Issue Briefs

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

Arvind Virmani

March 2012


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%.


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


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.


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

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

  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.

India-China Relations: Key is Symmetry

Arvind Virmani
May 24, 2013

Hard-Soft line, Bad-Good Cops & Dual Response
The recent Chinese attempt to change the Line of control in Ladakh by setting up a post 19 miles inside Indian territory and well inside the current line of control, about a month prior to the first visit of new premier Li Kiqiang has been compared by the Author to a similar pattern of action regarding Arunachal Pradesh in the mid-2000s. This analysis showed that China’s behavior towards India seems to alternate between a hardline and soft-line one, which in a Ying-Yang pattern, operationally resembles the classic “Good cop, Bad cop” behavior of police in Western culture. This confirmed earlier analysis that had led the author to suggest that India respond by adopting a dual policy of building defenses(physical and diplomatic) to deter aggression, while simultaneously trying to build better mutual understanding through dialogue and economic and cultural relations.
Analysts have also pointed out that this was the most serious (physically aggressive),incident since the Sumdrong Chu valley incursion in 1986. As such the Sumdrong Chu incident also provides us lessons in understanding China’s behavior and how to deal with the aggressive, hardline, bad cop aspects of this behavior, while keeping our cool and maintaining a dialogue with the “soft line,” “peaceful rise”, good cop elements in China’s leadership.This validates the approach of “Carrying a big(bigger) stick while talking softly.”
Symmetry Strategy
This broad approach can be implemented through a “Symmetry Strategy.” Using an analogy from physics, the Symmetry Strategy would be similar to creating a shield of “anti-particles”(anti-matter)around us so that any “particle” (matter) that China aims at us is neutralized before reaching us. Or less elaborately, creating a mirror image policy (anti-particle) for every negative policy (particle)aimed at us or affecting us, to neutralize it (anti-matter and matter annihilate each other).
The most fundamental asymmetry is between the size of India’s and China’s economy and the consequent asymmetry in defense expenditures. The correction of this asymmetry requires a restoration of Indian growth to 8% per annum and to maintain it there for a couple of decades, as China’s growth slows below 8%. The other asymmetries requiring correction relate to foreign and defense policies.
Past Asymmetry
There are three areas where the Indian desire for “Peace” has led India to not undertake actions that may offend China, while China had no compunctions about taking similar actions that deeply hurt India and offends Indians. These are,
(1) China’s aggressive defense of “Core national interests,” and the expansion of the boundaries of these interests since 1980.
(2) China’s use of Selective Nuclear Proliferation as an instrument of Party policy.
(3) The buildup of infrastructure in and to Tibet, for use by Police, Military and migrants.
(4) Export of China’s Goods, Services and Capital and Import of Technology (through all means).
Core Interests
A symmetric approach, therefore requires a clear definition and defense of our “core national interest:” The States of Jammu and Kashmir(J&K) and Arunachal Pradesh are an essential element of democratic, multicultural, multi-religious, multi-ethnic India (our core national interest). India’s core interest of secularism is grounded in a history of welcoming and hosting all major religions of the world as well as those escaping prosecution from other countries. The maintaining of secular polity is as much, if not more of a core interest of democratic India, than “Social stability” is for China. Correspondingly J&K and Arunachal Pradesh are as much the core national interest of India as theautonomous regions of Tibet andJinxiangand the island of Taiwan are ofChina. Similarly China’s references to “One China Policy,” can be counterpoised with a “One India policy,” along the line that Indian diplomats already seem to have started doing.
The Bay of Bengal, the Arabian Sea and the Indian Ocean are as important to India as the East China Sea and the South China Sea are to China. If it is important for China to have strong bilateral relations with Pakistan, Nepal, Sri Lanka, Bangladesh and Myanmar, it is equally important for India to have strong bilateral relations with Japan, S Korea, Vietnam, Indonesia and Australia. The old colonial and perhaps Neo-colonial illusions of “Watch what we say not what we do,” will not work in this new globalized and information-ally connected world. India has the right to develop as close a defense technology relationship with Japan as China has with Pakistan: India and Japan must become, “All weather friends” a la China and Pakistan.
The Indian political class has long believed that economic asymmetry with China, means that we must act and behave in a manner that does not offend them. There are several mistaken assumptions underlying this belief that need to be corrected: First overall economic asymmetry does not mean you cannot defend yourself against attack or deter such attacks in the first place. Pakistan has demonstrated over half a century how an economy 1/15 the size of India can not only defend itself, but attack it directly and indirectly while deterring India from military and other counter action. They have done this through highly skillful and effective diplomacy, till the Frankenstein of Jihad destroyed their credibility and constrained their policy and behavior. The USSR with 1/4th to 1/3rd of the US economy showed that it could make the World Bipolar. Second, the Gandhian principle of ‘turning the other cheek,’ no matter how noble it is in an individual context, is not an effective method of achieving peace. Deterrence, which raises the cost and/or risk of aggression, is. The most effective way to reduce the probability of War is by developing enough military might and diplomatic support to deter aggression.
This fundamental flaw in our earlier reasoning led to a border policy that resulted in under development of border states and border areas, for fear that good infrastructure connectivity with the rest of India, would allow China to walk off the Tibet plateau into our valleys and thence into the Indo-Gangetic heartland. This self-destructive policy of Isolating and sanitizing (‘inner line permits’) the border areas has rightly been given up. In the meantime China has built a high quality civilian and military infrastructure connecting Tibet to the rest of China and blanketing Tibet itself right up to the border. Symmetry demands that we unapologetically do the same vis-à-vis Arunachal Pradesh and Ladakh. When China can send thousands of Han migrants into Tibet, India has an equal right to facilitate the migration of its Ladakhi residents into the border areas. Likewise for Arunachal and the middle sector.The recent Indian approach to building up border infrastructure and forward defense (airfields, strike corp) is the right one, but like all else in India the resources and attention devoted to it by the political and bureaucratic apparatus may flag unless public pressure is maintained.
A suggestion for transferring control of ITBP from the home ministry to the army should be considered more seriously setting aside turf considerations in the National interest. We must improve our surveillance architecture to detect more quickly, attempts to build structures inside the LAC and to design and develop military counter moves that can be implemented quickly and effectively by the Army. These need not be in the same place in which China has a strategic interest or tactical advantage, but could be in an area of interest, value or advantage to us. As speed is of the essence, the Army should be authorized to take initial reactions quickly.
One element is however, still missing: This is a policy of encouraging and supporting Ladakh residents to fully and actively exploit the Natural resources of Leh district up to the line of control. A civilian Ladakh border development authority could be set up to undertake this effort.
Aggressive Deterrence or Diplomacy
Some analysts have argued that we should also adopt the Chinese policy of Aggressive deterrence, by undertaking tit for tat military incursions on the Chinese side of the LAC, raising questions about Tibetan autonomy and religious-human rights, developing military ties with Taiwan and supplying nuclear technology to Vietnam and others. In my view this goes a little beyond symmetry to mimicking their worst behavior and thus losing our democratic distinctiveness. To continue with the Physics analogy this would be a bit like replacing “Strategic Symmetry” by “Super Symmetry.” Without ruling it completely, I would not recommend adopting this approach at the current time. However we should push defense and nuclear co-operation more aggressively, without constantly looking over our shoulders for China’s reaction.
There are three elements of aggressive diplomacy we must pursue are;
(a) Making our case on the Border and China’s aggressive behavior known to Global opinion makers. A map of China’s claim line in 1960s as presented by China’s PM Chou En Lai must be printed, distributed and explained to all analysts, diplomats and media interested in China’s relations with other countries(including India). Further our willingness to make reasonable trade-offs between claims in the West and East should be made known to these opinion makers.
(b) A Forward policy on bilateral defense co-operation with all strategically important countries and co-operation in defense production and R&D with all countries with more advanced capabilities than ours (in any area). This would include framework agreements for co-operation between the Indian private sector and the private sectors of each of these countries. As we have historically never favored multilateral institutional co-operation in defense (e.g . CENTO, SEATO) and China appears hyper-sensitive to multi-lateral co-operation around its borders, there is no harm in down playing this element at the current time.
(c) Nuclear co-operation can and should be pursued more forthrightly within the international non-proliferation agreements that we have signed or committed to. We must step up nuclear co-operation with democratic Japan, S Korea, Australia, Israel, Germany and Canada by an order of magnitude. We have long resisted closer nuclear co-operation with Vietnam and Taiwan. Though our policies should not and must not show the same disregard for international rules, we can perhaps use this lever to induce China to take a more benign attitude to India’s entry into the Nuclear Suppliers Group (NSG) and Missile Technology Control Regime (MTCR). Another lever that needs reconsideration is the development of technology for building mega-ton thermonuclear weapons.
Economic Balance
When discussing Sino-Indian economic relations we generally talk of total Trade, less about the fact that 75-80% of the total is India’s Trade deficit with China. This has begun to change. Symmetry requires that we highlight and analyze and discuss the massive imbalance between China’s exports to India and India’s exports to China and work to restore the trade balance. This will not be easy given the export-investment led growth strategy that is still being pursued by China Inc. We should participate actively in discussions of China’s controlled exchange rate that barely moves despite large surpluses.
China Inc also has a strong interest in exporting project and construction services and capital equipment to India. They are also willing to provide longer term low risk loans and equity capital . This favors sectors like Telecom. However, with respect to such a “sensitive sector,” we should not be diffident about raising security concerns regarding companies controlled by the PLA or Communist Party linked (so called) private individuals.
With China’s real per capita income about 2.3 times that of India (PC GDP ppp) and nominal per capita income over 4 times that of India, the real and market wage differential should approach those ratios as China liberalizes labor mobility and wages. Much of the labor intensive export oriented manufacturing sector would then become enormously uncompetitive. There is a unique opportunity for China to transfer most of this exportable sector to India and make increased profits, while gaining enormous good will in India by creating jobs. The Indian Government, economic analysts and media should be researching, publicizing and propagating this case.
India needs to take a much less diffident stance towards China. We must pursue a more active approach to developing defense co-operation between the private sectors of India and those of other democratic countries like Japan, Germany and the USA and even S Korea and Australia. This should cover both defense production and R&D. The Indian government must simultaneously raise the limits for FDI in Defense to 74% to facilitate this process. India must also take a much clearer diplomatic approach to defining and presenting our core interests to the World.

A New Regional Doctrine for India

Arvind Virmani

April 10, 2013

Nepal has been in flux since the overthrow of the monarchy. Since the Soviets left Afghanistan, the Pakistan Army has usedJihad as an instrument of State Policy against India. More recently a Golden opportunity of settling many issues with Bangladesh was available and half grasped, but is in danger of slipping away. The Maldives has been in flux with a dictatorship giving way to democracy and possible reversal/setback. Sri Lanka, after eliminating a terrorist and secessionist threat, seems to be diluting its historically strong democracy and undermining democratic institutions. These developments in the Indian sub-continent and the maritime region around it, challenge us to think about a regional doctrine to replace the abandoned “Indira doctrine” and “Gujral Doctrine.” We can take a cue from the strengths and weakness of these doctrines and apply them to the changing strategic environment. Domestic developments, such as the greater interest and involvement of State Governments or State parties in International policy also argue for a clearer enunciation of a regional doctrine.
National Interest
Why are we interested in the region? What is the National interest of India in the South Asia region. Anybody who has followed India’s international affairs since independence knows that most if not all the threats have originated in this region. Leaving aside conventional territorial threats the most important threat has been from terrorism. This threat has taken many different forms including financing, training, directing, provision of safe havens. It was nurtured and developed long before it became an explicit known public threat. Any regional doctrine must have a strategy for addressing the short, medium and long term aspects of this threat. The second regional threat that we have faced is the acquisition of nuclear weapons either through explicit or tacit support of nuclear weapons powers and the use of nuclear weapons for nuclear blackmail in various forms. It would be naïve to believe that this threat cannot worsen either on the intensive or extensive margin. A regional doctrine must try to ensure the minimization and/or elimination of the threat of nuclear blackmail and blackmail using other weapons of mass destruction.Finally on the positive side it would be in the interests of all countries of the region, including India,would gain from free trade in goods and services and mutual FDI.
Geographical Spread
What should be the Geographical reach of such a regional doctrine? That depends on the degree to which developments in the country/region can either benefit us or harm us. There is general agreement that developments in the Indian sub-continent-South Asia (Afghanistan to Myanmar, Nepal to Sri Lanka) have this potential. Whether Maldives in the Arabian Sea has this potential is less clear. What about other more distant island nations in the Indian Ocean? This depends partly on the amount of resources we are able to commit to the overall task and our strategic reach and partly on the presence of larger, stronger potentially hostile external powers operating in the Indian Ocean (a circumscribedversion of ‘Indira doctrine’). By these criteria, Maldives could be included within the region of operation of the doctrine, while other islands may be added over time, as capabilities and potential threats grow. Other Indian Ocean islands of potential interest are Mauritius and Seychelles.
Democracy, Secularism, Peace
Our own culture, secular traditions and democratic principles must form the bedrock of any external doctrine. The basic thrust of the doctrine must be to actively support friendly, peaceful, secular democratic forces, in the region. This would include civil society organizations, political forces and parties and governmental institutions that believe in a peaceful democratic future for their own country and for peaceful, friendly and co-operative relations with neighboring countries (including India). One operational consequence would be for Indian elites, media, and public to clearly and openly back genuinely pro-peace, political parties in these countries. They must, however, be mindful of creating public pressure on the government to adopt a blunt approach that can prove counter-productive. There should also be less inhibition in co-operating with Civil society organizations in other democratic countries that share the same objectives.
Government of India must be much more subtle and nuanced in its approach than civil society organizations, think tanks and media need to be. If and when such friendly parties are in power in the region, the Indian Government should provide asymmetric inter-governmental benefits to assure them and their supporters of the benefits of their positive approach (a selective version of Gujral doctrine).On the other hand government per se should not “unabashedly back Pro-India political parties (NitinPai BS 8/2/13),” in these countries, as in our view, this could be counter-productive in promoting friendly forces.
Dictatorship, Fundamentalism, Terrorism
The second aspect of this doctrine must be a hard headed strategy for opposing dictatorial and militaristic forces that have no compunctions about using violence against their own citizens, supporting terrorists, or engaging in hostile actions against neighbors such as India. This requires us to undermine fundamentalist/extremistelements and organizations, whether religious or ideological, which have a philosophy, ideology or history of violence. We have to rid ourselves of our extreme squeamishness in confrontingforces,which have no moral or social compunctions about harboring, sheltering, training andfinancing militant groups thatuse violence against innocent civilians (in any country in the region).We must be prepared to use every feasible means to thwart such forces. We must also undermine their supporters -Political parties which provide open or tacit support,countries or organization outside the region that provide funds and safe heavens.
It is essential that the Indian elite, media and public adopt a clear and open stand against extremist forces, organization, elements in supposedly moderate political parties and organs of the government (e.g. Army). They must have an equally clear stand against terrorist killing of innocent civilians. Though government’s stand should be equally unabashed with respect to hostile non-govt. organizations, its public posture towards extremist forces within the government (of these countries) would have to be more nuanced. It is more important for the government to act quietly and forcefully against such institutions than to talk a lot about it. It can however, take a much more active diplomatic stance in private dealings with other countries who profess the same values and approach with respect to terrorist forces threatening them. At the same time the Indian elite, media and civil society must understand and support the nuanced public stance of the Indian government
Ethnic Cleansing
Government could, however, take a more active role in international forums in exposing genocide and ethnic cleansing by an anti-India governing party or organ of government, perhaps through an announced policy. For instance India should have supported international efforts to expose the genocide in E. Pakistan/Bangladesh and to punish the guilty, including elements of General Tikka Khan’s army (a la Justice Hamood-Ur-RahmanCommission) and its agents and collaborators in the Jamat-e-islami (Razakars). The main argument against this proposition is that, it will open us to foreign interference and questions from other governments about how we have handled the insurgencies in J&K, the North West and in Maoist areas. There are two approaches to this: If the questioning is from Western ‘do gooders’, we must confidently question their own record of supporting dictators and murderers to further their national objectives. If the questioning is from oligarchic and dictatorships we must quietly but firmly tell them how their own record can and will be questioned. This requires a little hard work, including building a dossier on these countries historical record, and an awareness among our analysts, commentators and diplomats about this record.
In this context the most important question confronting the sub-continent is the ethinic-religious cleansing going on in Pakistan. Though it started long ago with prosecution of Hindus it has now been extended not only to Christians but to all non-Sunni Islamic sects and groups such as the Adamidis and Shia’s. Recent reports suggest that it is beginning to be applied to other sects such as the Aga-Khanis, Sufis and even liberal Sunnis who deviate from fundamentalist tenets of Al Hadith. The global terror unleashed by fundamentalist Islamic groups (many originating in Pakistan) is now giving a rise to an ugly counter-reaction by Buddhists in Myanmar and Sri Lanka.
Civil Society Idealism
The main modality for supporting positive forces and opposing negative ones in theregion,should be Civil Society organizations funded or supported by the government. These would need to have a clear program for study and analysis of neighboring countries to identify the positive and negative forces, the socio-political dynamics and the organization that need to be supported or ostracized. Based on this analysis they would have to work out country strategies to support the positive forces and oppose and undermine the negative forces in each country. They may need to hire development experts, former diplomats and intelligence experts with knowledge and expertise in these countries to formulate and implement these strategies. This knowledge and expertise would also be invaluable in government decision making in emergencies. One of their most important regional objectives should be to support other civil society organizations across the region, particularly those headed by Women, which believe in and work on, the socio-cultural objectives that constitute the high culture and the best traditions of the sub-continent.
It may also be worth creating and funding regional language TV, web papers and web sites that are run by regional language speaking non-Indian journalists and media persons. For instance Civil society groups could fund an Urdu language website that is run by journalists of Pakistan origin (/nationality) interested in preserving liberal non-sectarian values, promoting liberal democracy and civilian control of Armed forces and preaching peace, countering ethinic and religious hatred and promoting rational discourse on critical Pakistani national issues like terrorism, Balochistan, cleansing of Shia-Hazras, TTP takeover of NW Pakistan and the origins and consequences of “The Deep State.”
Government Pragmatism
Though this doctrine will help in the medium-long term, in the short run, National Interest should play a dominant role in deciding how to deal with Army led Pakistan (Musharraf after his coup), a Military led Myanmar (with sole friend China), or democratic countries veering towards oligarchy. We must ignore the self-interested advice of Western human rights activists who have never been able to stop their own countries from coddling dictators who made life hell for neighboring countries.
Independent think tanks, Government supported organization and perhaps the National Security Advisory Board should try to formulate a full-fledged Regional Doctrine along these lines. It should then be discussed by the media and political parties. Once there is a broad agreement we should also invite think tanks in friendly countries such as the US to comment on it, before reaching a final understanding among ourselves. For any policy doctrine to succeed there must be a tacit understanding among all elements of society on its broad contours and the role of different institutions in propagating and promoting it. In my limited experience, successful foreign policy and diplomacy (the US, Pakistan till 5 years ago) always has this tacit co-ordination behind it.
1. Hagerty, Devin T., “India’s Regional Security Doctrine,” Asian Survey, Vol. 31, No 4, April 1991. University of California Press.
2. Robert Stewart-Ingersoll, Derrick Frazier,Regional Powers and Security Orders: A Theoretical Framework, Rutledge Global Security Studies, 2012, pp 116-117, 124, 146-149.
3. James R. Holmes, Andrew C. Winner, Toshi Yoshihara, Indian Naval Strategy in the Twenty-first Century, Rutledge, 2009.

Quota formula reform is about IMF credibility

Arvind Virmani, 22 June 2012

Looking at the economic and business media over the past few months you can be forgiven for thinking there are no other problems with the world economy. This column argues that we need to remind ourselves of the need to reform the IMF, lest the ‘International’ part will lose all credibility.

The Eurozone crisis has overwhelmed all other debates about the reform and development of global governance institutions dealing with the world economy . It is therefore necessary to remind ourselves why we need a reform of the IMF quota formula. The quota formula determines the both the quota contribution and the vote share of the members of the IMF (except for the basic vote which is assigned equally to all members and therefore favors the smaller members). Not are only are all policy issues decided by a majority vote of the board, but it subtly influences the thinking and behavior of the staff. Thus a rational and reasonable quota formula reform is fundamental to the credibility and legitimacy of the IMF in a rapidly changing world economy. Unless the power balance in the IMF changes to reflect the changes in the balance of economic power in the world economy, the IMF will inevitably lose credibility as an international institution. Maybe my eyesight and hearing are not as strong as in my youth, but in the past year I have neither seen nor heard anything (in the IMF or G20 setting) that would indicate that there is any recognition by the European powers of the need for formula reform (and vote shares) to maintain credibility.

Figure 1 illustrates for the ten largest countries, the discrepancy between their share of aggregate world production in 2011 (GDP sh) and their calculated quota share (CQS). All the European powers have a calculated quota (as per the formula) that is higher than their share in world GDP, while the USA and the BRIC have a calculated quota share that is lower than their share in world GDP.

Table 1 on the contribution of major economies to World growth during the past three decades encapsulates succinctly the point about global change and credibility. In the decade of the 1980s, the US and Eurozone + UK contributed over one-fifth each with Japan contributing about one tenth. In the decade of the 2000s the contribution of each of these had declined sharply with the USA contributing less than the 10% contribution of India, and all three together contributing about half that of China. The contribution of the Eurozone + UK has declined progressively from 20.6% in the 1980s to 17.3% in the 1990s to 6.4% in the 2000s. This reflects a fundamental transformation of the world economy and an emerging shift in economic power. Unless this shift in economic power is reflected in the IMF an institution for monitoring/managing the global economy, it is not difficult to imagine it going the way of other UN institutions that have completely lost global credibility and are increasingly being bypassed.

Figure 1. Shares of world GDP and calculated IMF quota




Table 1. Structural change in the world economy

Contribution to world growth
1981-1991 1991-2001 2001-2011 1981-2011
United States 21.2% 26.3% 9.6% 17.0%
Euro Area + UK 20.6% 17.3% 6.4% 12.6%
Japan 11.4% 2.4% 1.0% 3.7%
China 8.7% 17.9% 29.6% 21.6%
India 4.4% 6.5% 10.1% 7.8%
Rest 33.8% 29.7% 43.4% 37.3%

There is one other very important fact that is often obscured, sometimes deliberately. The contribution of the “Rest of the World” has increased by 10 percentage points from 33.8% in the 1980s to 43.4% in the 2000s. A formula that fully reflects the changes in the global economic power will add to the vote share of the smaller countries, not reduce it.

The US share of the world economy has declined from 23% in 1980 to 19% in 2010. Yet they have wisely chosen to hold a little over 15% of the quota shares and continue to remain below their share of the World economy. The Euro area + UK’s share of the World economy has declined from 25% of total in 1980 to about 18% in 2010, while their calculated Quota share (CQS) is still 27.5% (2009). At the same time their share of total borrowing from the IMF has increased dramatically. Three decades ago the rich countries had the money and controlled how it was lent to the poor countries who were the main borrowers. The objective situation has now reversed with the rising powers perfectly willing to contribute as much as needed as long as their quota share is adjusted appropriately, while the major borrowers are the rich countries of Europe. The earlier arguments are therefore being turned on their head to justify the continued control of the European powers. Unless the quota formula is changed to realign the voting rights in the IMF with the changing balance of global economic power, there is a danger of global public opinion beginning to question the ‘International’ in IMF and to wonder whether it is the European Monetary Fund (EMF).


Bryant, Ralph C (2003), Turbulent Waters: Cross-Border Finance and International Governance, Brookings Institution, June.

Bryant, Ralph C (2004), Crisis Prevention and Prosperity Management for the World Economy.Pragmatic Choices for International Financial Governance, Brookings Institution.

Bryant, Ralph C (2010), Governance Shares for the International Monetary Fund: Principles, Guidelines, Current Status, Brookings Institution, March-April.

Buira, Ariel (ed.) (2005), Reforming the Governance of the IMF and World Bank, Prepared for the G24 Research Programme, Anthem Press.

Cooper, Richard N and Edwin M Truman (2007), “The IMF Quota Formula: Linchpin of Fund Reform”, Policy Briefs in International Economics 07-01, Peterson Institute for International Economics.

International Monetary Fund (2000), “External Review of Quota Formulas: Report to the IMF Executive Board of the Quota Formula Review Group, Report of a Group of Independent Experts (Chairman, Richard Cooper)”, International Monetary Fund, April. The Report includes an Annex and Statistical Appendixes. The Report and staff commentary were made public in September 2000.

International Monetary Fund (2008), “Reform of Quota and Voice in the International Monetary Fund – Report of the Executive Board to the Board of Governors”.

Kelkar, Vijay, Praveen K Chaudhry, Marta Vanduser-Snow and V Bhasker, “Reforming the IMF: Towards Enhanced Accountability and Legitimacy”, in Ariel Buria (ed.), Reforming the Governance of the IMF and the World Bank, Anthem Press.


In VOX EU at

Strategic Response to Pakistan’s India Policy

ByArvind Virmani
August 15, 2013


On 11th May, 2013 General elections were held in Pakistan, and on June 5, 2013 Nawaz Sharif, the leader of PMLN was sworn in as PM with a majority. One of the supporters of the PMLN, in Punjab was the JUD.Indian General electionresults were declared on May 16th giving the BJP a majority in the Lok Sabha. On 23rd May, 2014 the Indian consulate in Herat was attacked by LeT (as suggested by the Afghan President a few days later and confirmed by the US govt. a month later). The BJP-NDA govt was sworn in in the presence of SAARC leaders, including Nawaz Sharif, who were invited for the swearing in on 26th May 2014. It was subsequently announced that the Foreign Secretaries of the two governments would meet in August 2014. On August 14, 2014 PTI leader Imran Khan (Azadi march) and Tahirul Qadri laid siege to the Red zone in the Capital Islamabad. The indo-Pak foreign secretaries meeting was cancelled on August 14, 2014, a week before its scheduled date of August 25, 2014, because Pakistan ignored the call by Foreign secretary not to meet separatist leaders. What does this very event full year portend for Pakistan-India relations?
However, neither the use of force nor diplomacy can serve if we are confused about our Strategy and Objectives. The basis of ‘strategy’ is an unsentimental understanding of the opponent and his strategy and objectives.

Military’s Objectives
After the formation of Bangladesh in 1971, the Pakistan Military, fully supported by the entire Pakistan establishment, developed a two pronged strategy of dealing with India: Acquire nuclear weapons and use these as a shield to carry out Jihad against India. Pakistan’s entire international policy and much of its internal policy was driven by this obsession of revenge against India. It was not just a policy of the Military, but was fully supported by and implemented by the Pakistani elites (political, bureaucratic, diplomatic, business, professional).
General Zia ul Haq (1977-88), imposed a policy of state-led Islamization, by bringing in his concept of Sharia, including the infamous blasphemy law. Under his regime, the fundamentalist Ahl-e-Hadith version of Islam, was introduced in (all) school curricula, as a result of which, “An entire generation of Pakistanis studying in public (and secular) schools has grown up viewing not only non-Muslim minorities but also Muslim minorities as “the other,” as “unpatriotic,” and as ‘not Muslim enough’.” Gen Zia Ul Haq, the “Godfather of global Islamic Jehad,” used to greet Indians with an expansive bear hug, so that they would assume that he too thought of them as long lost brothers.
Zia’s successor as Army chief, Gen Mirza Aslam Beg (1988-1991), developed the policy of “Strategic depth,” in an effort to incorporate Afghanistan as a training and operations base for Jihad against India and to improve “deniability.”About 90,000 Afghans, including Mullah Mohammad Omar, the Taliban Emir, were trained by Pakistan’s ISI during the 1980s.
So the first question we have to answer is whether there is any change in this dual policy towards India? There are two parts to this: One relating to the Pakistan Military (PakMil) and the other to the non-military elites of Pakistan.

Jihad & its Supporters
The most important event that will shapethe behavior of the Pakistan Army in the next two years, is the accelerated withdrawal of the US from Afghanistan (by 2014). This withdrawal provides it a golden opportunity to restore its hegemony in Afghanistan. Ideally the Army would like to reestablish the dominant position it had before the Taliban was driven out of Afghanistan and had to shift its headquarters and operating bases to Pakistan (Quetta Shura, Waziristan, ‘Taliban prisoners!’). Failing this it would be happy with a regime that subserves the Pakistan Army’s interests. This is likely to be the central and most vital objective of the Pakistan Army and its primary operational instrument the ISI,during the next two-three years.
The tantalizing hints of a change in Pakistan Army doctrine purportedly downgrading India’s unchallenged position as “sole enemy,” are diplomatic publicity designed to restore Western perceptions of Army led Pakistan as a “trusted ally”. At the same time the Jehadis within the Army–ISI and the “Good Taliban” need to be reassured. The following statement of Maj-Gen Asim Saleem Bajwa, DG, Inter-Services Public Relations (ISPR) keeps open the possibility of doing both: “Army prepares for all forms of threats. Sub-conventional threat is a reality and is a part of a threat matrix faced by our country. But it doesn’t mean that the conventional threat has receded(quoted in the Express Tribune).”

Signal & Pointers
What then was the motivation for therelatively small but aggressive action across the LOC in January 2013? Several commentators had asserted that this action was designed to send a signal to the Indian Army.To buttress this argument they have pointed to the increase in cease-fire violations compared to a year ago. It has been argued that with the resumption of military and civilian Aid to Pakistan, the Army is again emboldened to ratchet up hostile actions against India, without fear of a serious response from the Indian Government. The factors mentioned by these analysts are certainly relevant for the assessment of the motivation and timing of specific actions of the Pakistan Army and ISI. However, another possibility is that the hostile action is a signal to Pakistan’s own Jehadis, both within the army and outside it.
One of the interesting pointers in this direction was the statement of LeT’s Hafiz Saeed, that this incident was part of the hostile and violent Indian actions across Pakistan and India’s repeated attempts to undermine peace! When a terrorist wanted by the USA, with a reward on his head,a hate monger who gives vitriolic speeches against Indians, talks about “Peace” it is worth noting! Not because it reflects a change of heart, but because it reflects what his handlers would like him to say. The fact that newspapers report that Hafiz Saeed visited POK a few days before the aggressive cross-border actions in January and August, and may have had a direct or indirect role, suggests that the Army wanted the Jihadists to be fully aware of this action, even if India downplayed it (as perhaps they mistakenly expected). Subsequently Hafiz Saeed gave an interview to the US press trying to portray himself as an ordinary person
The second pointer was how quickly Pakistan’s civilian government (EAM Rabani) responded by its diplomatic statement of willingness to refer the incident to the UN, knowing full well that with Pakistan currently chairing the UN security council, India would be more than usually reluctant to refer the incident to anyone outside established bilateral channels. The civilian government has repeatedly faced demands from Pakistani Jihadists to take India to the UN on Kashmir. This was followed by an appeal from the OIC for a fact finding team to J&K. The Army knew beforehand that such an opportunity could arise and perhaps used it as an argument to obtain prior Civilian government approval for limited action on the LOC, that could be used to counter Jehadi criticism of the Army and government “inaction” on Kashmir.
A third pointer was the discovery of mines with Pakistani markings from the Maoist insurgents and reports of ISI activity in the troubled Rhongiya areas on the Myanmar-Bangladesh border. The Huriyat leaders who visited Pakistan soon after the incident were reportedly told by the Army brass as well as the leaders of the LeT and the JeM not to participate in any Indian Govt. peace initiative for the next year. More recently the release of ‘Afghan Prisoners’ purportedly to meet the Afghan demand (for handover of Taliban leaders based in Pakistan)half way and to aid theAfghan peace process has been followed by reports that the released leaders are back fighting the US forces. As the middle ranks of the Taliban fighters had been depleted by US drone strikes, the Pakistan Army perhaps thought it could play both sides of the aisle by replenishing depleted Taliban ranks in Afghanistan while presenting this as a peace gesture to the Afghan government (and the USA/UK).
Current Priorities
The hostile Pakistani army actions across the LOC is a signal to the Pakistani jihadists( “Paltu Kuttas” – ‘Pet dogs’)that thePakistan army and Government are not abandoningtheir anti-India policy, in their respective quests: The Army for a dominant role in Afghanistan,financed and underwritten to the maximum extent possible by the USA and the civilian government for normalization of relations with India so as to remove the stigma of being dubbed “terrorist central” and to reduce the control of the Army over the political system and government.
The greater challenge for India is therefore to,
(a) Help stave off a fundamentalist takeover of Afghanistan,and
(b) Prepare for a renewed threat to India (including J&K) from Pakistan controlled jihadists operating from fundamentalist(re-)controlled regions of Afghanistan.
This requires a multipronged Indian effort to increase the cost to the Pakistan Army of a policy of training, financing and directing jihadists and terrorists across the sub-content.

Democracy & Elites
Past developments like the attack of Jihadis outside the control of the Military (Tehrik e Taliban Pakistan) on Pakistan Military officers, vehicles, offices and bases (Mehran Air base Karachi) and the successful killing of Osama Bin Laden in Abbottabad, Pakistan by the USA have lowered the prestige of the Army and provided some space for the politicians to assert themselves. The reassertion of constitutional rights by the Pakistan Judiciary has also helped in this process, though there are also negative effects. These and other developments have provided some opening for the non-military elites to start questioning the self-serving Anti-India narrative of the Pakistan Army.

Pakistani Elites After 9/11
The Al Qaida attack on the USA (9/11) set in motion a process of learning among the US, UK and other Western analysts and policy makers, who directly or tacitly supported this Pakistan policy by connecting all violation of global rules and practices by Pakistan to something that India did or did not do. The erosion of the international carte blanche for Pakistan, forced a rethink by the globalized English speaking elites of Pakistan. But Inside Pakistan they may be a shrinking minority, decimated by the murder of any one who exposes Pakistan military’s double dealing on Terrorism or draws the ire of the Sunni fundamentalists (misusing anti-blasphemy laws). With the coming of democracy, the leaders of the major Pakistani political parties (PPP, PML-N) have realized that their own and their party’s interests are not identical to those of the Pakistan Military and appear to be willing to consider changing the anti-India policy. Mr. Nawaz Sharif has gone further than Mr. Zardari could, in making clear that more normal relations with India would also be in the interest of his party.
However, in a democracy one must ask, what is the extent of support for changing a policy of anti-India Jihad, to one of Peace. Unfortunately, as the old (English educated) elite has begun to realize that the Frankenstein terrorists they have created may destroy Pakistan itself by taking it back into a medieval age, the new Urdu speaking (Sunni) elites appear to be behind the terrorists. General Zia ul Haq (1977-98), imposed a policy of state-led Islamization, by bringing in his concept of Sharia, including the infamous blasphemy law. Under his regime, the fundamentalist Ahl-e-Hadith version of Islam, was introduced in (all) school curricula as a result of which, “An entire generation of Pakistanis studying in public (and secular) schools has grown up viewing not only non-Muslim minorities but also Muslim minorities as “the other,” as “unpatriotic,” and as ‘not Muslim enough’.”
The impact of this policy is not confined to Hindus, Christians, Ahamadis, Aga Khani’s, Sufis and other offshoots and variants of Islam: “The anti-Shia militants roam with impunity, appear on prime-time talk shows on television and hold political rallies where they declare Shias as unbelievers and Wajib-ul-Qatal (deserving of death). These anti-Shia groups have ties to political parties that afford them both political influence and protection. They are rarely arrested, even after they proudly and publicly announce their deeds—like in the repeated massacres in 2013 of Hazara Shias in Quetta.” (Isphani op cit)“
“The anti-Soviet Afghan jihad of the 1980s not only helped the groups in Afghanistan, it had a massive blowback on Pakistan. Money from Saudi Arabia and other Gulf countries poured in for madrassas all over Pakistan, bringing curricular changes, a Wahhabi (or as it is referred to in South Asia, Ahl-e-Hadith) version of Islam and its views of both Muslim as well as non-Muslim minorities. The curricular changes were not only in the religious schools but also the secular ones. An entire generation of Pakistanis studying in public (and secular) schools has grown up viewing not only non-Muslim minorities but also Muslim minorities as “the other,” as “unpatriotic,” and as “not Muslim enough.”(Isphani(op cit))”

Elections and After
The period between the announcement of Pakistan’s General election and the announcement of election results were marked by a number of developments: These included disqualification of insufficiently Islamic candidates by the election commission and its officials, supported by the judiciary (in dismissing review petitions). A systematic campaign,by the TTP & related groups, against what were called “liberal parties (ANP, PPP)” in Pakistan context (not global), and the killing/assassination of these parties candidates. The open wooing of the “good jihadi” organizations (Jud, Let, LeJ et al) by Nawaz Sharifand his PML(N) and by Imran Khan and his PTI cannot also be ignored or dismissed as normal “dirty politics” .
The World (including India) perceived the elections in Pakistan as reasonably successful. This gave rise to intense speculation of the changed prospects of better relations between the two countries. Aggressive questions by Indian Media have forced Nawaz Sharif to express positive sentiments about peace with India and to invite the Indian PM for events normally not attended by foreign dignitaries. This led soon after to a counter statement by Syed Salahuddin, head of Hizbul Mujahedeen (HM) and member of the Defa e Pakistan (DeP) warning him not to dilute Pakistan’s anti-India policy. What is the likely policy orientation of a Nawaz Sharif led Civilian Pakistan Government and how if at all is it likely be to be different from policy under the previous Civilian Government?
Nawaz Sharif’s Support Base
Nawaz Sharif owes his clear victory in the election at least in part to, (a) The branding of PPP & ANP as “secular parties” by the Tehrik-e-Taliban Pakistan (TTP) and its deceleration of war on them during the elections (assassinations/bombing of their candidates, workers and supporteres). (b) Close relations with and support of the Jehadi parties in Punjab like the Jamat U Dawa(JuD) / Lakshar-e-Toiba(LeT) and the Jaish-e-Mohammad(JM). Add to this the votes and seats won by Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) and the Jamat e Islami (JI), the religious fundamentalist base is large. From occasional articles in the English Press it is appears that the post partition (new) Urdu speaking elites of Pakistan (Media, Judiciary, Professionals, Businessman) are much more fundamentalist in their religious beliefs and attitude towards non-Muslim countries, particularly USA and India.
Like any good politician PM Nawaz Sherif is unlikely to openly challenge the objectives of these parties (e.g. Salafi/Wahabi Islamization of Kashmir), which he perhaps shares as part of the Urdu speaking elites. In fact PMLN’s first budget makes an explicit budgetary allocation for the Jamaat U Dawa (JUD) the parent body of the Laksher e Toiba (LeT). PM Nawaz may however, try to convince the Jehadi’s to change their strategy and tactics in the interest of Pakistan’s global image and failing economy.
The other part of his support base, the lower middle class youth looking for jobs and earning opportunities and businessmen looking for profits, could in contrast provide him with an equally strong base for normalizing economic relations and exploring new avenues for mutual economic benefit. To the extent that terrorist bombings and assassinations in Pakistan are a threat to foreign, non-resident Pakistani and even domestic investment (capital flight), the base could support strong measures to restore law and order in Pakistan.
New India Policy?
Nawaz Sharif’s assumption of the reins of government with a democratic mandate reinforces these conclusions and fleshes them out more clearly. Nawaz Sharif in full co-operation of the Army is likely to promote a shift of Jihad related activities (promoting, training, organizing, managing jihad), out of Pakistan and into Afghanistan and the badlands of the Af-Pak borders to increase “deniability”. As he said, he will “not allow Bombay type attacks from the soil of Pakistan.” However, the Jihadi’s will need to be kept happy by reviving cross-border firing and infiltration attempts. As President General Musharraf was responsible for making the cease-fire on the LOC more effective (as part of the peace process), we cannot rule out the possibility of Nawaz Sharif repudiating it internally to allow the Army to revert to the pre-Musharraf posture.
He may also try to moderate the Jehadi’s anti-India & anti-US rhetoric and to keep it out of media that can be accessed easily by foreigners and foreign (including Indian) media. On the other hand he may give a freer hand to diplomats on speaking about Kashmir related issues, while simultaneously stepping up the decibel level on the need for Indo-Pak peace.

Economic Relations
If Nawaz Sharif and his party choose, they can bring about complete normalization of economic-business relations(including investment), trade and transit (to Afghanistan & Central Asia) policy and infrastructure connectivity between Pakistan (+PoK/AK) and India (including J&K). As these are mutually beneficial relations, on our side the need is to meet each other half way (there is no need for special concessions by either party). Many of these ideas were discussed at a Seminar that I attended at the Wilson Center in Washington with eminent Pakistani economists & retired bureaucrats in late 2012. If Pakistan chooses it could become the trading and transport hub for connecting thriving economies of Central Asia, India, Afghanistan (mineral resource potential) and Iran/Gulf countries. The TAPI pipeline project could be brought more firmly on the agenda. Permanent Normal Trading Status (MFN) is economically minor but politically important foundation on which this mutually beneficial relationship can be built. As noted by many observers, the two Punjabs could play a very important role in creating the positive narrative to smooth the political path.
In this, I differ somewhat with those who favor an incremental approach. I would favor an approach that asks the new Pakistan government how quickly and how far they are willing and able to go on all economically related issues and be willing to move as fast as (we judge) they are able to do. I must warn that moving fast does not mean making asymmetric concessions: If the new democratically elected government of Pakistan cannot convince its own electorate of the benefits to Pakistan of economic normalization, then no amount of concessions can help in convincing the masses: They would merely be seen either as a sign of Indian weakness or as attempts to bribe special interests in Pakistan to adopt anti-national policies in Pakistan. Both bilateral and SAARC processes need to be activated to provide a greater flexibility.

India’s Policy Response
India needs to separate non-concessional, mutually beneficial relations from concessional gestures and keep the former from becoming hostage to jihadist bombings in India. Friendly gestures and concessions affect a tiny minority of the elite in Pakistan and have little chance of affecting the behavior of the establishment in Pakistan. If they do not harm the Pakistan Military, its terrorist instrument the ISI, and the Jihadists managed by them (Haqqanis, Laksher e Toiba,HM et al), they have no effect on their behavior. Similarly deadlines and conditions regarding trial and conviction of 26/11 and other cross border terrorist attacks are routinely ignored by the Pakistan Government and retracted by them. This achieves nothing except reducing Indian credibility. The only purpose that these periodic demarches can serve is diplomatic, namely informing World Public opinion of the double faced nature of Pakistan’s statements and actions.
The only way of dealing with the Pakistan Military’s Jehad policy is to devise an anti-terrorist strategy covering not just India but the whole of Southern Asia. We have to be more innovative and bolder in disrupting the Jihad supply chain (including financing), taking the fight to the terrorists across Southern Asia (Afghanistan to Myanmar)and increasing the cost to the Pakistan Military of its Jehad policy. If the supply of defensive equipment to Afghanistan helps strengthen democratic anti-Taliban forces in Afghanistan, India should proceed with all deliberate speed on the Afghan Government’s request for weapons Aid. Further, as Edward N Luttwak, the military historian and strategist, has convincingly argued (paraphrasing): “On the military front, India’s response should be to decisively inflict damage on Pakistan’s army. The idea is to go for precision strikes at valuable targets that are not of utmost importance (even in a symbolic fashion), but inflict heavy losses on the Pakistan Military for any of its misadventures across the border. India has to acquire capabilities to make such surgical strikes using a relatively small, relatively high-grade commando forces equipped with vehicles to strike selectively and precisely so as to cause maximum damage to targeted installations.”
On the LOC the Indian Army Chief should be empowered to act firmly and proportionately in self-defense (without fuss and public breast beating), to any cross border actions, and without prior permission of the Secretary (Defense)/ Defense Minister, for a defined period(say 1-2 days). One or more MEA officers, familiar with broader diplomatic issues should be seconded to the Army to provide inputs directly to the Army Chief and/or the commander dealing with the LOC.
This should not be construed to mean that we should not talk about or seek a cease fire on the LOC. A genuine cease fire on the LOC is in the mutual interests of the people of India and Pakistan (not the Pak Army) and should remain one of the aims of India-Pakistan relations.
Indian Diplomacy should also document to Shia governments and intellectuals across the World of the ethnic-religious cleansing going on in Pakistan with the connivance, if not active participation (e.g. Baluchistan) of the Pakistan Military and government in it. We should also not do anything that harms the people of Pakistan, particularly those that are genuinely open to good relations with India, while being crystal clear that we have every right to undermine those who support terrorism against India. In fact we should try and find innovative ways of helping groups and sub-groups in Pakistan who are positively inclined towards India, without making it easier for the Pakistan Government to provide funds to organizations like the Jamaat U Dawa (JUD) through its budget.

Business Relations
The most significant area of potential mutual gain for the people of India and Pakistan (positive sum) is the restoration of India-Pakistan-Afghanistan-Central Asia/Iran connectivity (road, rail, air transport), transit, trade and investment relations to a level that prevailed historically. In fact with the resource rich economies of Central Asia booming and China seeking outlets through them and markets in South Asia there is a potential for a quantum leap in economic interactions and mutual benefits. This should be the focus of any formal official interaction between India and Pakistan.

Strategy: Two Prongs
Keeping this background in mind what should be the Indian Governments strategy to deal with Pakistan. As has been clear for some time it is in India’s interest to have a two pronged approach towards Pakistan:
(1) Identify, discuss and implement economic, cultural and other policies that are good for the people of both India and Pakistan. For instance, theory and empirical evidence points to the fact that normal trade, transit, investment backed by good trans-border and trans-Asian (from C. Asia/Iran to Myanmar) infrastructure would be in the interests of both countries and their people. Similarly, genuinely open and symmetric social and cultural policies would be mutually beneficial and can and should be pursued without interruption. What is completely unclear at this point is the case for India to make any asymmetric economic concessions and gestures that are only economically beneficial for Pakistan and financially costly for us. These require a much higher standard of trust in the Pakistan government and in its ability to overcome domestic objections to normalization.
(2) Increase the costs to the Pakistan Military of its anti-India Jihad and thus affect its benefit-cost calculus. This has three elements: (a) The Military as an institution (flow of financial aid and sophisticated equipment & technology), Forceful response to cease fire violations. Targeted attack on valuable (but not iconic/symbolic) assets by a small super-specialized commando force, in response to cross-border terrorist incidents. (b) The Anti-India Jihadi organizations (Take the fight to them all over S. Asia by developing covert assets). (c) The personal interests of serving & retired Army/ISI officers: Identifying & blacklisting (UN, US, west) all those connected with terrorism.

In my view there is likely to be little or no substantive change in Pakistan’s policy towards cross border Jihad, though it may be better nuanced and supported by a more credible civilian government narrative, which will again perhaps befuddle some analysts in the West. The attempted bombing of India’s Consulate in Jalalabad (August 3, 2013) and the joint Pakistan army-Jihadist attack across the LOC(August 6, 2013), confirm this analysis. Any piecemeal deal that helps Pakistan Military’s (Pak Mil) objectives (e.g. Siachin) should be off the table. The first priority for India must be to strengthen anti-terrorist operations not only in India, but across the whole of Southern Asia. The second priority should remain a genuine and lasting cease fire on the LOC.
The new Pakistan government has the business support base and democratic mandate to take significant steps towards normalization of economic relations with India. Whether its fundamentalist support base and the Army veto will allow it do so, is an open question. India should be prepared to meet Pakistan half way to wherever (and however quickly) the Nawaz government is able to move on the economic arena.However, if the Military veto and Jehadi directed (JUD, LeT, HM, JeM)influenced public opinion is so strong that the Pakistan PM cannot act even on minor matters like MFN, it is doubtful whether he can bring about any path breaking changes in Business, Trade and Investment relations between the two countries.