Facing down the neighbourhood bully

ARUN SHOURIE

The danger will not go away just because we refuse to see it. A clue to the coming years lies in the contrasting attitudes of governments and legislatures in the West. This very month, both the European Parliament and the US House of Representatives have passed resolutions endorsing the cause of Tibet and its people. In this very month, governments of those very countries have bent backwards to assure China that they will not inconvenience it. For two reasons, at least, I fear things are going to get much worse in the coming months. On the one hand, China is now in a position where no government is prepared to talk the truth about or to China: look at the turnaround in the policy of Australia; similarly, with the US now dependent on China for financing its bailout packages, the US will not take a stand on any issue that may offend China — look at the way China has silenced the new administration by reminding it of the extent to which China holds US government paper, and what it can do to the dollar’s value and, even more so, to its status as an international reserve currency.

The second factor concerns us in India. It is an apprehension, thus far mercifully just a possibility, but a possibility nonetheless. Namely, that in the coming years, we may have in India even weaker coalitions than we have had in the last few years, that leadership in India may pass into hands which will be even more preoccupied with its own petty calculations and even less concerned with what is happening in Tibet as in other areas around India. The rationalisation that became so convenient an alibi when China invaded Tibet will come in handy again: “When the country most affected by developments in Tibet, namely India, is silent, why should we get worked up about the developments?”

Nor is there any shortage of persons who will rationalise succumbing to whatever China dictates. Just the other day, at the India International Centre, during a discussion of my book on India’s Tibet and China policy, a commentator said, “I am a south Indian, for heaven’s sake. I have not grown up with this feeling of Delhi being the centre of things. How does what happens to Tibetans concern us? If the Tibetans want to strive for their independence, good luck to them; let them do so on their own. Why should we allow ourselves to be dragged into their problem?”

The same thing goes for the border between Tibet and India. There is a unilateral objectivity, espousing which is taken as the hallmark of “independent thinking” in India. Books have been put out showing how in regard to Aksai Chin, for instance, the Indian borders were successively advanced northwards and eastwards by British surveyors in late 19th and early 20th century. That the Chinese have similarly enlarged the entire concept of “China” is not mentioned at all: is it not a fact that the original China was only one-third of what China is today? I hear similar “objectivity” in regard to the eastern border, in particular in regard to Tawang. This cannot but dissipate national resolve; it cannot but further expose Tibetans to Chinese oppression; and it cannot but ultimately endanger India.

We must bear in mind that China has a clear view of what it wants to be — the dominant power in Asia and one of the two major powers in the world. It regards India as a potential nuisance, a nuisance that must be confined within South Asia. All its policies, including its policy of conquering and suppressing Tibet, its policy of militarising Tibet and stationing air and nuclear bases in Tibet, are part of this larger policy.

We must also be clear that China is just not going to make any conciliatory move in regard to Tibet. In fact, one sure road for Chinese leadership to ascend has been through Tibet: the present president of China won his spurs by the systematic oppression of Tibet which he directed and over which he presided. China only goes through the pretence of talking to the Dalai Lama’s delegations from time to time — as it did, for instance, in the run-up to the Olympic Games. It is only waiting for the Dalai Lama to pass away, knowing that, with this centre of gravity gone, the Tibetans will be reduced to an even more helpless situation.

It is for this reason that we can expect that, in the coming months, China will put the kind of pressure on India which it has put recently on South Africa — pressure to either silence the Dalai Lama completely or to evict him from India. And, I’m afraid, there will be no shortage of rationalisers who will say, “Why should we let one man, howsoever eminent and pious, come in the way of improving relations between China and India, as improving those relations is required for India’s own security?”

There is another feature about India’s stance towards Tibet, a feature that reveals a lot about us as a people, a feature that goes beyond the attitude of successive Indian governments. As is well known, the Buddhist tradition was forgotten in India; in fact, the Buddha himself seems to have been forgotten and the Buddhist sites erased from our collective memory till a few Britishers took it upon themselves to hunt them down and excavate them. Among the places in the world, where this great heritage of mankind, and the Buddha’s doctrine and practice, were preserved has been Tibet. The great Tibetan masters have been with us and amidst us now for 50 years. It is indeed true that Panditji helped set up institutions in which higher Tibetan learning and Tibetan arts and culture could be preserved and nourished. And there is no doubt that the Tibetans themselves feel that these institutions have been instrumental in helping save their culture and religion. But it is equally true that, as a people, we have not thought it necessary to learn from the Tibetan masters. In this sense, the policy of successive governments of India, the policy of shutting our eyes to what is happening in Tibet and what China is doing around India is representative of the way we have shut our eyes to the presence of Tibetan masters in our midst.

As a people and as a country we will pay for this ill-karma.

It is often said, “But we had no option in 1949/50.” Take that to be true for a moment. The tragedy is that six long decades later, we remain a country without options.

The truth is harsher and lies in what Guru Nanak said:

Bal chhutkeyo, bandhan parhe, kachhu na hot upaaye / Kahe Nanak, Hari gaj jyon hi ho sahaaye / Bal howa, bandhan chhute, sab kuch hot upaaye/ Nanak sab tumre haath mein, tum hi ho sahaaaye

(My strength is exhausted andI am in bondage/ I cant do anything at all says Nanak/ Now the Lord is my support; He will help me as he He did the elephant/ my strength has been restored and my bomds have been broken / Now I can do everything Nanak! Everything is in your hand, Lord! You are my helper and support)

It is weakness that lies at the root. The rest, accepting Chinese “suzerainty” one day, “sovereignty” the next; accepting Tibet as an autonomous region within China one day and as an internal affair of China the next — these are just successive steps to “operationalise” that weakness, so to say. Unless we acquire strength comparable to that of China; unless we build up an alliance system with other countries that are concerned about Chinese intentions and might, we will be left with hope as our only policy: the hope that “ultimately truth triumphs,” that “ultimately tyrannies dissolve,” the hope that like all else “ultimately China too will evolve towards freedom and democracy.”

(Concluded)

 ARUN SHOURIE, The writer is a Rajya Sabha MP from the BJP,

Source: Indian Express
Tuesday , Apr 07, 2009 at 1534 hrs

Facing down the neighbourhood bully

ARUN SHOURIE

The danger will not go away just because we refuse to see it. A clue to the coming years lies in the contrasting attitudes of governments and legislatures in the West. This very month, both the European Parliament and the US House of Representatives have passed resolutions endorsing the cause of Tibet and its people. In this very month, governments of those very countries have bent backwards to assure China that they will not inconvenience it. For two reasons, at least, I fear things are going to get much worse in the coming months. On the one hand, China is now in a position where no government is prepared to talk the truth about or to China: look at the turnaround in the policy of Australia; similarly, with the US now dependent on China for financing its bailout packages, the US will not take a stand on any issue that may offend China — look at the way China has silenced the new administration by reminding it of the extent to which China holds US government paper, and what it can do to the dollar’s value and, even more so, to its status as an international reserve currency.

The second factor concerns us in India. It is an apprehension, thus far mercifully just a possibility, but a possibility nonetheless. Namely, that in the coming years, we may have in India even weaker coalitions than we have had in the last few years, that leadership in India may pass into hands which will be even more preoccupied with its own petty calculations and even less concerned with what is happening in Tibet as in other areas around India. The rationalisation that became so convenient an alibi when China invaded Tibet will come in handy again: “When the country most affected by developments in Tibet, namely India, is silent, why should we get worked up about the developments?”

Nor is there any shortage of persons who will rationalise succumbing to whatever China dictates. Just the other day, at the India International Centre, during a discussion of my book on India’s Tibet and China policy, a commentator said, “I am a south Indian, for heaven’s sake. I have not grown up with this feeling of Delhi being the centre of things. How does what happens to Tibetans concern us? If the Tibetans want to strive for their independence, good luck to them; let them do so on their own. Why should we allow ourselves to be dragged into their problem?”

The same thing goes for the border between Tibet and India. There is a unilateral objectivity, espousing which is taken as the hallmark of “independent thinking” in India. Books have been put out showing how in regard to Aksai Chin, for instance, the Indian borders were successively advanced northwards and eastwards by British surveyors in late 19th and early 20th century. That the Chinese have similarly enlarged the entire concept of “China” is not mentioned at all: is it not a fact that the original China was only one-third of what China is today? I hear similar “objectivity” in regard to the eastern border, in particular in regard to Tawang. This cannot but dissipate national resolve; it cannot but further expose Tibetans to Chinese oppression; and it cannot but ultimately endanger India.

We must bear in mind that China has a clear view of what it wants to be — the dominant power in Asia and one of the two major powers in the world. It regards India as a potential nuisance, a nuisance that must be confined within South Asia. All its policies, including its policy of conquering and suppressing Tibet, its policy of militarising Tibet and stationing air and nuclear bases in Tibet, are part of this larger policy.

We must also be clear that China is just not going to make any conciliatory move in regard to Tibet. In fact, one sure road for Chinese leadership to ascend has been through Tibet: the present president of China won his spurs by the systematic oppression of Tibet which he directed and over which he presided. China only goes through the pretence of talking to the Dalai Lama’s delegations from time to time — as it did, for instance, in the run-up to the Olympic Games. It is only waiting for the Dalai Lama to pass away, knowing that, with this centre of gravity gone, the Tibetans will be reduced to an even more helpless situation.

It is for this reason that we can expect that, in the coming months, China will put the kind of pressure on India which it has put recently on South Africa — pressure to either silence the Dalai Lama completely or to evict him from India. And, I’m afraid, there will be no shortage of rationalisers who will say, “Why should we let one man, howsoever eminent and pious, come in the way of improving relations between China and India, as improving those relations is required for India’s own security?”

There is another feature about India’s stance towards Tibet, a feature that reveals a lot about us as a people, a feature that goes beyond the attitude of successive Indian governments. As is well known, the Buddhist tradition was forgotten in India; in fact, the Buddha himself seems to have been forgotten and the Buddhist sites erased from our collective memory till a few Britishers took it upon themselves to hunt them down and excavate them. Among the places in the world, where this great heritage of mankind, and the Buddha’s doctrine and practice, were preserved has been Tibet. The great Tibetan masters have been with us and amidst us now for 50 years. It is indeed true that Panditji helped set up institutions in which higher Tibetan learning and Tibetan arts and culture could be preserved and nourished. And there is no doubt that the Tibetans themselves feel that these institutions have been instrumental in helping save their culture and religion. But it is equally true that, as a people, we have not thought it necessary to learn from the Tibetan masters. In this sense, the policy of successive governments of India, the policy of shutting our eyes to what is happening in Tibet and what China is doing around India is representative of the way we have shut our eyes to the presence of Tibetan masters in our midst.

As a people and as a country we will pay for this ill-karma.

It is often said, “But we had no option in 1949/50.” Take that to be true for a moment. The tragedy is that six long decades later, we remain a country without options.

The truth is harsher and lies in what Guru Nanak said:

Bal chhutkeyo, bandhan parhe, kachhu na hot upaaye / Kahe Nanak, Hari gaj jyon hi ho sahaaye / Bal howa, bandhan chhute, sab kuch hot upaaye/ Nanak sab tumre haath mein, tum hi ho sahaaaye

(My strength is exhausted andI am in bondage/ I cant do anything at all says Nanak/ Now the Lord is my support; He will help me as he He did the elephant/ my strength has been restored and my bomds have been broken / Now I can do everything Nanak! Everything is in your hand, Lord! You are my helper and support)

It is weakness that lies at the root. The rest, accepting Chinese “suzerainty” one day, “sovereignty” the next; accepting Tibet as an autonomous region within China one day and as an internal affair of China the next — these are just successive steps to “operationalise” that weakness, so to say. Unless we acquire strength comparable to that of China; unless we build up an alliance system with other countries that are concerned about Chinese intentions and might, we will be left with hope as our only policy: the hope that “ultimately truth triumphs,” that “ultimately tyrannies dissolve,” the hope that like all else “ultimately China too will evolve towards freedom and democracy.”

(Concluded)

 ARUN SHOURIE, The writer is a Rajya Sabha MP from the BJP,

Source: Indian Express
Tuesday , Apr 07, 2009 at 1534 hrs

Responding to the Economic Meltdown

ARUN SHOURIE

Some lessons for South Asia Arun Shourie

(The Asian Development Bank recently organised a meeting in Manila of central bank governors, ministers and senior finance officials from South Asia to consider the impact of the economic meltdown, and possible responses. Michel Camdesus, former managing director of the IMF delivered the opening address, former Union minister Arun Shourie the closing address. This is the text.)

Several features about the current economic crisis stand out. The first, of course, is the sheer scale of what preceded it, and the magnitude of what has happened in its wake: to recall a typical fact, in a recent lecture, Andrew Sheng mentions that, on the eve of the breakdown, the nominal value of financial derivatives and exchange traded derivatives had soared to fourteen times the world’s GDP.

The second feature is the pace of wealth destruction in this round: as has been observed, there has scarcely been another period of four to five months in which almost fifty trillion dollars worth of wealth has been wiped out.

Third, as several observers have pointed out, the breakdown differs from the Southeast Asian crisis in other respects also: that crisis was on the periphery of the world economic system; this one has originated in, and has thus far most severely struck the very heart of the system. The result makes demands of its own: as the Southeast Asian economies went into a tailspin, the OECD economies held up; this helped the recovery of the former as they were able to resume exports to the latter. This buoy is not available this time round: while some of our economies may be able to resume growth only when the US, European and Japanese economies come out of the recession, we will have to depend on our own efforts. This is all the more so as governments, pressed by job losses at home, will, overtly or covertly, adopt protectionist measures. As a lemma, the same proposition holds for China: it is idle to expect, as commentators kept saying in the last quarter of 2008, that China would shore up other economies. China is focusing its efforts on reorienting its economy towards domestic demand, domestic requirements, domestic employment: the “stimulus” this effort may provide for other economies will only be a residual.

FOurth, the world has turned out to have become much more intertwined than experts had pronounced it to be. Economies are much more inter-linked, sectors within an economy like India are much more interdependent than had been presumed. How contrived the declarations of October/November last year look just four/five months later – that our economies will not be affected as the “fundamentals” of our economies are strong, as our economies are, in effect, “decoupled” from western economies. Our economies are linked to others through exports of goods as well as services, through remittances, through foreign inflows – through monies that have come in for arbitrage even more so than as direct investment. But more than any of these, our economies are linked with those of US, Japan and Europe through that all-pervasive intangible – confidence. Yes, particular banks and firms have been thrown into difficulties. Yes, there is shortage of liquidity. But the real blow has been to confidence – that is the tsunami that has traveled all the way to our shores. Till confidence is restored, things will not begin to turn around. And notice that as yet, the 4 trillion dollars notwithstanding, nothing that the governments of the US, Europe or Japan have done has shored up confidence.

That is one reason why the periodic declarations, “We expect recovery from the third quarter of 2009/ from the first quarter of 2010…,” are just that much whistling in the dark.

In spite of the scale of the breakdown; in spite of the pace at which wealth has been destroyed; in spite of the fact that nothing that has been done thus far – and what has been done this time round is far greater in magnitude than in any other crisis in decades – has shored confidence, in spite of these features, government after government has underestimated the impact that the crisis is certain to have on its economy. Indeed, several governments – and the Government of India is a prime example – have been in denial. The tsunami has hit countries successively. But, till the penultimate moment, each has convinced itself that the tsunami has passed at a safe distance.

The first lesson is not to remain in denial. Governments must anticipate. They must react at lightning speed. They must overwhelm. The old adage is indeed apt: hope for the best but prepare for the worst. A lemma is: do not be lulled into relaxing your effort by blips: that in Pakistan’s case remittances have, in fact, increased a bit in the last two months may well be due to the fact that workers who are being laid off in the Middle East are repatriating their savings in one go; that automobile sales in India have gone up in January may well be due to some transient factors… Hence, instead of clutching at these straws, prudence dictates that we assume that developed countries will take five to seven years to return to the status quo ante, and devise our responses accordingly.

Nature of the stimulus

The view has been urged, “Our deficit is our stimulus.” Such claims are a symptom: the current crisis is being used by many governments, the Government of India is again a prime example, to cover up the results of mismanagement during the period preceding the crisis. Financial profligacy is what caused the deficits in India, for instance, not some prescience about the impending breakdown. Unchecked, poorly targeted subsidies on food and fertilizers; on petroleum products; a massive waiver of agricultural debts; pay rises for government staff – these three items are what pushed the combined deficit of central and state governments in India to over 11 per cent of the country’s GDP. Not only were these outlays way beyond what prudence would have allowed, they were grossly under-budgeted: the provision for food and fertilizer subsidies was at least a third less than what would manifestly be required; the POL subsidies were kept out of the Budget calculations all together; as were the outlays on the massive increases in governmental salaries.

The assertion, “The deficit is our stimulus,” presumes that our economies are today suffering from the classic Keynesian deficiency of demand. That is far from being the case. Not a generalized deficiency of demand but a breakdown of confidence – this is what is causing industry to hold back on investment, it is what is causing even consumers to hold back on purchases. And that is precisely why cuts in rates of interest, cuts even in taxes are not triggering the surge in investments and purchases that policy makers have assumed would follow: how can the fact that a person will have to pay 2 per cent less as interest lead him to go in for a house when he is not sure whether he will have his job two months from now?

Prior profligacy limits a country’s ability to deal with the crisis. And profligacy today limits its ability to deal with the crisis as it continues into next year. Today the countries that have reserves, that have fiscal headroom, that have the ability to execute massive infrastructure projects – these are the countries that are in a better position to navigate the crisis. When investors and others see that their government is unable to bring its expenditures to heel, their confidence in the future is further damaged. And there is the real effect too: in India, with governmental borrowing of Rs. 3600 billion having become inescapable in 2009/2010, the State will be pre-empting the private sector from the market, it will be pre-empting the very sector on which it is coming to rely not just for executing infrastructure projects but even for financing them. A return to fiscal discipline, therefore, is necessary precisely for meeting the crisis.

There is another reason for this. The crisis is no longer a generalized one. By now it is sector-specific. It is location-specific. It is firm-specific. Units in Tirupur in Tamil Nadu producing garments for exports have been hit hard. By the time the stimulating effects of a general deficit will reach Tirupur, an age would have passed.

Moreover, jobs are not malleable. Establishments in the gems and jewelry business have had to cut down operations drastically in Gujarat. Assume that, through deficits, the Government finances public works in Bihar or even in Surat. How many diamond cutters will be inclined to or even be able to avail of them?

To be of help the relief must be in the locality and in the industry that has been hit. Faced with a sudden fall in purchases of trucks, the commercial vehicles sector will be helped not when the Government goes in for an even larger general-purpose deficit but when it decides to expedite procurement of trucks for the country’s defence forces.

The same goes for individual firms. To pluck an example from India, the very firms that were the pride of the country yesterday as they acquired firms abroad are in danger today: several of them acquired the foreign firms with substantial borrowings. Today, with the collapse of markets, the fall in commodity prices, the evaporation even of working capital, they are finding it difficult to service their obligations. That constitutes a twofold problem for the country. First, at the very time that foreign funds have been withdrawn – close to 70 billion dollars in the last six months – about $ 53 billion short term debt has to be serviced – either through repayment or through renewal – in the coming year. Second, a failure of even one of these firms will not just be a problem for that firm, it will be yet another blow to confidence in general. In a word, governments should be planning not just general packages but location-specific, industry-specific and firm-specific relief.

While doing so, governments must keep the inarticulate in mind also. With sources of external commercial borrowing having dried up, Indian corporates, for instance, will be turning to Indian banks and the Indian market. The small and medium establishments, already hit by the sudden and extreme risk-aversion that has seized our banks like banks elsewhere, will now be squeezed out completely. Yet, as a recent McKinsey study reminds us, this is a massive sector. It accounts for 40 per cent of manufacturing output, that is about 17 per cent of the country’s GDP. It accounts for close to 44 per cent of exports. Most important, it employs close to 30 million people. Closures and lay-offs in this sector will be diffused. But they will be of an order that, if unattended, can trigger social unrest.

For the same set of reasons, governments should be alert to early signs of stress even in sectors that are conventionally regarded as strong. In India, for instance, it is generally assumed, and quite rightly so, that our banking sector is safe as it has been conservative. It has made substantial progress in bringing down non-performing loans to just about 2 per cent of its outstandings. But recent studies – by Chetan Ahya and Ridham Desai of Morgan Stanley, by Joydeep Sengupta and Anu Madgavkar of McKinsey – remind us other that there are facets also: about 40 per cent of corporate India’s asset base has a return on incremental capital that is lower than the cost of capital; and Indian banks have lent $ 100 billion to these vulnerable firms – loans that account for a fifth of total bank loans. In a word, take no sector for granted. Identify the vulnerable units in each sector, and prepare contingency plans for them – remembering always that a collapse of any constituent of any sector will impair the most important variable that is needed for revival, the very variable that is most fragile today – namely, confidence in general.

In such environment general deficits will be as much of a stimulus as throwing money out of the window. The stimuli which will really help are ones that strengthen the viability, sustainability, and competitiveness of the economy for the long run -- that is, for the time when this particular crisis would have passed and the economy would be back to its normal course. A good example of this kind, for instance, is the announcement in the US that it will be deploying a good bit of its stimulus plan towards creating a green infrastructure. Outlays to create alternate energy which liberate economies like those of South Asia from their current dependence on imported oil supplies; expenditures to multiply and enlarge manifold the current facilities available for higher and technical education, facilities which would overcome the extreme shortage of technical personnel in these countries would be examples of the same kind. An excellent initiative, one that we should emulate, is available from Singapore. The Government has launched a plan under which a person losing his job can enroll in an institution for acquiring higher skills than the ones that are required for his existing job. He is paid a stipend for every day that he attends a class for five hours of class. When the current downturn is behind us, the person will be able to seek a job which is better paying and which demands more of him than the job that he has just lost.

The crucial variable here is the ability of the country to execute these projects expeditiously. This is why China is way ahead of, say, the typical South Asian country. To begin with, it has $ 2 trillion of reserves. With these it can finance massive infrastructure projects – an option that is not available to a country like India which, through the Government’s profligacy of the past three years, has robbed itself of fiscal headroom. Equally important, China has large supplies of engineers and skilled personnel – because of the extensive programmes which it had implemented earlier for both, training engineers as well as for upgrading vocational skills. With those two trillion dollars it can also, as it is doing, acquire mineral and other resources in other parts of the world, the resources that it will need for its long-term growth. Most important, China has a shelf of projects which it can start implementing forthwith: many of these projects had been prepared to the last detail as long ago as 2005. Several of them were kept in abeyance, in a sense, as it was felt that the economy was overheating. Now they can be implemented without any delay. And that is possible because China has overcome the customary obstacles which hold up the execution of projects in countries such as ours. It has acquired an unmatched capacity to implement projects expeditiously. In our case, apart from implementing such projects as can be implemented now, the current crisis is yet another occasion to make every effort to acquire the ability and resources to improve the capacity to implement projects more expeditiously in the future.

Why not start straightaway? Institute massive rewards for firms and local and provincial governments that expedite the implementation of projects? Institute tax rebates for companies which, instead of laying off workers, retain them and have them acquire better skills?

A role for the ADB

And this points to a vital role which an institution like the Asian Development Bank can discharge at this moment. Andrew Sheng and others justifiably remind us of the curious charge that has been put out – namely, that countries of Asia have exacerbated the current crisis by their excessive savings, that the current crisis has been made possible, indeed that it has been intensified by what have been called “global imbalances”. This is one of those predictable surprises. Our countries were being hectored incessantly that we should increase our savings rate. And now we are being told that, because we have done so, we have contributed to intensifying the existing crisis! But, for a moment, take this charge at face value. The cure is obvious. The cure to “global imbalances,” it has been rightly said, is to develop the capacity within Asia to use our savings here.

In addition to improving our capacity to implement projects within our countries, we should enhance our capacity to implement cross-country, regional projects. There are a large number of such projects which can be implemented, but which have been languishing for reasons that are as remediable as they are well-known. Setting up power projects in Nepal from which power is sold mostly to India; setting up projects to exploit the natural gas resources of Bangladesh from which a large proportion of gas would be sold to India – these projects have not got off the ground for decades because undertaking them has become a political issue within Nepal and Bangladesh. This is where the Asian Development Bank, with the trust which countries in the region repose in its fairness, and in its objectivity and expertise, can play a vital role. It should, for instance, draw up the terms and conditions which would be best for Nepal and would be fair to India for implementing power projects in that country.

This is the role which would be more appropriate than to expend time and effort in setting up yet another institution. As is customary in the wake of every crisis, today also proposals are being advanced for setting up new institutions. Shouldn’t we set up an institution for regional monitoring? Shouldn’t we set up an arrangement, a regional fund for helping our countries tide over such crises? Our experience with new institutions in response to crises has been, that, ten years after they have been set up to deal with the problem, the problem remains as it was, and the institution has become a new problem. Therefore, instead of going in for more institutions, an organisation like the ADB should use its influence and expertise and acceptability to persuade governments to at last start implementing cross-country projects.

Reforms

The current crisis has triggered a sort of triumphalism among those who have traditionally opposed reforms in our countries. “See,” they say, “capitalism has failed; liberalization and opening up of the economy, integration with the world has brought all these problems upon us.” Therefore, they are pressing, not just a halt to further reforms, but for a reversal of many of them. With this logic in hand, we should just have remained at the hunting and gathering stage. Had we only done so, none of the crises that afflict countries periodically would have touched us at all! The lesson is the opposite one. Every circumstance, every arrangement, every new setup opens up new opportunities just as it also occasions new problems. We should not, for that reason, shy away from reforms and progress. The lesson is to institute such correctives and reforms as the new circumstances demand. One of President Obama’s advisers has a good maxim: “No crisis should be allowed to go waste”. In the current circumstances also, the people, as well as governments will be prepared to take measures today which they would not have taken in normal times. The new circumstance should, therefore, be used to affect improvements that are necessary in the light of the crisis as it has unfolded, and at the same time to institute those reforms which will enable our countries to adopt policies and implement projects more expeditiously – policies and projects which, as we noted above, will strengthen the viability, competitiveness and sustainability of our societies for the future.

But all this is contingent on our having clear-headed, competent, purposeful, strong governments. This is the real deficit, the real crisis in our societies – apart from the advance that has been registered in Sri Lanka of overcoming the terrorist threat, and apart from the steady hands that guide Bhutan, governments in South Asia are losing grip as well as legitimacy. No stimulus package, no slew of economic reforms can survive the wreckage of governance.

Considerations that go beyond countries

One of the important features about the current crisis is that the breakdown has not come about because of one rogue, not even because of a handful of rogues. This is not the work of a Harshad Mehta or a Madoff. Entire industries have been involved in bringing about this collapse. Mortgage salesmen, banks, financial analysts, chartered accountants, auditors, rating agencies, regulators, central bankers and the governments – what has happened is the joint product of one and all of them. I’m reminded of a phrase which Joseph Berliner had used to describe the inability over decades of Soviet planners to get at the facts about individual enterprises. The reason, he said, was that from the bottom – the shop-floor of the factory – to the top – the provincial and central planning bodies – everyone had a vested interest in exaggerating the production figures and minimizing the quantities of raw material that had been used to produce the particular item. The reason, he wrote, was that functionaries all along the line were knit in “interlocking webs of mutual complicity.” These “interlocking webs” of the complicit are precisely what account for the current breakdown. For that reason, merely adding one more twist to a regulation or even to the law; merely setting up another institution which in the end comes to work in the same way as the existing institutions – such steps will not do.

For we must examine how this mountain of sand swelled to such proportions and “no one noticed.” We must reflect on the ease with which what was good for a few got dressed up as being good for all. We must reflect how warnings, even protests, some of them from leading statesmen of Asia itself, were disregarded. In fact, they were drowned in the general applause and acclamation of “financial innovation” which was said to be taking place. We must reflect how, in fact, regulations were enacted in countries like the U.S. but were not enforced. We must recall how, at crucial turns, regulations were, in fact, relaxed.

There were several reasons why all this happened. For the present purpose recalling just two of them will suffice. First, the beneficiaries, for instance the investment bankers, had acquired the position and “the intellectual stature” of referees. They were interlinked with advisers, analysts, rating agencies, and ultimately with the regulators. That is how what was good for them came to be dressed up as being good for all. Similarly, several governments and central bankers, as is now acknowledged even by some of the prime actors themselves, blew into the bubble and made it swell even more. The reason was that they took the resulting rise in asset values as certificates for their performance, they took them to be evidence of the correctness of their policies and as proof of the confidence which markets all over the world reposed in them personally.

After all, it is not that warnings were lacking. It is not the case that everyone was convinced that the innovations were all for the good. All of us today recall the statement of Warren Buffet – about an entire category of these innovative instruments being “Weapons of Mass Destruction”. We recall the warnings of Naseem Talib, of Roubini, of Jeremy Grantham. The point to reflect is, “How is it that these warnings went unheeded? How did they get drowned?”

The second point to reflect upon is more fundamental: are there features that are inherent in this kind of a financial universe and which make such breakdowns inevitable? Take, for instance, the simple matter of Asset-based Lending. Marry it to the perverse incentive system which became the characteristic of the financial world in the West. Loans would be given on the basis of the value of a category of assets, say houses. As the volume of loans against that category of assets for further investment in that category of assets increased, the value of those assets went up. Accordingly, in the second round, those who could offer those assets as collateral were able to borrow even more against those assets. That in turn raised the value of those assets even higher… And the larger the volume of loans that got made against those assets, the higher the rewards that accrued to those stoking the fire. And notice, the extent to which “innovation” was taken to further this fire: so much so that today the banks themselves, and the companies that ostensibly insured the transactions of those banks do not know the extent, even by a broad order of magnitude, to which they have become exposed to those toxic instruments.

To continue with the current example, so as to safeguard ourselves against future collapses of this kind, we must devise and hone gauges of our own to identify bubbles. And it should be the duty of our governments and central banks to alert our citizens, in particular small, uninformed, retail investors about bubbles that are emerging. Even this recent episode shows that when asset prices rise at the astronomical rate at which they did in the last five years, a bubble is getting formed. Similarly, when transactions come to have little to do with reality, that too is an indication that we should heed. In this last round, for instance, far-fetched and unimaginably esoteric formulae became the basis for millions of dollars to move into and out of “packages”, and countries. The ratio of one currency to another; the ratio of those two currencies to that of another pair of currencies; correlations of absolutely distant variables over whatever stretch of time fit that string of observations… Such determinants became the automatic triggers for transactions. They had nothing to do with what was happening in the underlying sectors, in the firms. When things are reach such a pass, we should know that transactions and instruments have departed so far from reality that they are bound to come down in a crash.

Thus, the spiral and the eventual collapse were inherent in the design itself. But there is an even more basic question that we must ponder. Are the spiral and the subsequent collapse inherent only in a particular sector? Or is it that the economies themselves have got addicted to bubbles? The real estate bubble in one round. The dotcom bubble in the next. The sub-prime and yen-trade bubble in the third…

Therefore, while much has been made of the fact that this breakdown was triggered by a policy failure, the failure to save Lehman Brothers, the fact is that the failure to save Lehman Brothers was just the occasion for what happened subsequently. That failure, to recall an expression used in a very different context, was just “the spark that lit the prairie fire.” The fact that entire sectors collapsed, that entire economies went into a tailspin so swiftly upon the decision not to save a single institution shows that the whole structure had become just a wall of sand. That is what we should reflect on for our future.

Several operational conclusions follow.

A few things to do

First, there is much talk of a new international economic architecture. Unfortunately, once again almost all work on what shape that architecture should take is being done in the very countries, sometimes by the very institutions and personnel whose excesses and misjudgments, to put it no higher, have led to the present pass. But they are, and quite naturally, loath to part with power. They may well let time pass. They may once again busy us in futile debates. And ensure that processes and institutions remain in their control. That would only ensure that the next bubble, and with it the next jolt will not be long in coming. That is all the more likely because, in those societies, the ones whose excesses and greed have led the world into this pit have got away scot-free. Others – tax payers who must pick up the bill for the bailouts, workers who must suffer joblessness – are the ones who are defraying the cost.

Second, we must keep our ears open to the Cassandras. We must not get swept away by intellectual fashions. Certainly, we should not succumb to the urgings of financial wizards and advisers who chastise our countries and governments for not keeping up with innovations that have been adopted “all over the world.”

Third, these events remind us once again that we must think for ourselves. We must be centres of countervailing intellectual, institutional and real economic power. Unless we build up these capacities, we will remain vulnerable to being misled by persons and institutions that have ideas that suit them rather than us, to say nothing of agendas they might have.

It is equally important to nail the culpable. First, we must document and nail the double standards of the West and of international institutions and international advisers. Policymakers in Southeast Asia recall vividly the advice which was thrust down their throats in the late 1990s. “No, no,” they were told, “you must let those who had made mistakes collapse. That is the way the market ensures that the mistakes will not be repeated in the future.” Governments in Southeast Asia, the government even of Japan, the country with the second largest economy of the world, let banks and other firms fail. These were then bought up at throw-away prices by western companies and consortia. And what is the position today? We are told that all rulebooks have to be thrown overboard. We are told that governments must intervene to save the companies and institutions which have done such gross wrongs, which have made such enormous mistakes, which have been propelled by little else than personal greed – we are told that governments just have to intervene and save these institutions at the cost of the taxpayer because, otherwise, the system as a whole will come down. When that was to be the consequence for our countries, no one was prepared to listen. Not just advisers, but institutions on which countries across the world, including our countries are represented insisted that failure was the only instrument for improvement. These double standards continue to this day. How many have spoken out against the protectionist measures which have already been announced by President Obama? Has he not announced that tax reliefs will not be available to firms that outsource their work? Has he not announced that foreign nurses will not be an employed or welcomed? What if the leaders of one of our countries had announced such measures?

For the same reason it is very necessary to document and nail the red-cards and yellow-cards which rating agencies and other monitors keep handing out. How come they were giving triple ‘A’ ratings to institutions and to instruments and to packages which we now see were entirely hollow? Are these not the very rating agencies and monitors that hand out ratings of one kind or another to our firms, indeed even to our countries, ratings that then influence the decisions of investors and thereby move billions of dollars into or out of our countries? We must document their record so that, in future, they command only as much authority as the intrinsic worth of their work deserves.

Conclusions

In a word,

We must grab the crisis by the forelocks, as we would grab time.

Second, by now the remedies have to be sector-specific, location-specific, firm-specific. General-purpose deficits are no answer to the downturn into which we have been pushed.

Third, we must think for ourselves. In particular, we must document the advice that was thrust down our throats over the years.

Fourth, we must focus on working and reforming existing institutions and processes rather than on setting up yet another slew of institutions. For this purpose institutions like the Asian Development Bank, countries like India and others in South Asia should coordinate and sustain intellectual effort.

[1] Andrew Sheng, “From Asian to global financial crisis,” Third K.B. Lall Memorial Lecture, Indian Council for Research on International Economic Relations, New Delhi, 7 February 2009.
 
ARUN SHOURIE, The writer is a Rajya Sabha MP from the BJP,
Source: Indian Express
Thursday , Mar 19, 2009 at 1703 hrs

Responding to the Economic Meltdown

ARUN SHOURIE

Some lessons for South Asia Arun Shourie

(The Asian Development Bank recently organised a meeting in Manila of central bank governors, ministers and senior finance officials from South Asia to consider the impact of the economic meltdown, and possible responses. Michel Camdesus, former managing director of the IMF delivered the opening address, former Union minister Arun Shourie the closing address. This is the text.)

Several features about the current economic crisis stand out. The first, of course, is the sheer scale of what preceded it, and the magnitude of what has happened in its wake: to recall a typical fact, in a recent lecture, Andrew Sheng mentions that, on the eve of the breakdown, the nominal value of financial derivatives and exchange traded derivatives had soared to fourteen times the world’s GDP.

The second feature is the pace of wealth destruction in this round: as has been observed, there has scarcely been another period of four to five months in which almost fifty trillion dollars worth of wealth has been wiped out.

Third, as several observers have pointed out, the breakdown differs from the Southeast Asian crisis in other respects also: that crisis was on the periphery of the world economic system; this one has originated in, and has thus far most severely struck the very heart of the system. The result makes demands of its own: as the Southeast Asian economies went into a tailspin, the OECD economies held up; this helped the recovery of the former as they were able to resume exports to the latter. This buoy is not available this time round: while some of our economies may be able to resume growth only when the US, European and Japanese economies come out of the recession, we will have to depend on our own efforts. This is all the more so as governments, pressed by job losses at home, will, overtly or covertly, adopt protectionist measures. As a lemma, the same proposition holds for China: it is idle to expect, as commentators kept saying in the last quarter of 2008, that China would shore up other economies. China is focusing its efforts on reorienting its economy towards domestic demand, domestic requirements, domestic employment: the “stimulus” this effort may provide for other economies will only be a residual.

FOurth, the world has turned out to have become much more intertwined than experts had pronounced it to be. Economies are much more inter-linked, sectors within an economy like India are much more interdependent than had been presumed. How contrived the declarations of October/November last year look just four/five months later – that our economies will not be affected as the “fundamentals” of our economies are strong, as our economies are, in effect, “decoupled” from western economies. Our economies are linked to others through exports of goods as well as services, through remittances, through foreign inflows – through monies that have come in for arbitrage even more so than as direct investment. But more than any of these, our economies are linked with those of US, Japan and Europe through that all-pervasive intangible – confidence. Yes, particular banks and firms have been thrown into difficulties. Yes, there is shortage of liquidity. But the real blow has been to confidence – that is the tsunami that has traveled all the way to our shores. Till confidence is restored, things will not begin to turn around. And notice that as yet, the 4 trillion dollars notwithstanding, nothing that the governments of the US, Europe or Japan have done has shored up confidence.

That is one reason why the periodic declarations, “We expect recovery from the third quarter of 2009/ from the first quarter of 2010…,” are just that much whistling in the dark.

In spite of the scale of the breakdown; in spite of the pace at which wealth has been destroyed; in spite of the fact that nothing that has been done thus far – and what has been done this time round is far greater in magnitude than in any other crisis in decades – has shored confidence, in spite of these features, government after government has underestimated the impact that the crisis is certain to have on its economy. Indeed, several governments – and the Government of India is a prime example – have been in denial. The tsunami has hit countries successively. But, till the penultimate moment, each has convinced itself that the tsunami has passed at a safe distance.

The first lesson is not to remain in denial. Governments must anticipate. They must react at lightning speed. They must overwhelm. The old adage is indeed apt: hope for the best but prepare for the worst. A lemma is: do not be lulled into relaxing your effort by blips: that in Pakistan’s case remittances have, in fact, increased a bit in the last two months may well be due to the fact that workers who are being laid off in the Middle East are repatriating their savings in one go; that automobile sales in India have gone up in January may well be due to some transient factors… Hence, instead of clutching at these straws, prudence dictates that we assume that developed countries will take five to seven years to return to the status quo ante, and devise our responses accordingly.

Nature of the stimulus

The view has been urged, “Our deficit is our stimulus.” Such claims are a symptom: the current crisis is being used by many governments, the Government of India is again a prime example, to cover up the results of mismanagement during the period preceding the crisis. Financial profligacy is what caused the deficits in India, for instance, not some prescience about the impending breakdown. Unchecked, poorly targeted subsidies on food and fertilizers; on petroleum products; a massive waiver of agricultural debts; pay rises for government staff – these three items are what pushed the combined deficit of central and state governments in India to over 11 per cent of the country’s GDP. Not only were these outlays way beyond what prudence would have allowed, they were grossly under-budgeted: the provision for food and fertilizer subsidies was at least a third less than what would manifestly be required; the POL subsidies were kept out of the Budget calculations all together; as were the outlays on the massive increases in governmental salaries.

The assertion, “The deficit is our stimulus,” presumes that our economies are today suffering from the classic Keynesian deficiency of demand. That is far from being the case. Not a generalized deficiency of demand but a breakdown of confidence – this is what is causing industry to hold back on investment, it is what is causing even consumers to hold back on purchases. And that is precisely why cuts in rates of interest, cuts even in taxes are not triggering the surge in investments and purchases that policy makers have assumed would follow: how can the fact that a person will have to pay 2 per cent less as interest lead him to go in for a house when he is not sure whether he will have his job two months from now?

Prior profligacy limits a country’s ability to deal with the crisis. And profligacy today limits its ability to deal with the crisis as it continues into next year. Today the countries that have reserves, that have fiscal headroom, that have the ability to execute massive infrastructure projects – these are the countries that are in a better position to navigate the crisis. When investors and others see that their government is unable to bring its expenditures to heel, their confidence in the future is further damaged. And there is the real effect too: in India, with governmental borrowing of Rs. 3600 billion having become inescapable in 2009/2010, the State will be pre-empting the private sector from the market, it will be pre-empting the very sector on which it is coming to rely not just for executing infrastructure projects but even for financing them. A return to fiscal discipline, therefore, is necessary precisely for meeting the crisis.

There is another reason for this. The crisis is no longer a generalized one. By now it is sector-specific. It is location-specific. It is firm-specific. Units in Tirupur in Tamil Nadu producing garments for exports have been hit hard. By the time the stimulating effects of a general deficit will reach Tirupur, an age would have passed.

Moreover, jobs are not malleable. Establishments in the gems and jewelry business have had to cut down operations drastically in Gujarat. Assume that, through deficits, the Government finances public works in Bihar or even in Surat. How many diamond cutters will be inclined to or even be able to avail of them?

To be of help the relief must be in the locality and in the industry that has been hit. Faced with a sudden fall in purchases of trucks, the commercial vehicles sector will be helped not when the Government goes in for an even larger general-purpose deficit but when it decides to expedite procurement of trucks for the country’s defence forces.

The same goes for individual firms. To pluck an example from India, the very firms that were the pride of the country yesterday as they acquired firms abroad are in danger today: several of them acquired the foreign firms with substantial borrowings. Today, with the collapse of markets, the fall in commodity prices, the evaporation even of working capital, they are finding it difficult to service their obligations. That constitutes a twofold problem for the country. First, at the very time that foreign funds have been withdrawn – close to 70 billion dollars in the last six months – about $ 53 billion short term debt has to be serviced – either through repayment or through renewal – in the coming year. Second, a failure of even one of these firms will not just be a problem for that firm, it will be yet another blow to confidence in general. In a word, governments should be planning not just general packages but location-specific, industry-specific and firm-specific relief.

While doing so, governments must keep the inarticulate in mind also. With sources of external commercial borrowing having dried up, Indian corporates, for instance, will be turning to Indian banks and the Indian market. The small and medium establishments, already hit by the sudden and extreme risk-aversion that has seized our banks like banks elsewhere, will now be squeezed out completely. Yet, as a recent McKinsey study reminds us, this is a massive sector. It accounts for 40 per cent of manufacturing output, that is about 17 per cent of the country’s GDP. It accounts for close to 44 per cent of exports. Most important, it employs close to 30 million people. Closures and lay-offs in this sector will be diffused. But they will be of an order that, if unattended, can trigger social unrest.

For the same set of reasons, governments should be alert to early signs of stress even in sectors that are conventionally regarded as strong. In India, for instance, it is generally assumed, and quite rightly so, that our banking sector is safe as it has been conservative. It has made substantial progress in bringing down non-performing loans to just about 2 per cent of its outstandings. But recent studies – by Chetan Ahya and Ridham Desai of Morgan Stanley, by Joydeep Sengupta and Anu Madgavkar of McKinsey – remind us other that there are facets also: about 40 per cent of corporate India’s asset base has a return on incremental capital that is lower than the cost of capital; and Indian banks have lent $ 100 billion to these vulnerable firms – loans that account for a fifth of total bank loans. In a word, take no sector for granted. Identify the vulnerable units in each sector, and prepare contingency plans for them – remembering always that a collapse of any constituent of any sector will impair the most important variable that is needed for revival, the very variable that is most fragile today – namely, confidence in general.

In such environment general deficits will be as much of a stimulus as throwing money out of the window. The stimuli which will really help are ones that strengthen the viability, sustainability, and competitiveness of the economy for the long run -- that is, for the time when this particular crisis would have passed and the economy would be back to its normal course. A good example of this kind, for instance, is the announcement in the US that it will be deploying a good bit of its stimulus plan towards creating a green infrastructure. Outlays to create alternate energy which liberate economies like those of South Asia from their current dependence on imported oil supplies; expenditures to multiply and enlarge manifold the current facilities available for higher and technical education, facilities which would overcome the extreme shortage of technical personnel in these countries would be examples of the same kind. An excellent initiative, one that we should emulate, is available from Singapore. The Government has launched a plan under which a person losing his job can enroll in an institution for acquiring higher skills than the ones that are required for his existing job. He is paid a stipend for every day that he attends a class for five hours of class. When the current downturn is behind us, the person will be able to seek a job which is better paying and which demands more of him than the job that he has just lost.

The crucial variable here is the ability of the country to execute these projects expeditiously. This is why China is way ahead of, say, the typical South Asian country. To begin with, it has $ 2 trillion of reserves. With these it can finance massive infrastructure projects – an option that is not available to a country like India which, through the Government’s profligacy of the past three years, has robbed itself of fiscal headroom. Equally important, China has large supplies of engineers and skilled personnel – because of the extensive programmes which it had implemented earlier for both, training engineers as well as for upgrading vocational skills. With those two trillion dollars it can also, as it is doing, acquire mineral and other resources in other parts of the world, the resources that it will need for its long-term growth. Most important, China has a shelf of projects which it can start implementing forthwith: many of these projects had been prepared to the last detail as long ago as 2005. Several of them were kept in abeyance, in a sense, as it was felt that the economy was overheating. Now they can be implemented without any delay. And that is possible because China has overcome the customary obstacles which hold up the execution of projects in countries such as ours. It has acquired an unmatched capacity to implement projects expeditiously. In our case, apart from implementing such projects as can be implemented now, the current crisis is yet another occasion to make every effort to acquire the ability and resources to improve the capacity to implement projects more expeditiously in the future.

Why not start straightaway? Institute massive rewards for firms and local and provincial governments that expedite the implementation of projects? Institute tax rebates for companies which, instead of laying off workers, retain them and have them acquire better skills?

A role for the ADB

And this points to a vital role which an institution like the Asian Development Bank can discharge at this moment. Andrew Sheng and others justifiably remind us of the curious charge that has been put out – namely, that countries of Asia have exacerbated the current crisis by their excessive savings, that the current crisis has been made possible, indeed that it has been intensified by what have been called “global imbalances”. This is one of those predictable surprises. Our countries were being hectored incessantly that we should increase our savings rate. And now we are being told that, because we have done so, we have contributed to intensifying the existing crisis! But, for a moment, take this charge at face value. The cure is obvious. The cure to “global imbalances,” it has been rightly said, is to develop the capacity within Asia to use our savings here.

In addition to improving our capacity to implement projects within our countries, we should enhance our capacity to implement cross-country, regional projects. There are a large number of such projects which can be implemented, but which have been languishing for reasons that are as remediable as they are well-known. Setting up power projects in Nepal from which power is sold mostly to India; setting up projects to exploit the natural gas resources of Bangladesh from which a large proportion of gas would be sold to India – these projects have not got off the ground for decades because undertaking them has become a political issue within Nepal and Bangladesh. This is where the Asian Development Bank, with the trust which countries in the region repose in its fairness, and in its objectivity and expertise, can play a vital role. It should, for instance, draw up the terms and conditions which would be best for Nepal and would be fair to India for implementing power projects in that country.

This is the role which would be more appropriate than to expend time and effort in setting up yet another institution. As is customary in the wake of every crisis, today also proposals are being advanced for setting up new institutions. Shouldn’t we set up an institution for regional monitoring? Shouldn’t we set up an arrangement, a regional fund for helping our countries tide over such crises? Our experience with new institutions in response to crises has been, that, ten years after they have been set up to deal with the problem, the problem remains as it was, and the institution has become a new problem. Therefore, instead of going in for more institutions, an organisation like the ADB should use its influence and expertise and acceptability to persuade governments to at last start implementing cross-country projects.

Reforms

The current crisis has triggered a sort of triumphalism among those who have traditionally opposed reforms in our countries. “See,” they say, “capitalism has failed; liberalization and opening up of the economy, integration with the world has brought all these problems upon us.” Therefore, they are pressing, not just a halt to further reforms, but for a reversal of many of them. With this logic in hand, we should just have remained at the hunting and gathering stage. Had we only done so, none of the crises that afflict countries periodically would have touched us at all! The lesson is the opposite one. Every circumstance, every arrangement, every new setup opens up new opportunities just as it also occasions new problems. We should not, for that reason, shy away from reforms and progress. The lesson is to institute such correctives and reforms as the new circumstances demand. One of President Obama’s advisers has a good maxim: “No crisis should be allowed to go waste”. In the current circumstances also, the people, as well as governments will be prepared to take measures today which they would not have taken in normal times. The new circumstance should, therefore, be used to affect improvements that are necessary in the light of the crisis as it has unfolded, and at the same time to institute those reforms which will enable our countries to adopt policies and implement projects more expeditiously – policies and projects which, as we noted above, will strengthen the viability, competitiveness and sustainability of our societies for the future.

But all this is contingent on our having clear-headed, competent, purposeful, strong governments. This is the real deficit, the real crisis in our societies – apart from the advance that has been registered in Sri Lanka of overcoming the terrorist threat, and apart from the steady hands that guide Bhutan, governments in South Asia are losing grip as well as legitimacy. No stimulus package, no slew of economic reforms can survive the wreckage of governance.

Considerations that go beyond countries

One of the important features about the current crisis is that the breakdown has not come about because of one rogue, not even because of a handful of rogues. This is not the work of a Harshad Mehta or a Madoff. Entire industries have been involved in bringing about this collapse. Mortgage salesmen, banks, financial analysts, chartered accountants, auditors, rating agencies, regulators, central bankers and the governments – what has happened is the joint product of one and all of them. I’m reminded of a phrase which Joseph Berliner had used to describe the inability over decades of Soviet planners to get at the facts about individual enterprises. The reason, he said, was that from the bottom – the shop-floor of the factory – to the top – the provincial and central planning bodies – everyone had a vested interest in exaggerating the production figures and minimizing the quantities of raw material that had been used to produce the particular item. The reason, he wrote, was that functionaries all along the line were knit in “interlocking webs of mutual complicity.” These “interlocking webs” of the complicit are precisely what account for the current breakdown. For that reason, merely adding one more twist to a regulation or even to the law; merely setting up another institution which in the end comes to work in the same way as the existing institutions – such steps will not do.

For we must examine how this mountain of sand swelled to such proportions and “no one noticed.” We must reflect on the ease with which what was good for a few got dressed up as being good for all. We must reflect how warnings, even protests, some of them from leading statesmen of Asia itself, were disregarded. In fact, they were drowned in the general applause and acclamation of “financial innovation” which was said to be taking place. We must reflect how, in fact, regulations were enacted in countries like the U.S. but were not enforced. We must recall how, at crucial turns, regulations were, in fact, relaxed.

There were several reasons why all this happened. For the present purpose recalling just two of them will suffice. First, the beneficiaries, for instance the investment bankers, had acquired the position and “the intellectual stature” of referees. They were interlinked with advisers, analysts, rating agencies, and ultimately with the regulators. That is how what was good for them came to be dressed up as being good for all. Similarly, several governments and central bankers, as is now acknowledged even by some of the prime actors themselves, blew into the bubble and made it swell even more. The reason was that they took the resulting rise in asset values as certificates for their performance, they took them to be evidence of the correctness of their policies and as proof of the confidence which markets all over the world reposed in them personally.

After all, it is not that warnings were lacking. It is not the case that everyone was convinced that the innovations were all for the good. All of us today recall the statement of Warren Buffet – about an entire category of these innovative instruments being “Weapons of Mass Destruction”. We recall the warnings of Naseem Talib, of Roubini, of Jeremy Grantham. The point to reflect is, “How is it that these warnings went unheeded? How did they get drowned?”

The second point to reflect upon is more fundamental: are there features that are inherent in this kind of a financial universe and which make such breakdowns inevitable? Take, for instance, the simple matter of Asset-based Lending. Marry it to the perverse incentive system which became the characteristic of the financial world in the West. Loans would be given on the basis of the value of a category of assets, say houses. As the volume of loans against that category of assets for further investment in that category of assets increased, the value of those assets went up. Accordingly, in the second round, those who could offer those assets as collateral were able to borrow even more against those assets. That in turn raised the value of those assets even higher… And the larger the volume of loans that got made against those assets, the higher the rewards that accrued to those stoking the fire. And notice, the extent to which “innovation” was taken to further this fire: so much so that today the banks themselves, and the companies that ostensibly insured the transactions of those banks do not know the extent, even by a broad order of magnitude, to which they have become exposed to those toxic instruments.

To continue with the current example, so as to safeguard ourselves against future collapses of this kind, we must devise and hone gauges of our own to identify bubbles. And it should be the duty of our governments and central banks to alert our citizens, in particular small, uninformed, retail investors about bubbles that are emerging. Even this recent episode shows that when asset prices rise at the astronomical rate at which they did in the last five years, a bubble is getting formed. Similarly, when transactions come to have little to do with reality, that too is an indication that we should heed. In this last round, for instance, far-fetched and unimaginably esoteric formulae became the basis for millions of dollars to move into and out of “packages”, and countries. The ratio of one currency to another; the ratio of those two currencies to that of another pair of currencies; correlations of absolutely distant variables over whatever stretch of time fit that string of observations… Such determinants became the automatic triggers for transactions. They had nothing to do with what was happening in the underlying sectors, in the firms. When things are reach such a pass, we should know that transactions and instruments have departed so far from reality that they are bound to come down in a crash.

Thus, the spiral and the eventual collapse were inherent in the design itself. But there is an even more basic question that we must ponder. Are the spiral and the subsequent collapse inherent only in a particular sector? Or is it that the economies themselves have got addicted to bubbles? The real estate bubble in one round. The dotcom bubble in the next. The sub-prime and yen-trade bubble in the third…

Therefore, while much has been made of the fact that this breakdown was triggered by a policy failure, the failure to save Lehman Brothers, the fact is that the failure to save Lehman Brothers was just the occasion for what happened subsequently. That failure, to recall an expression used in a very different context, was just “the spark that lit the prairie fire.” The fact that entire sectors collapsed, that entire economies went into a tailspin so swiftly upon the decision not to save a single institution shows that the whole structure had become just a wall of sand. That is what we should reflect on for our future.

Several operational conclusions follow.

A few things to do

First, there is much talk of a new international economic architecture. Unfortunately, once again almost all work on what shape that architecture should take is being done in the very countries, sometimes by the very institutions and personnel whose excesses and misjudgments, to put it no higher, have led to the present pass. But they are, and quite naturally, loath to part with power. They may well let time pass. They may once again busy us in futile debates. And ensure that processes and institutions remain in their control. That would only ensure that the next bubble, and with it the next jolt will not be long in coming. That is all the more likely because, in those societies, the ones whose excesses and greed have led the world into this pit have got away scot-free. Others – tax payers who must pick up the bill for the bailouts, workers who must suffer joblessness – are the ones who are defraying the cost.

Second, we must keep our ears open to the Cassandras. We must not get swept away by intellectual fashions. Certainly, we should not succumb to the urgings of financial wizards and advisers who chastise our countries and governments for not keeping up with innovations that have been adopted “all over the world.”

Third, these events remind us once again that we must think for ourselves. We must be centres of countervailing intellectual, institutional and real economic power. Unless we build up these capacities, we will remain vulnerable to being misled by persons and institutions that have ideas that suit them rather than us, to say nothing of agendas they might have.

It is equally important to nail the culpable. First, we must document and nail the double standards of the West and of international institutions and international advisers. Policymakers in Southeast Asia recall vividly the advice which was thrust down their throats in the late 1990s. “No, no,” they were told, “you must let those who had made mistakes collapse. That is the way the market ensures that the mistakes will not be repeated in the future.” Governments in Southeast Asia, the government even of Japan, the country with the second largest economy of the world, let banks and other firms fail. These were then bought up at throw-away prices by western companies and consortia. And what is the position today? We are told that all rulebooks have to be thrown overboard. We are told that governments must intervene to save the companies and institutions which have done such gross wrongs, which have made such enormous mistakes, which have been propelled by little else than personal greed – we are told that governments just have to intervene and save these institutions at the cost of the taxpayer because, otherwise, the system as a whole will come down. When that was to be the consequence for our countries, no one was prepared to listen. Not just advisers, but institutions on which countries across the world, including our countries are represented insisted that failure was the only instrument for improvement. These double standards continue to this day. How many have spoken out against the protectionist measures which have already been announced by President Obama? Has he not announced that tax reliefs will not be available to firms that outsource their work? Has he not announced that foreign nurses will not be an employed or welcomed? What if the leaders of one of our countries had announced such measures?

For the same reason it is very necessary to document and nail the red-cards and yellow-cards which rating agencies and other monitors keep handing out. How come they were giving triple ‘A’ ratings to institutions and to instruments and to packages which we now see were entirely hollow? Are these not the very rating agencies and monitors that hand out ratings of one kind or another to our firms, indeed even to our countries, ratings that then influence the decisions of investors and thereby move billions of dollars into or out of our countries? We must document their record so that, in future, they command only as much authority as the intrinsic worth of their work deserves.

Conclusions

In a word,

We must grab the crisis by the forelocks, as we would grab time.

Second, by now the remedies have to be sector-specific, location-specific, firm-specific. General-purpose deficits are no answer to the downturn into which we have been pushed.

Third, we must think for ourselves. In particular, we must document the advice that was thrust down our throats over the years.

Fourth, we must focus on working and reforming existing institutions and processes rather than on setting up yet another slew of institutions. For this purpose institutions like the Asian Development Bank, countries like India and others in South Asia should coordinate and sustain intellectual effort.

[1] Andrew Sheng, “From Asian to global financial crisis,” Third K.B. Lall Memorial Lecture, Indian Council for Research on International Economic Relations, New Delhi, 7 February 2009.
 
ARUN SHOURIE, The writer is a Rajya Sabha MP from the BJP,
Source: Indian Express
Thursday , Mar 19, 2009 at 1703 hrs

Surprised ?

ARUN SHOURIE

Our coastal areas are coming under increased threat from terrorist groups, which have decided to use the sea route to infiltrate into India. They also plan to induct arms and ammunition through the sea routes” — that is Shivraj Patil addressing the directors general and inspectors general of police in November 2006. “We understand they (the terrorists) have been collecting information regarding location of various refineries on or near the Indian coastline... Some Lashkar-e-Taiba (LeT) operatives are also being trained specifically for sabotage of oil installations. There are plans to occupy some uninhabited islands off the country’s coastline to use them as bases for launching operations on the Indian coast...”

That was the ever-alert home minister in November 2006. The minister of defence has been no less alert. On March 9 2007, he was asked in the Lok Sabha, whether “the intelligence agencies have warned about the possibility of terrorists trying to infiltrate through the sea route or trying to target our offshore installations?” He answered, “Yes, sir. There are reports about terrorists of various tanzeems being imparted training and likelihood of their infiltration through sea routes...” He was asked whether “maritime terrorism, gun-running, drug-trafficking and piracy are major threats that India is facing from the sea borders of the country?” His answer? “Yes, sir.”

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On May 9 2007, the home minister was asked in the Rajya Sabha, whether “it is a fact that there are strong apprehensions of terrorist threats to the country through the sea route?” “As per available reports,” he answered, “Pak based terrorist groups, particularly LeT, have been exploring possibilities of induction of manpower and terrorist hardware through the sea route...” On December 8, 2007, the National Security Adviser, M.K. Narayanan, was educating the world at the 4th Regional Security Summit organised by the International Institute of Strategic Studies, the Manama Dialogue. “According to our intelligence reports,” he confided to the assembled sheikhs and experts, “there are now certain new schools that are now being established on the Pakistan-Afghanistan border, which now specialise in the training of an international brigade of terrorists to fight in many climes. According to our information, recruits from 14 to 15 countries have been identified as amongst the trainees there... Training has become extremely rigorous — it is almost frightening in nature... Studies are being carried out about important targets, with regard to vulnerability, accessibility, poor security, absence of proper counter-terrorism measures, etc. The sea route, in particular, is becoming the chosen route for carrying out many attacks, even on land. References to this are to be found replete in current terrorist literature.” “Given India’s experience in dealing with terrorism,” he added, “I would like to therefore sound a note of warning, that there is no scope for complacency...”

On March 11, 2008, A.K. Antony addressed the “International Maritime Search and Rescue Conference,” in Delhi. He warned the delegates of “dangers of terror attacks from the sea in the region.” In the course of his address, Antony admitted that the Coast Guard faces shortage of manpower as well as hardware. But “necessary steps are being taken to strengthen the search and rescue infrastructure of the Indian Coast Guard...” On November 13, 2008, just a fortnight before the assaults at Mumbai, Manmohan Singh warned the BIMSTEC summit, “Terrorism and threats from the sea continue to challenge the authority of the state...”

By now it was time for Shivraj Patil to address yet another meeting of the DGs and IGs of Police. Thus on November 22, 2008, that is literally on the eve of the attacks in Mumbai, he told the police chiefs, “To control terrorism in the hinterland, we have to see that infiltration of terrorists from other countries does not take place through the sea routes and through the borders between India and friendly countries. The coastlines also have to be guarded through Navy, Coast Guard and coastal police. The states’ special branches and the CID should identify the persons forming part of the sleeper cells and lodging in cities and towns and studying in educational institutions and working in industries and professions...”

And four days later, the terrorists, using the exact same sea route, do the exact same thing that these worthies have been warning others about. Are they consultants to government or ones running the government? Is their job to issue warnings to others or to see that the warnings are acted upon? Warning given, the job is done. But that is the fate of warnings in this system. After all, that very sea route was used to smuggle explosives for the blasts across Bombay in 1993. Were those blasts not warning enough?

Seven years later —in 2000 — the warning and lesson were made explicit yet again. Four task forces were set up in the wake of the Kargil war. The one on border management warned, “The long coastline with its inadequate policing makes it easy to land arms and explosives at isolated spots on the coast.” It recalled that this is exactly how explosives were smuggled into Maharashtra in 1993. “The situation, if anything, has worsened over the years with the activities of the ISI becoming more widespread along the coast particularly by extension into the coast of Kerala... Such coastal areas must be particularly kept under surveillance.”

There is space here to cite just one example. The task force pointed out that the ISI had started using the Lakshadweep archipelago as a major staging point for smuggling arms and personnel into India. The agency used smugglers and their networks — like Dawood Ibrahim and his tentacles — and their routes for doing so. These dons and their networks were given shelter and support in return for helping the agency with its operations against India.

Now, Lakhsdweep has 36 islands. Ten of these are inhabited. Talking of one of these islands — Suheli — the task force pointed out that, sea vessels of smugglers apart, “there have been instances of twin rotor helicopters (of the kind used by militaries) landing at Suheli Island and spotting of unidentified helicopters flying over the waters around the islands...” And what were we doing? “Intelligence gathering in the islands,” the task force recorded, “is carried out by one inspector, one sub inspector, one head constable and three constables working in the special branch at Kavaratti” — just one of the 36 islands. “Intelligence gathering in all other islands is carried out by one head constable/constable who reports to the OIC (the officer in charge) of the police station who in turn passes it on to the inspector (special branch) at Kavaratti.” Please read that again: 36 islands; one inspector, one sub inspector, one head constable and three constables on the main island; and one head constable/constable for all the remaining 35 islands...

What has happened since, what is the position today, I ask the person who has held the highest posts in intelligence. Exactly what it was then, he says, with one difference. With the upgradation of all posts, the inspector (special branch) at Kavaratti is now designated not as officer in charge, but as joint assistant director or deputy central intelligence officer depending on his cadre. As for the other recommendations — patrolling, setting up sensors, and a host of others things are as they were.

And we are surprised!

I can multiply such examples by the score at no notice at all. Recalling just one thing will be sufficient. When, during a debate on national security in the Rajya Sabha, I began citing such passages from the report of this task force, shouts went up from the Congress, “But this is a secret report... How has he got it?... How is he citing it?...” Shivraj Patil remained his composed self, eventually chiding me with the sagacity which even terrorists have by now come to associate with him.

Things to do. First, act on recommendations that are made by committees you set up. Second, that will not happen unless we send a better type into legislatures and, thence, to governments. When we select leaders who treat the police as their private army; when we select leaders for whom investigating agencies are instruments to fix rivals or let off allies, don’t expect the police and agencies to suddenly turn around and forestall terrorists.

Third, remember that little can be achieved unless every aspect of governance, is brought up to par. You can’t have a first-rate commando force and a third rate magistracy. You can’t have defence and intelligence personnel who will nab terrorists and courts that will let them off, or, better still, enable them to live off the treasury as state guests for years. And that excellence must reach down to that “head constable/constable” level. When K.P.S. Gill reconquered Punjab for the country, he did so by strengthening and invigorating the local thana.

Fourth, that is only one part of the explanation. A weakened and confused society explains as much — and the responsibility lies as much with those who have dissipated national resolve, who have made nationalism a dirty word. That set includes the media as much as politicians. Sixty-seventy thousand killed by terrorism and we are still debating whether we should have a federal investigating agency. Sixty-seventy thousand killed by terrorists and we are still debating whether we should have a special law to bring them to book.

Of course, we must have the agency. Of course, we must have the sternest law in the world. But having the law is not enough. We must enforce it. One side of the picture is that, to pander to its vote bank among Muslims, the government has been withholding sanction to the law passed by the Gujarat assembly — even though that law is the exact replica of the law that its own party’s government has passed in adjacent Maharashtra. The other side is that, as the Maharashtra government does not use the law it has, those who will give shelter and support to terrorists give them with abandon — you just have to think of the quantum of weapons that the terrorists brought in; the detailed local knowledge they had — of the spot at which to land their boats, of the location of the building in which Jews and Israelis were staying, of the insides of the hotels, to see that they could not have executed their plans without the most extensive local help, help given over months.

And enforcing the law means carrying out sentences that the law provides. The parliament of India is attacked, guards are killed; one of the killers is tried and convicted, the sentence is confirmed by the Supreme Court, and, eight years after the assault, his “papers are still being processed,” indeed there are signature campaigns against executing the sentence. Given these circumstances, the best thing for a terrorist to succeed in his mission, and then get caught. He will get the best lawyers to defend him. He will get judges who are ever so solicitous about his rights, ever so finicky about procedures. And, of course, he will get activists to shoot off press statements on his behalf. Lawyers better, judges more solicitous, activists more articulate and better networked than any in his own country.

But for any of this to happen, the society has to be clear in its mind. This is, it has for 20 years been, war. It can be won only by overwhelming the adversary — not by running after the terrorist, as K.P.S. Gill says, but by out-running him, indeed by over-running him. Not an eye for an eye. For an eye, both eyes. Not a tooth for a tooth. For a tooth, the whole jaw. Human rights? Yes, we will respect the human rights of the terrorists and their sponsors and their local supporters to the extent that they respect the human rights of our people.

Finally, have a clear realisation of the condition of the society and state of Pakistan. Unless you come across evidence that the nature of the state and society of Pakistan has changed, it is idiotic to put faith in the profession of this ruler or that. Remember Musharraf’s “Main naya dil leyke aayaa hun”? Taliban and Al Qaeda are not the cause of the state of Pakistan. They are the result of the Talibanisation of Pakistani society and state.

Where do you think, and by whom do you think are the teachers instructed to ensure that students from class 1 onwards “recognise the importance of jihad”; to ensure that they “must be aware of the blessings of jihad”; to ensure that they “create yearning for jihad in his heart”; to ensure that they develop “love and aspiration for jihad, tabligh, shahadat, sacrifice, ghazi, shaheed”? Where do you think, and by whom are teachers instructed to ensure that students from kindergarten onwards learn to “make speeches on jihad and shahadat”, and are “judged on their spirit while making speeches on jihad”? Do you think these are instructions issued by the Islamic fundamentalists to maulvis in madrasas? They are instructions given by the government of Pakistan through official circulars to principals and teachers in government schools of Pakistan.

You didn’t know that? Exactly. That is a large part of the problem. You will find reams of these and other facts in the 2002 report edited by Pakistani academics, A.H. Nayyar and Ahmed Salim, and published by the Sustainable Development Institute, Islamabad, ‘The Subtle Subversion: The state of curricula and textbooks in Pakistan, Urdu, English, Social Studies and Civics’. Get on to the Internet, download and read the report from www.sdpi.org. Here is a part of the problem that you can solve by yourself.

As for the rest of the problem,as we can no longer rely on Shivraj Patil, we are compelled to continue to rely on the one who has been for the government as a whole, what Shivraj Patil has been for the home ministry — that is, the prime minister, Manmohan Singh.

ARUN SHOURIE, The writer is a Rajya Sabha MP from the BJP,
Source: Indian Express
Monday , Dec 01, 2008 at 0545 hrs