdpPpp Pop GdpPpp Pop
Low Income (LICs) 9.1 7.7 2.4 6.6 7.9 1.3 6.4 1.3 11.6 2.4 13.4
Lower Middle Inc. 34.2 28.4 22.2 24.3 31.8 11.7 23.8 11.7 35.9 22.2 41.5
Upper Middle Inc. 47.1 36.4 45.2 33.3 52.0 29.6 34.6 32.6 36.6 61.9 42.2
High Income (HICs) 9.5 27.5 30.1 35.8 8.2 15.9 35.1 54.4 15.9 13.4 3.0

Several developed country governments may choose not to participate in the equity of the bank as their legislatures will not sanction the funds. For instance if the USA choose not to subscribe, the remaining participants equity/vote share would go up, improving the share proportion of lower and middle income countries( Favg1). This improves further if the ‘North’ does not participate at all in the equity of the SSDB (Favgo).

The ranking of the top shareholders arising from the formulas is given in table 2. The most important result is that the rich countries neither have a majority in the top 5 nor in the top 10. This is a precursor of what should happen in institutions like the World Bank and the IMF. In going from Fmin to Favg, the ranking of South Africa, an upper middle income country and Nigeria, a lower middle income country, change dramatically, with the former moving down twelve places and the latter moving up ten places.  Other significant changes in top 30 ranking are for Iran (-10), Thailand (-8), Turkey (-7) and Pakistan (+7).  If the share holding is restricted to the South (Favgo), then most countries get a higher share than in either base scenario (table 2).

 Table 2: Country Equity cum Vote Shares resulting from different Formulas

Equity/vote shares using formula Unadjusted Share in World Share in South
Country Favgo Favg1 Fmin Favg Favgo Fmin Favg GdpPpp Pop GdpPpp Pop
China 15.0 15.0 15.0 15.0 24.3 13.6 16.7 13.6 19.7 25.8 22.7
India 15.0 13.7 10.3 11.7 15.3 5.5 11.5 5.5 17.5 10.3 20.2
United States 8.6 12.3 0.0 4.6 12.0 19.5 4.6 0.0 0.0
Brazil 5.1 3.4 5.4 2.9 4.4 2.8 2.9 2.9 2.8 5.6 3.3
Russia 4.7 3.0 4.0 2.6 4.1 2.1 2.5 3.0 2.1 5.7 2.4
Japan 4.6 3.5 3.9 0.0 1.9 3.8 5.8 1.9 0.0 0.0
Mexico 3.4 2.2 3.0 1.9 2.9 1.6 1.8 2.1 1.6 4.0 1.8
Indonesia 3.9 2.9 2.6 2.5 3.3 1.4 2.4 1.4 3.5 2.6 4.0
Germany 3.1 2.3 2.6 0.0 1.2 2.6 4.0 1.2 0.0 0.0
 Iran 2.0 1.4 2.1 1.2 1.8 1.1 1.1 1.2 1.1 2.3 1.3
Turkey 2.1 1.4 2.0 1.2 1.8 1.0 1.2 1.3 1.0 2.5 1.2
France 2.3 1.8 1.9 0.0 0.9 1.9 2.9 0.9 0.0 0.0
United Kingdom 2.3 1.7 2.0 0.0 0.9 1.9 2.9 0.9 0.0 0.0
Italy 2.0 1.7 1.7 0.0 0.9 1.6 2.4 0.9 0.0 0.0
Thailand 1.5 1.0 1.5 0.9 1.3 0.8 0.9 0.8 0.9 1.5 1.1
Korea 2.6 1.6 1.4 1.4 2.3 0.7 1.3 2.0 0.7 3.7 0.8
South Africa 1.3 0.9 1.3 0.7 1.1 0.7 0.7 0.7 0.7 1.3 0.8
Spain 1.5 1.3 1.3 0.0 0.7 1.3 1.8 0.7 0.0 0.0
Egypt 1.5 1.1 1.3 0.9 1.3 0.7 0.9 0.7 1.1 1.3 1.3
Pakistan 2.4 1.9 1.2 1.6 2.1 0.6 1.6 0.6 2.5 1.2 2.9
Argentina 1.3 0.9 1.1 0.7 1.2 0.6 0.7 0.9 0.6 1.6 0.7
Colombia 1.1 0.7 1.1 0.6 0.9 0.6 0.6 0.6 0.7 1.1 0.8
Poland 1.4 0.9 1.1 0.8 1.2 0.6 0.8 1.0 0.6 1.8 0.6
Nigeria 2.1 1.7 1.0 1.4 1.8 0.5 1.4 0.5 2.3 1.0 2.6

Conclusion

The creation of a new South Bank provides us with an opportunity to set up a governance structure that will be representative, fair and credible and last into the future.  The current note has explored one aspect of governance, the equity formula and the distribution of equity/vote shares.  Subsequent notes will explore other aspects of Governance such as the board of directors and the procedures for selection of top management.

References

  1. Virmani (2004), Arvind “Economic Performance, Power Potential and Global Governance: Towards a New International Order, Working Paper No. 150, ICRIER, December 2004.

http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233.

  1. Virmani(2011a), Arvind ““Global Economic Governance: IMF Quota Reform,” IMF Working Paper No WP/11/208, July 2011.

 http://www.imf.org/external/pubs/cat/longres.aspx?sk=25198.0

  1. Virmani (2011b), Arvind “Global Economic Governance: IMF Quota Reform,” Macroeconomics and Finance in Emerging Market Economies, October 2011.

[1] This is based on author’s  two years on the board of a multilateral institution (an inside view).

[2] The existing Regional Banks, by definition, are constrained to operate within their region.

[3] See Virmani (2011a) or Virmani (2011b) for a detailed annunciation of principles in the context of reform of an existing global economic institution.

[4] At a first level. At the next level their short term reduction in intermediation profits would be offset by longer term gains from faster development of  the low and middle income countries.

[5] The minimizing formula (Fmin) will in a decade or so result in the largest share holder(s) having a share that is less that 15%, making the limit redundant from then onwards.