Central banks are pushing on a string. If they insist on more monetary stimulus, the world could head toward an inflation crisis with similarities to what happened in the 1970s. Thus, central bankers may be making fools of themselves while trying to restore growth to everyone’s satisfaction. But globalization is making demand manipulation less effective than in the past, as multinational corporations have made production completely movable. Hence, no government can count on a localized, the kind of virtuous cycle that balances supply and demand and is necessary for demand stimulus to work.

The rise of the true multinational corporation has been the most important economic development since 1990. These are independent forces, and many are stronger than most countries. Any policymaker or economist who doesn’t understand the work of today’s multinationals is not qualified for the job. …………………….

………………… That is the best scenario for Europe without structural reforms. Now, it appears Europeans don’t want reform and won’t accept a lower standard of living. They have politicians who want to spend their way out of problems, backed by famous American economists. We will see the consequences soon.

The above are verbatim quotes from Andy Xie’s piece for the Caixin magazine published on 7th May. It is well worth a read.

Hunkering down, accepting lower growth and lower standard of living (for a while) while working to remove the (natural and energy) resource constraints on growth that have become more and more binding in recent years, limiting govenrment support to the very needy, etc., are the possible ways to deal with the mountain of debt and living beyond means that have characterised the last three decades.

We have basically stolen growth from the future. We need to pay back, at least for a while. Failure to acknowledge that will bring us greater grief. We are on our way there.

Apropos this NDTV discussion on the government’s decision to sharply raise petrol prices. Poor Chandan Mitra who probably thought this was an excellent opportunity to score a few political points against the Congress party was cornerned when the host Nidhi Razdan and the excitable Surjit Bhalla demanded an immediate yes or no answer: Would the BJP support an increase in diesel prices?

But before BJP was questioned, there was the usual politician bashing with both Razdan and Bhalla demanding that politicians should behave like statesmen. Well, more than NDTV hosts and for that matter this blogger, politicians reflect our will—or at least our baser instincts. Conduct a survey in the poshest New Delhi colony and one will know instantly what a miniscule minority supports the latest increase in petrol price—fiscal prudence be damned. Now, it is quite all right to wish that politicians would rise above  partisan warfare but they should hardly blamed for acting like our true representatives.

Coming to BJP: The principal charge laid against the BJP was that it was politically expdient in opposing the petrol price hike. It knew that oil companies were suffering; the fiscal deficit is increasing; and the economy is slowing—the government was left with little option but to permit this increase. What were the solutions BJP could offer? Would it support an increase in diesel prices considering how it is being diverted to run the SUVs of the rich. Of course, Mitra was caught in a bind: He could not obviously support an increase in diesel prices—no politician in India can ever support a price hike  howsoever justified—but neither could he completely oppose it considering the fiscal implications.

Hallelujah! Mission accomplished. BJP was exposed!

There are three things which are wrong with this narrative.

First, an opposition party in a democracy exists to, well,  oppose the government and draw as sharp a distinction between its policies and that of the ruling party as possible. Unless its opposition is as egregious and as counter productive as BJP’s marches against the nuclear deal, the party can hardly be blamed for not supporting the Congress party especially on policies which may be inherently unpopular. Manish Tewari is fond of reminding all and sundry that the NDA government increased the price of petroleum products 30 times. So how many times did Congress support these price increases—economically necessarily as they may have been? Why should BJP be expected to act differently? More importantly, was the Congress punished electorally for its intransigence?

Second, the mess in the petroleum sector is the result of wrong policies pursued by multiple governments over the years. Just to give one example: Shell India’s Vikram Mehta pointed out that out of the 140,000 crore under-recovery of the oil companies during 2011, petrol only accounted for 15000 crore with diesel, kerosene and LPG responsible for the rest. Yet the government has focused on only increasing petrol prices because politically it is the easiest decision to make. If the Congress party is indulging its political interests, the opposition can hardly be expected to do otherwise.

Third, as it is being belatedly acknowledged, the Indian economy is in a mess with growth slowing and fiscal deficit ballooning. Once again, this hasn’t happened overnight.  Ever since the UPA government came to power in 2004, it has created massive new entitlement schemes of dubious value. The government expenditure has increased substantially crowding out private investments and creating inflationary pressure.  The UPA government has paid little attention to the reform process arguing willy-nilly that India was destined to grow. anyway. At this rate, Indian citizens would be entitled to all and sundry but with a bankrupt government!  (Others in the Congress party simply believe that entitlements matter more than growth.)

Or take an issue which has nothing to do with the poor. The NDA government had taken some halting steps towards privatizing non-core public sector units. The UPA government completely reversed this policy declaring that even in case of  non-core PSUs, the government would ensure that its stake remains at 51% at the minimum. Result: The government recently sanctioned a 30000 crore rescue package for Air India. Wasn’t India’s fiscal situation dire then? Could not have government found a better way to spend 30000 crores than on ‘rescuing’ a dysfunctional airline? And most important, for an ostensibly aam aadami government,  what has Air India got to do with the poor?

The larger point is fairly simple: India’s current economic situation is the result of deliberate ideological posturing and poor policy making. And again it hasn’t happened overnight.

Nevertheless, it must be conceded that UPA’s economic populism has delivered political results. It comprehensively won the 2009 elections virtually decimating the BJP and while elections are won or lost for multiple reasons, the freebies delivered to the voters certainly played an important part. However, the problem with populism is that the day of accountability inevitably arrives and when it does, drastic actions are required. But here’s the thing: The Congress benefits politically from massive government spending, wins elections and is cheered by the Left-liberal intelligentsia for taking care of the poor but when it comes to paying the bills, the opposition should act ‘responsibly’ and not ‘polticize’ issues! Unless one believes that BJP and its leaders are in politics solely for altruistic reasons, it would be extremely foolish to expect the BJP to do so.

In fact, the sheer chutzpah is breathtaking!

The role of the opposition in a democracy is not to rescue the government from precarious situations. It is to take advantage of the government’s poor performance and argue to the voters that it can do better. This is how accountability in a democracy is fixed.

Politicians react to incentives. The Indian voter has rewarded populism and sloganeering over fiscal prudence and long-term growth. How can politicians be blamed for acting in a manner which their voters prefer? Indeed, as Sushant Singh had pointed out in this excellent commentary in Pragati: ‘[The] most damaging legacy of the Congress-led UPA government [is] moving the complete political ideology in India towards the Left.’ Populism is hard to fight even in advanced countries; in a poor country like India with millions struggling for their daily existence, it is even more challenging.

BJP fails this test. But its failure is hardly its own but an indictment of the Indian political system and its biggest stakeholder: the Indian voter

P.S  Retributions has been extremely critical of the BJP in the past. It will continue to do so. Acknowledging political realities does not mean acquiescence.

Just why is Pakistan interested in installing a friendly regime in Afghanistan? If you read books and articles written over the last couple of decades, you will come across arguments such as the need for “strategic depth” to counter India, to prevent a pro-India regime in Kabul that will result in the Indian encircling of Pakistan and, even more grandly, to create an Islamic centre of power that stretches from the shores of the Arabian Sea to the Caucasus mountains. Going by the statements of members of the Pakistani establishment and some of its commentators, these are indeed the reasons why Pakistan wants to dominate Afghanistan.

Yet, to a large extent, the ambition and the paranoia that motivates these goals are in the realm of fantasy. Important people might believe in these fantasies, which means they must be taken seriously, because those important people do act on the basis of their delusions. However, there is also an argument to be made that these fantasies, paranoias and strategic sophistries are used to mask the real motive.

Pakistan’s real motive in seeking to dominate Afghanistan is the fear of its own dismemberment. Until the Soviet invasion of Afghanistan in 1979, Islamabad’s main agenda was to prevent Kabul-supported Pashtun and Baloch nationalism from escalating into full-blown movements for independence. The strength of Pashtun nationalism and Kabul’s rejection of the Durand Line (which continues to this day) create deep insecurities in Islamabad, causing it both to bolster Islamism as an ideological counter, sponsor political instability in Afghanistan and attempt to install a friendly regime there.

It is a matter of historical fact that Pakistan—under President Zulfikar Ali Bhutto—began training Islamist militants in 1973, long before the Soviet invasion. Burhanuddin Rabbani, Gulbuddin Hekmatyar and Ahmed Shah Massoud received training in Pakistani camps so that Bhutto could counter Kabul ‘forward policy’ towards Pakistan. Kabul’s policies over the Durand Line had caused Pakistan to close its borders with Afghanistan in 1961. When the Baloch insurgency erupted in the early 1970s, Kabul (under the Daoud regime) supported it. Bhutto’s response was to nurture proxies in the form of Islamist militants—an old trick for the Pakistani establishment—under the leadership of the then Brigadier Naseerullah Babar, who as Inspector-General of the Frontier Corps, set up training camps in North and South Waziristan. More than 5000 militants were thus trained between 1973-1977. Again, it must be stressed, before the Soviets invaded. The narrative that most people accept—that Pakistan’s sponsorship of the mujahideen was a response to Soviet invasion of Afghanistan—is factually incorrect. [Rizwan Hussain's Pakistan and the Emergence of Islamic Militancy in Afghanistan has a good account of this]

The Pakistani establishment fears that a strong independent Afghanistan—like the one that existed up to the mid-1970s—will pursue an irredentist agenda, claiming the Pashtun areas of Pakistan. People in the tribal regions of Pakistan have only a tenuous association with the Pakistani state, and even for people in the so-called ‘settled areas’ of Khyber-Pakhtunkhwa, age-old Pashtun solidarity is often stronger than allegiance to a geopolitical entity called Pakistan. Afghanistan can well decide to support the insurgency in Balochistan to weaken Pakistan enough. Therefore, Pakistani strategists can see an existential threat in a strong, independent Afghanistan.

They can’t, however, state this as the official reason, because to do so would be admit the hollowness of the idea of Pakistan. That’s why fantastic notions of strategic depth, pre-empting strategic encirclement or building a Central Asian caliphate come in useful. “Strategic depth” is a plausible justification to convince patriotic Pakistanis of why their military is interfering in Afghanistan. Islamabad’s case appears a lot more ‘understandable’ to international opinion if it cites the fear of Indian encirclement rather than fear of Pashtun and Baloch self-determination as the reasons for its actions. Domestic and foreign Islamists will be enthused by the idea of flying the green flag of Islam all the way to the borders of Russia.

Theoretically, Pakistan’s military-jihadi complex might be persuaded to stop destabilising Afghanistan if it were convinced that Kabul will not lay claim to Pashtun lands east of the Durand Line. In practice that would be nearly impossible, not least because Afghan nationalism will not accept it. Even Mullah Omar’s Taliban regime didn’t.

Some matters will be decided by the force of arms. If at all.

In the meantime, pay attention to what Dr. Brahma Chellaney has written on the ‘irresistible rise’ of Asia. It is very sobering for the triumphalist camp in Asia.

Mohit Chandra’s brilliant open letter to India’s graduating classes. Spot on.

Of course, of course, some would point to positioning, technicals, oversold conditions, etc. Been there and seen that.

• NSA Announces New Program to Prime College Students for Careers in Cyber Ops – Many of the nation's colleges and universities offer courses or promote projects in cybersecurity. NSA's new program differs in that it integrates the relevant academic disciplines, with a focus on technology and the techniques associated with specialized cyber operations – collection, exploitation, and response, for example. Each new center is also required to include an academic unit about the legal and ethical issues in this area.

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Leaving aside the economic debate, it was certainly unexpected that the United Progressive Alliance (UPA) government would tolerate a 10% hike in petrol prices. The UPA government has been extremely cautious when it comes to economic decision making preferring to sacrifice reforms at the altar of populism.  It has failed to push even relatively benign reforms like increasing the limit on foreign direct investment in the insurance sector.  So what gives?

A cynical answer may be that the government realizes that any increase in petrol prices would lead to howls of protest; the substantial increase is designed to ensure that even with a partial roll back, the oil marketing companies would still be able to survive. If the comments of Congress spokesperson Manish Tewari are any indication, this scenario may already be playing out.

It was interesting that only the petrol prices were increased; diesel, kerosene and LPG  were left untouched even though they are largely responsible for the under-recoveries of the oil companies. Conventional political wisdom holds that the petrol is consumed by the middle class and the rich while diesel should be subsidized because of its cascading effect on inflation. However,due to the sharp difference between petrol and diesel prices, this dynamic no longer holds true to the same extent.  A report by the Center for Science and Environment suggests that from 4 percent in 2000 the share of diesel cars in new car sales has increased to nearly 40 percent. (Others have reported that the figure is as high as 50 percent.). Indeed, petrol cars now tend to be the smaller and are favored by the middle class while the gas guzzling SUVs are more likely to be diesel vehicles. With petrol prices far outstripping diesel prices, the sale of diesel vehicles is only likely to increase further. Nevertheless, despite the economic absurdity, it is still politically expedient to increase petrol prices while sparing diesel in the name of helping the ‘aam aadmi.’

But the crucial question remains: Will this hurt the Congress party politically? One view may be that this too shall be forgotten; people may be angry for a couple of weeks but then they would become used to paying higher prices at the pump. And the government could also decrease  prices before the 2014 elections to placate the middle class. On the other hand, it is also possible that the Congress party no longer cares for the urban middle class vote. It may well believe that because of the anger against corruption and general economic mismanagement, the urban voters may not be inclined to vote for the Congress in 2014 irrespective of what happens to petrol prices. Despite its outstanding performance in urban areas in the 2009 general elections, the Congress clearly believes that its victory was ensured by populist measures like the National Rural Employment Guarantee Act (NREGA) directed primarily at the rural voters. If the middle class is not going to vote for the Congress anyway, it makes little political sense to worry about increasing petrol prices especially when the central government’s fiscal situation is poor and it urgently needs additional money for new schemes like the universal pension for the elderly.

Finally, the debate needs to joined on what kind of future is envisioned for India. India  can become a quasi-socialist country—as it looks increasingly likely under UPA— with a relatively small middle class expected to pay for government largesse. Or it can become a pro-growth country with a strong social safety network which is limited in scope and innovative in nature. The Congress party led by Sonia Gandhi clearly believes that growth is incidental and all that matters is income transfer and statist schemes. Unfortunately, India’s economic growth has it self become a potent shaming device in this debate (Oh! How can we tolerate poverty in an era of 8% growth?) and indeed, the galloping economy over the last decade has allowed the government to get away with massive populism with little focus on India’s growth story. Yes, India’s poverty is heartbreaking but a country cannot build a first world social security network on a thirld world economy. In any case,  the chickens are coming home to roost and with the slowing government revenue, this conflict is only likely to become sharper and would demand clear answers from both the political class as well as the voters.

Most Indian reports on China tend to look at that country as a unitary entity with little focus on the internal political and institutional dynamic that affects Chinese actions. Walter Russell Mead blogs about the old Chinese legend of “nine dragons stirring up the sea” used by maritime policy circles to describe the various government agencies involved in the South China Sea. The “dragons” include maritime police bureaus, the national navy, fisheries departments, coastal state governments, energy companies, the foreign ministry, and other bodies. Competition among these actors for a bigger share of the budget pie, and influence within and without China, is intense. He draws from a report titled Stirring up the South China Sea (I) released last month by the International Crisis Group.

Here is an extract from the executive summary of that report:

The conflicting mandates and lack of coordination among Chinese government agencies, many of which strive to increase their power and budget, have stoked tensions in the South China Sea. Repeated proposals to establish a more centralised mechanism have foundered while the only agency with a coordinating mandate, the foreign ministry, does not have the authority or resources to manage other actors. The Chinese navy’s use of maritime tensions to justify its modernisation, and nationalist sentiment around territorial claims, further compound the problem. But more immediate conflict risks lie in the growing number of law enforcement and paramilitary vessels playing an increasing role in disputed territories without a clear legal framework. They have been involved in most of the recent incidents, including the prolonged standoff between China and the Philippines in April 2012 in Scarborough Reef. Any future solution to the South China Sea disputes will require a consistent policy from China executed uniformly throughout the different levels of government along with the authority to enforce it.

China’s maritime policy circles use the term “Nine dragons stirring up the sea” to describe the lack of coordination among the various government agencies involved in the South China Sea. Most of them have traditionally been domestic policy actors with little experience in foreign affairs. While some agencies act aggressively to compete with one another for greater portions of the budget pie, others (primarily local governments) attempt to expand their economic activities in disputed areas due to their single-minded focus on economic growth. Yet despite the domestic nature of their motivations, the implications of their activities are increasingly international. Other factors – both internal and external to China – have also been responsible for increasing tensions, but they are beyond the scope of this study.

Effective coordination of actors is also hampered by a lack of clarity over precisely what is supposed to be defended. China has yet to publicly clarify the legal status of the so-called nine-dashed line that appears on most Chinese maps, encompassing most of the South China Sea. While the foreign ministry has taken steps to try to reassure its neighbours that Beijing does not claim the entire South China Sea and has at least partially justified its claims on the basis of the United Nations Convention on the Law of the Sea (UNCLOS), the government cannot easily back down from claims to significant portions of the sea that are based on historical presence in the region. Local government agencies take advantage of this lack of legal clarity when engaging in activities in disputed areas.

Read the rest here.

FT reported on its website on 20th May that some Chinese buyers of thermal coal and iron ore are deferring purchases and defaulting on contracts. That squares well with this short blog post.

A friend shared this story from China local press with me. The statistics on the PBoC enterprises’ confidence index is significant:

Along with decreases in lending, enterprises in China are clearly losing confidence inthe country’s economy. According to a survey of 5,000 companies by the PBC, anindex tracking enterprises’ confidence in the country’s economy sank to 39.2 percent inthe first quarter of this year, the third consecutive quarter of decrease, far below the 50percent mark which separates optimism from pessimism. As China’s business climate gets frostier and its entrepreneurs become less ambitious, it’s inevitable that importswill suffer in the process.

To the best of my knowledge, this PBoC survey of 5000 companies is not actively tracked in Bloomberg.

Yet, talk of economic stimulus in China excites investors. Scepticism, people, scepticism! Where is it? Why have investors lost it? Why have they stopped demanding risk premium? Why are they giving away their hard earned money so easily?

I am not able to make sense of this story – as to its deeper significance.

Amidst all the hand-wringing and hand-waving on Greece, Spain, Europe, the Indian rupee and what else, this piece of news on the Pentagon annual report on Chinese military went unnoticed:

“Chinese actors are the world’s most active and persistent perpetrators of economic espionage,” the report said.

That is par for the course for an aspiring superpower. That is how they compete.

The overexpansion and invasion of politics in the higher education system has made China’s universities yet another victim of political corruption. [Link to full article]

There are something that are still common between the rising Asian giants!

Spent 3+ days in D.C area. Gave a talk at the GW University co-hosted by the US-India  Business Council (USIBC). Spoke on India. Had to do a balancing act. I think it went well. Decent crowd. 20+ but great participation.

Could not get a sense of the health of the economy. Not that I was looking for it. Did not see the 60% overweight in the small sample that I ran into. No road rage. Only my anxious friend, not to miss a turn, skipped a red light!

Top news during my stay was Facebook IPO pricing. My 10-year old son wondered what the fuss was about and why Zuckerberg was a billionnaire when he had nothing to sell. One friend clarified that we, the people, are the product.

The other story was, of course, JP Morgan. This WSJ story, as usual, was great on the human interest dimensions. But, for me, the key take-aways are:

The debacle has raised broad questions on Wall Street and in Washington about whether any executive can properly oversee such a large financial institution, whether new regulatory rules will do anything to prevent another financial crisis and whether tougher regulation is needed to further rein in risky bank trading, particularly at financial behemoths that are viewed as too big to fail.

Indeed, hubris wants and feeds itself on becoming bigger. Coffee mugs in America are a testimony to their obsession with size. The simple answer to the question posed in the first highlighted sentence above is that no executive (human being) can properly oversee such large financial institutions. Period. It needs not a whole lot of humility to accept that. Just some humility would do.

Last year, Mr. Macris dropped risk-control caps that had required traders to exit positions when their losses exceeded $20 million.

Why would some one do that unless they were overconfident? Again, the importance of two words in English that start with ‘H’: Hubris and Humility.

Mr. Dimon had recalled that he was aware of the group’s strategy to take a bearish position on the economy, an official says. And he also recalled that early this year he approved a reduction in that position amid signs of economic recovery, though the official says Mr. Dimon had never vetted the “particular means to execute” the strategy.

This is a very important disclosure. This is an example of how banks behave with their clients. Their economist for the US is a perma-bull. He has never had anything negative to say on the US economy. If he sounds cautiously optimistic, that is the worst negative sentiment you can get out of him and as an investor, it would be time to head for the exit doors. Yet, the bank’s proprietary trading unit – CIO office is a politically correct label for the old prop. trading desk.

At the same time, the appointment of a Venezuelan immigrant as MIT President showcased the best of what America has to offer. Mr. Reif’s remarks at the press conference after his  selection is a  great read. Lovely touch at the beginning of his remarks.

P.S: Will be curious to know the United Airlines’ policy on the recruitment of pilots and cabin crew.

The Historical Novel Society monthly mail collects book reviews from various newspapers making it easy for people like me to decide what to read and what to avoid. The past few months, I did not find anything interesting. But this month there are two books which I want to read.

The first one is Hilary Mantel’s Bring Up The Bodies which is a sequel to her Booker prize winning Wolf Hall. I am not a big fan of English royalty and the palace politics, but the only reason the book looks interesting is the period — 16th century — when Europeans where on a looting spree around the world. NPR had an interview with her and most of the reviews are positive.

Historical fiction has many pitfalls, multiple characters and plausible underwear being only two of them. How should people talk? Sixteenth-century diction would be intolerable, but so would modern slang; Mantel opts for standard English, with the occasional dirty joke, and for present-tense narration much of the time, which keeps us right there with Cromwell as his plots and Mantel’s unfold. How much detail – clothes, furnishings, appliances – to supply without clogging up the page and slowing down the story? Enough to allow the reader to picture the scene, with lush fabrics and textures highlighted, as they were at the time. Mantel generally answers the same kinds of question that interest readers in court reports of murder trials or coverage of royal weddings. What was the dress like? How did she look? Who really went to bed with whom? Mantel sometimes overshares, but literary invention does not fail her: she’s as deft and verbally adroit as ever. [Bring Up the Bodies by Hilary Mantel - review]

The second book is non-fiction about the First Crusade. Washington Post has the review of Peter Frankopan’s  The First Crusade: The Call From the East

But the West possessed fighting men and modern technology — chiefly the knight mounted on an armored war horse — and there might lie salvation, of a sort. By eliding the interests of Constantinople with the promise of liberating Jerusalem, Alexios presented himself as a champion of Christendom. He wrote to Urban, who, faced with a rival pope and widespread clerical discord, quickly grasped that a noble cause in a distant land would bolster his wobbly perch on the throne of St. Peter. To increase the Crusade’s attractiveness, the savvy pontiff emphasized not only the spiritual rewards of participation, but also the virtual guarantee of a place in heaven for those who lost their lives. The leaders of the Crusade soon included Robert, Duke of Normandy (one of William the Conqueror’s sons); Count Raymond of Toulouse; Godfrey of Bouillon; and the soon-to-be-famous Bohemond, whose family controlled the Norman kingdom of Sicily. They and their carefully recruited armies, consisting of reliable fighting men, would meet at Constantinople in 1096 and 1097.In the meantime, the unexpected occurred. From 1095 to ’96, a charismatic preacher, Peter the Hermit, gathered a following of his own and, without papal authorization, unleashed what is now known as the People’s Crusade. Whipped to a frenzy, this ragtag and chaotic mob moved across Europe, preaching anti-Semitism, murdering Jewish populations and devastating the countryside in its hunger for food and supplies. Somehow, a remnant of these marauding zealots made their way to Asia Minor, where they brutally overran a small castle near Nicaea — and were in their turn crushed by vengeful Turkish forces. Ironically, many of these fanatical Christians quickly converted to Islam to save their miserable lives.[‘The First Crusade: The Call From the East,’ by Peter Frankopan]

Barack Obama has executed a very smart policy change—he has effectively dehyphenated Af-Pak by extricating the United States from the long-running Afghan civil war and focusing Washington’s attention on Pakistan. The United States will put in a genuine effort to mitigate the risk of a Taliban take-over in Afghanistan but will essentially leave Afghans to fight out their own affairs. It will, instead, maintain a security presence in the region tasked with keeping military pressure on jihadi militants that pose a threat to its own security.

What does this imply?

First, as far as the United States is concerned, not only Hamid Karzai but the post-2002 Afghan state is dispensable. If the Afghan state cannot secure itself against Taliban revolutionaries or other factions that seek to destroy it, Washington will not be concerned beyond a point. This message, as we will see, has (predictable) consequences.

Second, although the United States will withdraw its troops in 2014, it is not in a form that the Pakistani military-jihadi complex expected. Pakistani generals had long assumed that US withdrawal from Afghanistan automatically implied that they could take over the place the next day through a combination of Mullah Omar, Gulbuddin Hekmatyar and the Haqqanis. They had also assumed that they held the cards because international forces depended on their goodwill to make a face-saving exit. President Obama has delivered the Pakistani generals a nasty surprise—the residual US presence on the Afghan side of the Durand Line and drone strikes on Pakistani soil will calibrate how much Pakistan can influence the security and stability of Afghanistan. We have not reached the point yet, but it may well be that international forces need not rely on Pakistani routes on their way out.

Third, as a consequence of Washington extricating itself from Afghanistan, we are bound to see political factions emerge around tribal and ethnic lines, fighting and allying among themselves and seeking external support. This process will strengthen if the Taliban were either to take or share power. Let’s not forget that the mujahideen separated into factions after the Soviets left in 1989 and fought each other. Let’s also not forget that there was no ‘Northern Alliance’ before the Taliban became a dominant political force. So just because there isn’t visible opposition to the Taliban today, it doesn’t follow that there won’t be one if they come to power. Just because Messrs Omar, Hekmatyar and Haqqani are Pakistan’s proxies today, it doesn’t follow that they won’t reach for each others’ throats tomorrow. Of course this means “civil war”, if only because the Afghan civil war has been ongoing for a couple of decades now.

Fourth, if and when the “civil war” does take place, the United States will become the swing power between the China-Pakistan-Saudi and the India-Russia-Iran alignments. It has so far been engaged in the self-weakening business of preventing India, Russia and Iran from cooperating over Afghanistan. Washington will have to decide which side it intends to back. The smart thing for it to do would be to back neither permanently, rather to back them selectively, while retaining for itself the power and influence that comes from its role as the balancer. For this, though, it will need to have better relations with each of these alignments than they have with each other. Therefore, its ability to swing will depend on whether it can get over its Iran dogma and work out a modus vivendi, at least in Afghanistan.

Fifth, if Pakistan need not keep appearances of being an ally in the war on terror, the military establishment might well prefer to install in power a regime that it is to its liking. To the extent that Pakistani army’s needs for an ‘acceptable civilian face’ to extract money from the United States is diminished, Imran Khan’s—and Hafiz Saeed’s—political fortunes are set to improve.

Finally, India will need to remain open to support political factions in Afghanistan that seek it, even while robustly backing the legitimate leadership of the Afghan state. The most important risk to India’s national security comes from the spillover of veteran Afghan militants. In the early 1990s, Pakistan solved two problems at one go by diverting the surplus militant manpower to Jammu & Kashmir. Given that it has been unable to even begin address the problem of deradicalising its militant manpower base, its leaders—both military and civilian—will be tempted to do the same now. The longer these militants have reason to fight in Afghanistan and in Pakistan, the better it is for India. This should be one of New Delhi’s policy goals.

It’s time to dust off histories of Afghanistan in the 1990s.

This month’s Asian Balance argues that China is indeed being ‘bullied’ by the Philippines. Such a statement is likely to cause many people to jump because of the value judgement placed on the term ‘bully’ as well as the David and Goliath-like setting. Shorn of those value judgements and biases, though, this statement holds up. As the column notes, the Philippines has more to gain and less to lose by behaving in a provocative manner than China.

One reason for this is Manila’s treaty alliance with Washington. This affords it with the security that the United States will have to intervene in some form if the Philippines is attacked by China. Washington has let it be known that it is unlikely to intervene in a territorial dispute. This allows China to act against the Philippines in the disputed territory—if Beijing takes military action beyond the disputed islands, and onto sovereign Philippines territory, then it raises the risk of US intervention. The exact red line might be fuzzy, but both Beijing and Manila know that it exists. The game then is to exploit the space before the red line is crossed.

The United States might well be using the Philippines as a proxy to indirectly contain China, its strategic adversary. However, this is not without its own strategic costs—failure to manage the proxy can drag the United States into a conflict it does not want to get into. Manila knows this and can exploit it, for instance, by demanding that the United States sell it arms so that it can defend itself better.

China is at the receiving end in this case, but is quite an accomplished player in the strategic proxy game. North Korea ties down the United States, Japan and South Korea in Northeast Asia. Pakistan checks India and the United States in the subcontinent. All in the game.

Today’s Asian Balance column in Business Standard.

The small-country bullies
China’s aggressive posturing over maritime boundaries has caused East Asian countries to look at other powers for support

It’s those Chinese fishing vessels again. Last month they ventured into a shoal in the South China Sea, presumably hunting for giant clams, when they were apprehended by the Philippines’ naval patrols. If the Philippines claims the Scarborough shoal – a few hectares worth of low-lying rocks 200 kilometres from its shores – China claims the entire South China Sea as its own. In what has become a familiar pattern over the last few years, the Chinese fishing vessels triggered off a confrontation that quickly escalated into a maritime and diplomatic stand-off. Chinese tourists left the Philippines, and Filipino bananas face an uncertain prospect now in clearing China’s food safety tests.

The two countries are now trying to back off at this time, but not before the “w” word surfaced in the popular discourse.
War? Over some uninhabited rocks in the middle of nowhere? Between China (GDP $7.3 trillion, defence budget $106.4 billion) and the Philippines (GDP $213 billion, defence budget $2.3 billion)? Who would want it?

Not China. While it certainly wants to keep its territorial claims alive by letting intrepid fishing vessels do to South China Sea islands what dogs do to lamp posts, it knows that an outright military conflict will be counterproductive to its longer-term interests.

Provocative fishing vessels and Beijing’s aggressive diplomatic posturing over maritime boundaries have already caused East Asian countries to look at the United States, India and other powers for support. In case China finds itself in a war with the Philippines, opposition to Beijing will consolidate, and the US will make strategic inroads into the region, making it harder for China to achieve its goal of dominating the Western Pacific.

The US too does not want a war. It has a military alliance with the Philippines, and Manila could call upon US support if it is attacked. Washington is understandably reluctant to let itself be dragged into a war against a great power by a small ally over a tiny issue. The Obama administration has signalled that territorial disputes are outside the scope of the defence pact. Even so, if it is seen as shirking from supporting its ally, the value of Washington’s strategic promissory notes in East Asia will sharply depreciate. It cannot, however, support its ally without provoking Beijing. A war would cause the US to choose between losing its reputation and getting into an unwanted confrontation with China.

Most East Asian countries do not want war either. They have spent the last decade attempting to engineer “regional security architectures” – essentially multilateral forums that discuss security issues – that hope to solve tricky geopolitical disputes without being bullied and without having to fight. Yet for all its achievements, the Association of South East Asian Nations (Asean) has little to show in terms of ability to manage armed conflict, even between its member states. Thailand, for instance, has stonewalled the deployment of Indonesian military observers over its border dispute with Cambodia over the Preah Vihear temple.

Nor has Asean been very vocal in insisting that China comply with the code of conduct in the South China Sea they agreed to in 2002. Its member states are unlikely to want their solidarity to be put to the kind of test that a China-Philippines naval conflict would entail.

What about the Philippines itself? For Manila, maritime boundaries in the South China Sea assume an economic significance that goes beyond nationalistic sentiment over territory. The seabed is supposed to have rich reserves of oil and natural gas, although estimates vary. The technology to exploit natural gas fields in the South China Sea is maturing. China National Offshore Oil Corporation already has semi-submersible deep sea drilling platforms. Manila has its eyes on healthy revenue streams from energy exports which can make a substantial difference to its fiscal position and overall economic health.

This, coupled with the security guarantee the Philippines enjoys by virtue of its alliance with the US, has caused it to stand firm and confront China. So much so that Dai Bingguo, one of Beijing’s top foreign policy hands, accused the Philippines, “a smaller country”, of bullying China. He has a point. As China’s leaders ought to know all too well, small countries that are backed by great powers have disproportionate negotiating power, and they “bully” both their adversaries and their backers. The Philippines might calculate that it has relatively less to lose by letting tensions escalate.

That’s the main risk — when pesky fishing boats, Chinese law enforcement vessels and Philippines naval ships are facing off each other, an accidental trigger can cause an unintentional escalation. Given the turbulence in China’s civil-military relations ahead of this autumn’s leadership transition, and the numerous Chinese state agencies engaged in the South China Sea, the risk of escalation is higher on its side. The onus, therefore, is on Beijing to keep a lid on the tensions.

Unrelated to the stand-off, a contingent of four warships from the Indian Navy’s Eastern Command is on a routine long-range overseas deployment to the South China Sea, and ports in China and the Philippines are among those it will call on. It does come at an interesting time, given its mission of what the Navy terms “generating goodwill among the neighbouring countries”.

Copyright © 2012. Business Standard. All Rights Reserved.

1. Last year there was a big brouhaha over the so called censoring of A K Ramanujan’s text on Ramayana. Deepak Sharma, the moderator of RISA, wrote an article in the Huffington Post titled Censoring Ramanujan’s Essay On Ramayana: Intolerant Hindus And Confusing Texts.  As the politics behind history is as interesting as history itself, here is an article by Koenraad Elst on the issue

“Where Ramanujan got it wrong, driven by his ideological agendas, is to to place all the diverse renderings of Ramayana at par with the Valmiki Ramayana. Let us get one thing VERY CLEAR – All these different versions of Ramayana (Dasharatha Jataka included) have the Ramayana of Valmiki as their basis and draw their storyline to it. It is another matter that they adapt it to their own purposes. Even Ashvaghosha, the author of Buddhacharita, salutes Valmiki as the Adikavi. The Shakya lineage was derided for having descended from a brother sister union. The Buddhists therefore created the Jataka in which Rama and Sita married, and linked the Shakyas with the Ikshavakus. So, their agenda was obvious. To claim, despite this obvious explanation, that in the ‘most ancient version of the Ramayana, Rama and Sita are siblings’ is to distort stuff with the deliberate intent of deriding Hindu beliefs.

2. A popular theory which explains the spread of Indo-European language around the world is called the Kurgan hypothesis.
   Jesus Sanchis, based on new work by Francisco Villar, suggests something radical.

Of course, some may think: “Ok, there were IE language in Europe at that early age, but then there was another wave of IE dispersal at the bronze age which brought the IE languages as we know them today and historically”. The authors admit this possibility, but also say that it is quite unlikely. As they say, and as I have insisted in this blog many times, there is no evidence of any sort of relevant population movement in the Bronze Age that could even remotely support this theory, usually known as the Kurgan theory.

3. How did ancient Indians trade? Did they simply barter or did they have any sort of currency? An excellent blog called Indian Coins looks at this

What gave an impetus to the development of a long lasting metal-based monetary system was the eventual arrival of gold, followed by silver and other metals. Gold was abundant in several south Indian rivers and people were able to glean gold nuggets from them. They were also able to extract coarse gold dust from sand with a reasonable effort. These gold nuggets and gold dust became an important medium of currency within India by 1000. Gold dust was placed in impervious bags and these bags were used for transaction. There are numerous references in ancient Indian literature to these bags of gold. This in turn attracted Indians to gold and silver which foreign merchants offered to purchase Indian products.

4. Sriram writes about the trinity of bhajana sampradaya in Tanjore region

The Tanjore region became the bhajana tradition’s stronghold with the arrival of the bhajana sampradAya trinity, namely Sadguru Swamin, Bhodendral and Sridhara Venkatesa Ayyaval. The trio existed between 1684 and 1817 AD. Ayyaval who was the senior most is considered the father of the Bhajan tradition in South India. Born in Tiruvisanallur, Tanjore District, Ayyaval was a contemporary of King Shahaji I (ruled 1684-1712). He firmly believed in nAma siddhAnta, the principle of chanting God’s name and composed several simple songs for congregational singing.

5. In 1873, Edward Lear arrived in India and spent time painting and sketching. Fëanor writes
   

   Lear’s Nonsense verses were immensely popular in India. Of course, this is not to say the local population knew any of them. Rather, the colonial kids – living in their bubbles – knew them and even studied them at school. His interaction with Indians appears to have been somewhat limited. He learned a few Hindi and Tamil words. He could ask the way (‘Rusta ke hai?’) and he was happy to eat ‘Bhat’ and curry, and in Madras, could say ‘Please endewennum?’ He expressed regret that he hadn’t bothered to learn the ‘Lingo’ before arriving in India.

6. During WW1, a large number of Indian soldiers fought in Mesopotamia. Seyahatname visited the Haydarpaşa English cemetery in Turkey and found some memorial stones.

Mesopotamia saw the largest influx of Indian soldiers. Over the course of the many campaigns, close to 675,000 Indian fighting troops as well as hundreds of thousands of auxiliary troops were involved in Mesopotamia. When General Townshend’s troops surrendered in April 1916, the POWs were marched all the way from Mesopotamia to POW camps in Turkey. Most of those who survived probably ended up at the POW camps in Afyonkarahissar (the name ‘black poppy castle’ always makes me chuckle). Apparently, there are still some memorial stones in that region of Anatolia, but most of the Indian POWs are remembered here in Istanbul.

7. Samanth Subramanian at NYTimes Blog has a post on independent India’s first corruption scandal involving the party that has been bringing us bigger and better corruption scandals for the past six decades.

After Mr. Chagla filed his report, Mr. Krishnamachari resigned on Feb. 18, 1958. When Mr. Nehru received the letter of resignation, he wrote back a note that was curiously dismissive of Mr. Chagla and that betrayed his deep fondness for Mr. Krishnamachari: “Despite the clear finding of the Commission so far as you are concerned, I am most convinced that your part in this matter was the smallest and that you did not even know what was done.” Mr. Mundhra, arrested at a suite at the Claridges Hotel in New Delhi, went to prison for 22 years.

That’s it for May. The next carnival will be up on June 15th or the weekend following it. If you have any links, please e-mail me at varnam.blog @gmail. (Thanks Sandeep, Feanor, as usual)

Earlier this week posters appeared in Pattan in Jammu & Kashmir’s Baramulla district, threatening to kill 13 persons for assisting security forces. Here is the poster by a group with a grand sounding title of “Al Mashterqa Lashkar-e-Taiba Hizbul Mujahideen”.

Al Mashterqa Lashkar-e-Taiba Hizbul Mujahideen's Poster

Here’s the Indian Army’s counter-poster.

In the first panel it says “Hey terrorists, why are you fighting these innocent people. Fight with the Army, your fight is with the Army.” In the second it tells the people “Don’t fear these terrorists because the army is with you. Call us for help.”

Now let’s see if the message gets through.

Pakistan wants an additional $5000 for each truck that passes through its its territory carrying non-lethal supplies for NATO troops fighting in Afghanistan. US is hoping to clinch the deal at $1500-1800 a truck of supplies. Pakistan also wants an indemnity waiver in case American cargo is damaged. US might end up discontinuing the Coalition Support Fund money it pays to Pakistan to balance out the new levy on supply trucks. And the haggling continues.

This reminds us of the story (often attributed to George Bernard Shaw) of a conversation between a very sophisticated gentleman and a very respectable lady at a party.

“Well,” says the gentleman, “just for the sake of our argument, suppose I offered you $100,000—would you spend the night with me?”

The lady, smiling coquettishly: “Who knows—I might very well!”

The gentleman: “Now suppose I offer you $10 for the night?”

The lady: “But what do you think I am?”

The gentleman: “We’ve already established what you are. Now we’re just haggling over the price.”

One wonders if that is the line someone from the US actually uses during the negotiations when the Pakistan rhetoric over sovereignty gets too much to bear: “We’ve already established what you are. Now we’re just haggling over the price.”

Pakistan, the United States and NATO are currently engaged in negotiations over a transit fee for the route from Karachi to the Afghan border. Pakistan has demanded $5000 per container (in either direction) although other reports suggest that it would seek a ‘nominal fee’ of around $1800. It is important to note that these are over and above what Pakistan has already been making from the container traffic.

Here’s a conservative estimate of how much the Pakistan makes from permitting US and NATO troops transit routes from Karachi to the Afghanistan border. Between 2005 and June 2010, Pakistani military and civilian government entities made $290 million (Update: At least $360 million, including toll revenues—see details below], or a little over $1000 per container, from allowing US and NATO transit to Afghanistan. The military establishment’s share of this is just over half, all of it in terms of pure rent or, as we like to call it “Al Faida”. The civilian government’s share came from taxes and through port charges.

Click to enlarge

An earlier post, from February 2009, has another estimate of the takings. Those figures are higher than these because they involve a different period and perhaps a different count of the number of containers. In the present analysis, the number of containers is taken from a report on the ISAF container scam by the Pakistani government’s Federal Tax Ombudsman, from January 2011. That report provides some interesting details about the political economy of the transit business—how a lot of people make lot of shady money. Also, it notes that 3544 US/ISAF containers are ‘missing’.

Update: According to Gen William Fraser, US Transcom commander, more than 35,000 containers were delivered through Pakistan in 2011. This would give the Pakistani military establishment $18.375 million in rent and an income of $17.5 million for the civilian government entities for the year.

If the US/ISAF traffic is in the range of 600 trucks per day, then Pakistan will earn around $129 million in 2012, of which the military establishment will pocket $66 million. Note that this excludes the transit fee/tax that is under negotiation.

Update (May 23, 2012): A senior Pakistani government official has testified to the Public Accounts Committee that the Pakistani army’s construction wing, the Frontier Works Organisation, has occupied all toll plazas along the route, and pocketed all the Rs 6.5 billion in toll revenues. That’s around $71 million at the current exchange rate, but higher given that the Pakistani rupee has been depreciating over the last few years.

Related Links: Pragmatic Euphony on the truth about the NATO supply routes.

In recent weeks, the price of gold in US dollar terms has dropped from around 1660 to around 1560 now. That is a 6% drop. Risk appetite has dropped. Investors have flocked to the dollar and yen. The scent of debt-deleveraging induced deflation is in the air. Hence, investors feel the need to abandon gold. It is strange. Investors have proven, time and again, to be myopic. The US dollar is no panacea. The Federal Reserve has expanded its balance-sheet more than the European Central Bank and the Bank of Japan have done since September 2008.

There is no threat of deflation. If anything, there is the threat of stagflation: low economic growth or recession combined with persistently above-target inflation in the US and in Europe. There are still persistent calls for the Federal Reserve to further expand its balance-sheet. In fact, many want the Federal Reserve to abandon any caution and buy risky assets aggressively. The latest to make this call is the Chief Economist for Citigroup. Willem Buiter was once a member of the Monetary Policy Committee of the Bank of England and then taught at the London School of Economics. He used to be critical of the bailout of financial institutions. Then, he joined one. Now, he is calling for helicopter dropping of money by the US and UK central banks.

FT subscribers can download the report written by Buiter here. The blog post in FT Alphaville on the Buiter note is here. I have written a lengthy comment on this brazenly irresponsible suggestion by Buiter in my latest MINT column.

There are rumours that Germany might loosen its stance on inflation and austerity and let the European Central Bank drop rates and expand the size of its long-term repo operations. All of these point to rising risks of stagflation because these measures will not lead to more economic activity but to more fear among the public that something is drastically wrong for countries to adopt such reckless policies. People will fear inflation tax and the government slapping higher taxes in future to make up for such aggressive policy measures. Therefore, they are unlikely to spend more. They are going to hold on to their cash more tightly than before. More likely that they would keep it under the carpet than even put it in banks.

At the same time, aggressive liquidity measures would boost speculation in commodities, cheapen the value of paper currencies relative to real assets and reverse the recent decline in commodity prices. In other words, aggressive monetary easing is more likely to result in higher inflation than in a growth pick-up. That is where the policy paths are leading to.

Perhaps, this is the ‘darkest before dawn’ for gold. Alternatively, the global financial order that was born in the 1980s and the paper money standard are on their last legs. Willem Buiter’s article reinforces the belief that fiat money backers are propelled by a death wish.

Tailpiece: Thanks to Zerohedge, stumbled upon this FT News item that a Japanese pension fund is switching into gold.

Shards of pottery with traces of mare’s milk, mass gravesites for horses, and drawings of horses with plows and chariots: These are some of the signs left by ancient people hinting at the importance of horses to their lives. But putting a place and date on the domestication of horses has been a challenge for archaeologists. Now, a team of geneticists studying modern breeds of the animal has assembled an evolutionary picture of its storied past. Horses, the scientists conclude, were first domesticated 6000 years ago in the western part of the Eurasian Steppe, modern-day Ukraine and West Kazakhstan. And as the animals were domesticated, they were regularly interbred with wild horses, the researchers say. [Whence the Domestic Horse?]

If you are interested in the history of horses in India, this would be a good starting point.