East Asia Forum

East Asia Forum

Indian growth has lifted all boats

Author: Jagdish Bhagwati, CFR India’s economy again exceeded expectations , growing by 8.9 per cent in the second quarter. Those outside India often show exuberance at such high and rising growth, following the nation’s economic reforms in the early 1990s. At home, however, you are just as likely to hear condemnation from those worried about the underprivileged this prosperity has bypassed. Such voices present India with a double challenge: they misrepresent the successful way growth has cut India’s poverty, but more importantly their critiques stand in the way of a much needed new wave of reforms, which would further benefit India’s poorest. The reform naysayers, among them the socialists in the ruling Congress party, reject the ‘miracle’ that may soon see India overtake China’s rate of growth. Instead they argue that gains have accrued to the rich, while inequality has increased. The most articulate critics include India’s progressive novelists, chief among them Pankaj Mishra, who recently wrote of the need to defend the downtrodden against ‘the pitiless exploitations of the new business-minded India’. Of course, in a country with more poor people than anywhere else on earth, desperate poverty remains a fact of life. But the evidence is fairly clear now, despite the deterioration in governance symbolised by the current corruption allegations over the sale of mobile phone licences in 2008, that the growth which followed India’s liberal reforms actually pulled as many as 200m out of poverty. Had the reforms started a quarter-century earlier, more would have followed. These improvements are also shared by nearly all underprivileged groups, a fact now documented in a series of studies. The political scientist Devesh Kapur, for instance, examined the fortune of the Dalits (or ‘untouchables’) in India’s most populous state, Uttar Pradesh, between 1990 and 2008. His research found that 61 per cent of those surveyed in the east of the state, and 38 per cent in the west, said that their food and clothing situation was now ‘much better’ than in the past. Al Stepan and Yogendra Yadav, also political scientists, found an even more striking result: less than a quarter of those in disadvantaged groups had seen their financial situations worsen between 1996 and 2004. What of inequality? Economist Amartya Lahiri recently studied India’s ‘scheduled’ castes and tribes – two very disadvantaged groups – and concluded that the past 20 years ‘have seen a sharp improvement’ in their relative economic fortunes. Two more economists, Pravin Krishna and Guru Sethupathy, found that while inequality (measured by a widely used index) had risen initially, it then fell back to the 1988 levels by 2004. So while the picture on Indian inequality is complex, a straight-line rise certainly cannot be asserted. But it is the finding on poverty that is more striking. Its implication is that being poor is now seen by India’s underprivileged as a removable condition. India is witnessing what I have called a revolution of perceived possibilities. In the 1980s, when growth was stagnant, Indians showed an attitude of resignation. Indeed I, along with my fellow economist Arvind Panagariy, predicted some years ago that economic aspiration would see India’s voters increasingly vote for politicians who promise to deliver more growth. This was underlined dramatically by the November election in India’s most backward state of Bihar, where a coalition led by pro-development chief minister Nitish Kumar won a landslide victory. Mr Kumar’s popularity in an impoverished region suggests that his fellow politicians can now be braver. They should look to augment reforms, not reverse them as the misguided progressives urge. This would mean a new push to expand trade liberalisation further in all sectors of the economy. Reforms could also further free up India’s labour market, accelerate privatisation, and open up its retail sector to investment from the rest of the world. All these can produce high economic returns, alongside improvements for the poor. These moves offer an added dividend too. Earlier rounds of reforms have generated revenues which can now be spent on targeted health and education programmes for the poor. This is what Indian planners wanted from the 1950s, but could never afford when revenues were as stagnant as the nation’s growth rate. Now the current generation can finally deliver. Jagdish Bhagwati is a Professor at Columbia University and senior fellow at the Council on Foreign Relations, New York. This article is based on the Lecture that Professor Bhagwati gave to the Indian Parliament (Lok Sabha) on December 2nd 2010. The full text of the Lecture is available here , at the Lok Sabha website. This piece was originally published in the Financial Times, on 1 December 2010. FDI and Indian growth: the new paradigm India: sustaining high growth needs new reform momentum Now for an Indian ‘miracle’

In search of a new climate change paradigm

Author: Mutsuyoshi Nishimura, Advisor to the Cabinet, Government of Japan The international approach to climate change is currently based upon the arbitrary ambitions of nations . Although these bottom up attitudes have propelled huge climate investment, no goals have been set in relation to climate stability. Future generations will surely ask why such investments did not achieve climate stability. The international community has to have a specific stability target and adopt strategies capable of achieving such a target on time . These strategies must be effective, inexpensive and not economically stifling for any country. They must provide equity in real terms. The surest and the cheapest strategy is a global cap on emissions with a carbon budget that will ensure the best allocation of carbon. Let governments own carbon space as their common property and sell such space to carbon emitting enterprises of all nations. Countries can earn new revenues which would be primarily given to individuals, business, industries and countries in need. Let us internalize externalities by putting a price on global carbon and let the world consumers share the equally passed-on costs of fossil fuel burning. Under such a scheme, governments would force all CO2 emitting enterprises of all countries to buy allowances before they burn fossil fuels. There would be a very simple and effective compliance system based on national registry of imported fossil fuels and fossil fuels domestically shipped. If the total amount of fossil fuels imported and domestically shipped is equal to the total of surrendered allowances, countries would be complying. The new paradigm would provide the most vulnerable nations with a larger part of the auctioned revenues so that they could cope with the rising carbon price, provide basic energy services to their people, adapt to future impacts, and join the march to the low carbon transformation. It is only by creating new wealth through the selling of allowances by auction, and providing them for developing countries that equity can be realised in real terms. There are now discussions about a re-allocation of carbon space from developed countries to developing countries. There is talk about a fair share, and how such a share must be achieved on the basis of equity. There is an argument for the entitlement and partition of carbon space. But some basic questions must be asked. What do the proponents of the partition idea propose to do with the partitioned carbon space? Since the proponents of entitlements are so keen on applying an equity formula to determine partitions, there is a question about what they are going to do with carbon space once an equitable partition has been decided. How is the partition going to be enforced? Does carbon space take the form of allowances? If not, how will the partition be measured and verified? The experience of resource nationalism in the 1960s tells us that entitling and partitioning resources was ruinous to the economies of countries in which practiced it, and, as a consequence, to the world economy. Resource nationalism soon faded; it was overwhelmed by the force of global economic growth. Modern day economic rationalism would call the concept of entitlement or partitioning economic manipulation. Partitioning on the basis of today’s equity considerations can hardly stand as valid 10-20 years into the future as nations grow and wither vertiginously and their relative power positions change interminably depending upon an untold number of factors and circumstances. Such ‘equity’ risks becoming the fodder of a protean world. In more detail, giving away carbon space to internationally competitive companies is a waste of resources as those enterprises can purchase carbon space and still compete in the global market. The governments can instead use partitioned carbon space for other useful purposes. And giving away carbon space for free to non-competitive enterprises does not ensure sustainable growth of those enterprises as such enterprises are without the means to improve their energy efficiency. A global carbon market with auctioning can deliver equity in real terms by enabling developing countries to burn less fossil fuels and grow quicker. It can be a new way to raise untapped revenues, save the most vulnerable countries from poverty and bring them low carbon growth for the first time in history. Thus, a global carbon market with auctioning can achieve both real equity and a thriving world economy. Equity can be built on sound economic rationalism. Today, the international community is indeed at a crucial crossroads. The choice is between institutional monstrosities, or the promise of something which promises to achieve climate stability at the lowest cost. Incentivising investment and growth costs far less than all other solutions and provides equity and a real chance for sustainable growth. . Cancun is the finishing point for the Bali Road Map. As both the Bali Road Map and the Copenhagen Accord do not spell out any action plan for long-term climate stability, a search must begin for a new road map that gives certainty that climate stability is achievable and enables the world economy to continue thriving. And this must be done before 2020, if not earlier. The paradigm started in 1960s must be replaced with a new one if we are to face the new challenges for decades to come and win this battle to preserve equity and economic growth. What we need is a new global alliance where the most vulnerable countries become an integral part of the second industrial revolution for clean growth. What is needed is a global carbon market. Mutsuyoshi Nishimura is the former Ambassador of Japan for the Global Environment. His views are strictly personal. Tiddlywinks on climate change US climate change bill – how international provisions work The international effort on climate change: Unravelling or shifting gear?

Time for change in Korea’s rough-and-ready China policy

Author: Moon Chung-in, Yonsei University, Seoul There is flashing red light in Korea’s China diplomacy. Turning a blind eye toward us, China adopted a neutral stance in the Ch’ŏnan incident, and in the case of the Yŏnp’yŏng Island incident, China even gave the impression it was taking North Korea’s side by its use of terms such as ‘cross-fire’ to refer to the shelling. On North Korea’s uranium enrichment program, China has taken an essentially passive stance by not only stressing the importance of ‘verifying the facts’ in reference to the reported enrichment facility, but also recognizing North Korea’s right to peaceful use of atomic energy. The visit to Seoul by State Councilor Dai Bingguo on which great hopes had been pinned came to an end without producing fruit. South Korea-China relations actually became more strained after his visit to Seoul. Dai once again called for a reconvening of the Six Party Talks, and strongly urged both the North and the South to exercise restraint, without making any mention whatsoever of the Yŏnp’yŏng Island shelling incident. How have South Korea-China relation deteriorated to this state after having been upgraded through great effort to the level of a ‘strategic partnership’ as they were characterized in the declaration issued following the South Korea-China summit meeting in May 2008? Before we place the blame on China’s diplomatic behaviour, we need to engage in a meticulous self examination of Korea’s China diplomacy. Aren’t perhaps the shortcomings of Korea’s China diplomacy the result of the bad move we’ve made in the game of diplomacy of underestimating China? Lacking a cool-headed understanding and analysis of ‘rising China’ we now are seeing that problems are arising as we approach China simply from the perspective of the situation in the 1990s when diplomatic relations between South Korea and China were opened up. Whether it is the nuclear issue or something else, we believe China can be convinced to follow our lead provided we are sufficiently persuasive. Is there any reason to expect China to have warm and fuzzy feelings toward the South Korean government when it is taking a position that implies there is no need for the Six Party Talks, in direct opposition to China’s assessment of the talks as the core diplomatic legacy of Chinese President Hu Jintao, or by putting forth proposals such as ‘Denuclearization Opening 3,000’ and ‘Grand Bargain’ in an effort to claim for itself the leading role in resolving the North Korean nuclear issue? In light of the longstanding, close ties between China and North Korea, there certainly is no reason for China to look favourably on South Korea when it is proposing a three-party strategic dialogue (South Korea-U.S.-China) on ways to deal with a contingency in North Korea. What is the background for disconnects of this kind?  It is quite clear that the problem is the excessive expectations the South Korean government has of the United States. Due to a belief that the U.S. is the only country uniquely able to control or influence China, it is thought that South Korea will be able to resolve its problems with China automatically and simply by strengthening its alliance with the United States. In the end, it is a valid assessment to say that the cause of the failure of South Korea’s China diplomacy is the Lee Myung-bak administration’s deeply rooted perception of the U.S. as a ‘panacea’ for South Korean diplomacy. Although jumping on the bandwagon with the U.S. is a position that is beyond reproach when viewed purely from the perspective of the traditional alliance relationship, it is apparent that there also is a problem with this way of thinking. In the course of promoting a strategic alliance with the U.S., the Lee Myung-bak administration has placed great emphasis on the shared values of a market economy and liberal democracy. This emphasis seems entirely natural from our point of view. From the perspective of China, however, these moves by South Korea are interpreted to mean that South Korea is playing an active role in the efforts of the U.S. to enlarge its sphere of influence as a way of containing or encircling China. It is difficult for China to countenance behavior that looks as though it is intended to bring pressure to bear on China by building an alliance based on values that have no regard for the combination of democracy and socialism that is a distinctive feature of contemporary China. Another problem is the self-centered approach taken in South Korea’s China diplomacy. These days, isn’t China a great power? It is necessary to take China’s perspective into consideration and to understand the country in a manner appropriate to its status as a great power. As an alliance partner of North Korea, for China it is very difficult to take South Korea’s side on the Ch’ŏnan incident while North Korea is strongly disavowing any role in the vessel’s sinking. Just as it was natural for the U.S. to take South Korea’s side, China tilted toward North Korea’s side. In the case of the Yŏnp’yŏng Island incident as well, the context of China’s reaction has to be understood. Given the circumstances at the time of the shelling incident, it certainly would not be warranted to give China low marks as a country in terms of rejecting international norms. After all, it was China that took the position of calling on both North Korea and South Korea to exercise mutual restraint while also urging them to seek a resolution of their issues through dialogue. As for putting national interest ahead of international norms, in reality, moralistically competing with China in terms of accountability, reputation, credibility, and the like rather than being helpful would have a negative effect on South Korea-China relations. Why do these kinds of problems arise? Above all, the core of the problem is the lack of professional expertise on China. Take the lineup of the Lee Myung-bak administration in the diplomatic and national security areas. For the most part, U.S. and Japan experts have a monopoly on positions and dominate these affairs as well as in the top posts in the executive branch and the National Intelligence Service. For them, it is easy to view issues from the American and Japanese perspectives not the perspective of China. The more serious problem is that the point of view taken by the core officials in the current administration is that there is no need for China experts. It seems they think it is better not to have China experts because of their client-grounded attitude that would advocate the Chinese perspective rather than the South Korea’s. Just as fatal as this lack of expertise are the flaws in the construction of the network of human resources. What’s known as ‘connection (guanxi)’ is a critical asset for improving relations with China. However, the current administration has completely eliminated all the key personnel dealing with China that were part of a network of experts that past governments had gradually assembled over a period of years. China relations are being spearheaded these days by conservative officials that are focused on protecting the points of view of the current administration. The way things are going, never mind building ‘connections’ and promoting constructive dialogue, you just have to hope that there are no heated debates with Chinese counterparts, and that meetings are being held to hear mutual differences rather than to enhance mutual understandings and improving relations. President Lee’s misperceptions and lack of knowledge also are a serious matter. While I was residing in China over a six month period last year, I witnessed a sharp cooling of South Korea-China relations. Up until the moment the Ch’ŏnan incident, the majority of government officials took the position that there was nothing unusual about the state of South Korea-China relations. President Lee Myung-bak also took the position in a statement that there were a few problems in the private sector but there were no problems on the government-to-government level. But was that so? Looking back from the present, there seems to be one of two possibilities: either the president was deceived by receiving incorrect advice or the President misrepresented the facts even though he had received an accurate advice from his subordinates. We have to change our way of thinking. Our future is with China. We have to have good relations with China. To do that we need to develop a more balanced practical diplomacy. A triangular alliance that is ‘anti-China’ made up of South Korea, Japan and the U.S. cannot be the alternative. Relations between the U.S. and China as well as relations between Japan and China must be good to ensure the peace, stability and prosperity of the Korean peninsula. In particular, it is necessary to put emphasis on the improvement of North-South relations. After all, ultimately, isn’t the North Korean problem the major reason for the deterioration of South Korea-China relations? Going forward, the government has to take a forward-leaning stance on the resumption of the Six Party Talks. North Korea’s acquisition of a uranium enrichment facility proves that the sanctions that have been in place are not effective. We need to acknowledge that there is no military option. We have to engage in dialogue. If bilateral talks are difficult then we have to make every effort to return to the suspended Six Party Talks. This is the best choice available for South Korea-China relations. Dr Moon Moon Chung-in, Professor of Political Science at Yonsei University and former adviser on North Korean affairs to President Kim Dae-Jung. An earlier version of this essay was posted here , on Nautilus. A more effective US policy on North Korea Obama’s North Korea policy and the June 15 South-North Joint Declaration North Korea provokes again

India’s moment of truth

Author: Peter Drysdale, ANU Like China, India emerged largely unscathed from the impact of global financial meltdown to grow at an impressive 6.7 per cent in 2008-09. This was a performance that ranked second only to China’s: although lower than the 9 per cent growth achieved in the three years immediately before. In 2009-10, the growth rate was 7.2 per cent and it appears likely to be over 8 per cent in 2010-11. As Govinda Rao argues in this week’s lead essay India’s impressive economic performance shows the strength of Indian economy. India escaped the global financial contagion as the Indian banking sector was not exposed to sub-prime lending and risky assets. But India’s continued good performance also demonstrates its domestic economic resilience, with growth fuelled by the high rates of domestic savings and investment. Rajiv Kumar writes this week that last year was also one of highs and lows for India, symbolic of the terrible choices that India’s leaders now confront in defining the country’s destiny in the decades ahead. India has taken its place within the councils of the world. Since November 2008, it has sat at the G20 summit. In the last six months the heads of government of all five UN Security Council members have visited Delhi; India has hosted the prime ministers of the United Kingdom and China and the Presidents of the United States, France and Russia. Most countries, including Japan and Germany but not yet China, acknowledge India’s claim to permanent membership of the Security Council. The rush to pay tribute to New Delhi is palpable. India has arrived, so it seems, on the centre of the global stage. But despite India’s strong economy and its moment in the global sun, most Indians will remember 2010 as a year of scams, scandals, corruption and national shame that threatened ‘not only the country’s brand equity but its economic prospects as well’. The sordid record included the corrupt mess of the Commonwealth games ; a brazen real estate scam (the Adarsh housing society case ) in Mumbai; and to top it all off the most audacious, gigantic, ‘in-your-face’ flouting of all governance norms and proprieties in the case of the allocation of 2G spectrum channels . The under belly of Indian political corruption was exposed for all to see through publication of the Radia tapes that revealed, as Kumar says, ‘the depth of the rot that has set in to India’s administrative machinery’. All this took place on the watch of Prime Minister Singh, whose personal honesty and integrity are beyond reproach, but that in no way qualifies the creeping systemic disease of administrative corruption that eats away at the fabric of Indian society and is a dead weight on India’s economic promise. Kumar sees hope on two things that the reforms have delivered already: the now entrenched freedoms of a vigorously open press that have put the searchlight on venal politics and provides more and more effective monitoring and system accountability in the public interest; and the dynamism and vigour of India’s entrepreneurial class and the corporate sector with its vast army of professionals in the new middle classes. Entrepreneurial energy was unleashed with the reforms in the early nineties and drives India’s economic performance in spite of the burdens of administrative corruption. Economic reform is far from done. Rao urges that without maintaining to momentum of reform (in macro and fiscal policy, in the provision of infrastructure, in labour law and the privatisation of the public sector), India’s economic chance will be lost. Economic reforms will be politically contentious. But the general election in 2009 has delivered a more stable government which has a window of opportunity to pursue deep reform, given that it does not have to confront populism at the ballot box just yet. India’s governance deficit, on such stark display again this year, has to be dealt with too, else all the entrepreneurial vigour will be perverted and growth will run into the sand. Kumar believes that ‘there is a real danger today (for the first time since 1991) of pro-private sector reforms being reversed’ and there could be a reversal back to seventies style populism. Not all the hubris in the world will justify India’s claim to a place on the global stage; but strengthening the foundations of administrative and economic reform to sustain the momentum of growth can. India’s moment of truth may well have come. There are few who think about India’s circumstance anywhere around the world who don’t wish India well in taking up the challenge. India’s high points and lows: no time for backsliding East Asia’s moment of truth China’s moment of truth on the market economy – Weekly editorial