NOTE: Asian development will be viewed in this section from 4 different points of view. First, from the view of the Asian Development Bank (ADB), then from the perspective of "catching up" to a globalizing world, and finally, from the perspective of the two biggest players, India and China.

A Master-plan for Market Expansion: The Asian Development Bank and Governance

By Shalmali Guttal

April 25, 2002

In its 1999 policy on governance, the Asian Development Bank (ADB) states, "The term ‘governance’ means different things to different people." In relation to the ADB, this is certainly true. The ADB’s forays into good governance over the past few years clearly show that what governance means to the ADB is quite different from what it means to millions of people in the Asia and Pacific region, who are unfortunately under its financial (and governance!) umbrella.

For most people, precepts of good governance would imply publicly accountable systems of rights, entitlements, laws, rules, distribution/use of resources, decision making, etc., that are based on universal principles of equality, equity, and justice, but which at the same time, allow for the cultural specificities of a society or nation. For the ADB, however, governance is about putting into place the required policy environments and structures in its Developing Member Countries (DMCs)--who are also its debtors--to ensure the success of ADB financed programmes.

By its own admission, the ADB’s approach to governance is "economic" rather than "political;" i.e., the Bank regards good governance from the perspective of "efficient management of public resources" and "sound development management." Accordingly, good governance is about "effective management" of the development process and encompasses the functioning and capability of the public sector, and the rules and institutions that provide a framework of conduct for government, public enterprises, private business and corporations. Although its policy states that "governance is about the institutional environment in which citizens interact among themselves and with government agencies/officials," the policy neither discussed, nor recognises a meaningful role for citizens in governance processes, frameworks and mechanisms.

The ADB does, however, articulate in considerable detail what governments--as "economic development managers"--must do in the area of good governance. The ADB claims a "legitimate and direct interest in governance issues" because of its involvement in the economic development of its DMCs. Its framework for governance both, arises from and supports, its development ideology.

Getting it Right

The ADB is a market fundamentalist in its economic and development approaches. Its poverty reduction strategy is based on unshakable beliefs in the wonders of rapid economic growth, financial liberalisation, privatisation, deregulation and increased market "openness." By adding the phrase "pro-poor" to its usual range of operations, it seeks to justify its efforts towards private sector and market expansion. For example, the stated purpose of a conference in March 2002 on privatised infrastructure development was to: help disseminate information on "pro-poor infrastructure development by the private sector," showcase lessons on "pro-poor contract design regulation and reform processes," and discuss current thinking on "pro-poor reform policy in infrastructure development." Appropriately, the conference was titled "Private Solutions for the Poor." It is extremely unlikely though, that the poor themselves were present at the Conference.

The Bank’s governance policy--which is considered an integral component of its poverty reduction strategy-- is in effect, a master plan of strategies, directions and actions that borrowing governments must follow in order to ensure the supremacy of market processes, structures and mechanisms in all aspects of social and commercial life. This is no secret and the ADB is makes its ideas on the correct place for government, the public sector and private enterprise in economic development quite clear:

"In a market-oriented economy, the government has the obligation to see that markets function efficiently and that the playing field is level for all participants…..Market regulation by the government should ensure that the operating rules do not discriminate between individual participants or interest groups."

The ADB’s approach to governance poses serious threats to preserving autonomy and sovereignty in national policy making. While the Bank claims that its principal activity is project lending, it argues that weak implementation capacity and poor sectoral policy frameworks in borrowing countries can negatively impact technically sound and well-designed projects. Therefore--the Bank argues--it undertakes programme or policy based lending to complement its project financing activities. Such program loans cover a range of activities, from local and sectoral studies to developing plans and strategies for the reforms of entire sectors (for example, judicial, administrative, transportation, agriculture, education, etc.). According to the ADB:

"These efforts at helping DMCs ‘get policies right’ are now commonplace in the Bank, and have led it to take greater interest in the capacity of borrowing governments for policy formulation and implementation. While the policy objective in a particular DMC sector might be clear enough, knowledge of the institutional framework and its capability will be helpful in the design of reform measures."

In other words, "good governance" provides the ADB with an effective and legitimate window though which it can institutionalise the reforms needed to firmly establish market capitalism among its DMCs. This involves writing new laws and regulations, developing new administrative and management systems, creating new positions and roles within government, institutionalising new decision making processes and in fact, doing whatever is required to ensure that the DMCs stay firmly on the path of market-led economic growth.

Hiding Behind the Charter

The ADB’s charter prohibits it from "interference" in the political affairs of its members and from being influenced by the political character of its members. Under Article 1 of the Charter, the purpose of the Bank is to foster economic growth and cooperation in the region, and the Charter clearly gives primacy to "economic considerations" in the carrying out of the ADB’s purpose and functions. By its own admission, however, the term "economic considerations" has been "widely interpreted" and ADB programs extend to any area that is deemed to have "economic effects." Accordingly, the Bank’s governance agenda too has extended into such diverse areas as the environment, education, health, judicial systems and women’s empowerment.

On the other hand, the ADB is not quite as willing to recognise the political consequences of restructuring national policy environments that form the core of it governance programmes. While it is true that social and environmental programmes have economic effects, all programmes, economic or social, also have political effects.

Numerous examples can be found in the region where the access and rights of people and communities to crucial resources and opportunities have either been severely restricted, or lost altogether as a direct consequence of ADB supported projects and programmes. Policy prescriptions such as enhanced cost recovery for health, education and public utilities, water user fees in irrigation systems, the rationalisation (downsizing) of civil service sectors, creating "flexibility" in labour markets, and the privatisation of public sector enterprises, have resulted in the disempowerment and marginalisation of large numbers of people across the region. The ADB’s strategy of "pro-poor growth" has encouraged governments to freeze minimum wages and withhold the rights of workers to association, benefits and protections. In countries such as Pakistan, India, Thailand and the Philippines, protests against ADB projects and programmes have resulted in social unrest and divisions, and at times, even political harassment of those who protest.

Since the ADB’s framework of governance does not discuss the political dimensions of governance, it shows little interest in the fact that its own projects and programmes may violate the constitutional rights and democratic spaces of citizens. Too often, reform regimes imposed by the ADB have acted as barriers to the accountability of governments to their own citizens, and to the protection of broad based public interest. The transformation of public sectors to serve corporate and market interests in the guise of "efficient management of public resources" undermines the obligations of governments to provide appropriately and sufficiently for their citizens. It also creates new vulnerabilities, especially among those who are already income poor and politically marginalised. Not only has the ADB not accepted its culpability in these consequences, but also, it has consistently hidden behind the privileges that its Charter provides and assumed a politically neutral face.

The ADB has taken much of its content and operational strategy regarding good governance from its sibling institution, the World Bank. Inspired by the World Bank’s "global experience with project and adjustment lending," the ADB feels confident in positioning good governance as "sound development management" necessary for "ensuring adequate returns and efficacy of the programmes and projects financed."

The World Bank’s Charter also prohibits it from engaging in political activities and directs that decision-making be based on economic considerations alone. But given the emerging track record of poor management and project quality, negative project and programme impacts, and allegations of corruption in numerous World Bank financed initiatives, the World Bank is indeed a poor role model of governance for any multilateral institution.

Reconstructing the Public Domain

The ADB has identified four elements of good governance for its purposes: Accountability, Participation, Predictability and Transparency. All four elements are operationalised by policy and sectoral reform programmes that promote private sector needs over public interest priorities. For example, "The litmus test [for Accountability] is whether private actors in the economy have procedurally simple and swift recourse for redress of unfair actions or incompetence if the executive authority." And, "Access to accurate and timely information about the economy and government policies can be vital for economic decision making by the private sector." Predictability is about developing legal frameworks, especially to support private sector development.

The ADB claims that its "bread-and-butter business" is assisting the public sector in DMCs. This assistance is geared primarily towards the reform of public enterprises, with a concomitant process of reconstructing an "appropriate" role for the State in a market-friendly economy. Maximising profits, minimising costs, preserving markets, market-friendly economic reforms, promoting market mechanisms in the provision of services, competitive operating environments, enhanced cost recovery, divestiture and privatisation, are the main concerns that guide the ADB’s assistance to the public sector, and the operationalisation of the ADB’s elements of good governance.

The ADB’s governance policy is vehicle for entrenching sectoral reform and reconstructing the public domain. It is also fundamentally contradictory. While the Bank claims to eschew involvement in political aspects of governance, its core mandate—promoting economic development—is a deeply political phenomenon. Economic development plans determine the distribution of a society’s wealth, opportunities and challenges, who gains and loses, and how power is realigned or entrenched. It is both delusional and self-serving for the ADB to project that the political and economic dimensions of governance can be separated in policy and reality.

The ADB’s policy on good governance offers no prescriptions for its own institutional governance. Accountability, Participation, Predictability and Transparency are the buzzwords for governments, but appear not to apply to the ADB’s own conduct or operations. ADB insiders have revealed that the institution is increasingly plagued by poor and irresponsible performance by Bank staff and Management, and a lack of clarity about its own operational policies and procedures. Questions have been raised in meetings of the ADB’s Board of Directors about the appropriateness of Bank conduct in formulating, processing and implementing projects. Controversies surrounding a number of ADB projects and programmes--from the Chashma Canal Project in Pakistan to reform programmes in the Pacific Island States—reveal that the ADB’s commitment to good governance is at best a lie and at worst, antagonistic to nationally meaningful and accountable governance structures and mechanisms.

Evidently, there is a lot for the ADB to learn and acknowledge about the implications of its specific version of governance. The ADB is well advised to clean its own house and demonstrate its accountability to citizens and their governments before imposing its version of governance on the people of the region.

Asia in the ‘Catch-Up’ Game

by Shahid Javed Burki

Executive Summary

Two developments, the first decades old and the second very recent, have reshaped and are re-shaping the global economic landscape. The first was the process of globalisation that reduced the distance among different economies in the world, not in the physical sense, but in the sense of easy flow of capital, trade, information and technology. Globalisation has produced a global economy the like of which the world has never known, and the process will continue to move forward the global economy.3 1 This is a revised version of an earlier draft which was discussed at an ISAS seminar, “Asia in the Catch-Up Game” held on 9 March 2010. Several helpful comments and suggestions made by participants at the seminar have been incorporated in this version. The future course of the world economy is one of the main issues addressed in the study. The second development was what economists and financial experts call the Great Recession of 2007-09 to distinguish it from the Great Depression that took such a heavy toll in the 1930s. What was ‘great’ about this particular downturn in economic activity was that its origins were not in the normal working of the large economies that produce trade cycles with some frequency. The slowdown that now seems to be winding down was great for several reasons. The ferocity with which it struck; it took the form of an economic tsunami that not many had predicted. It hit many shores. It was caused not by the normal ups and downs in economic activity but by misplaced faith in the rationality of the markets. And it is likely to change dramatically the structure of the global economy. It is this final aspect of the Great Recession that is the subject of this inquiry.

Going back to the analysis of “catch-up” offered by Alexander Gerschenkron, the premier economic historian of the twentieth century, the role the state plays in the process acquires special significance. In this regard, it is particularly important to note what governments can do to better the lives of their citizens. The government’s role as an economic player was relegated to the back benches in the 1980s by the economic philosophy that accompanied Ronald Reagan to the White House. Called The Washington Consensus, this view left the private sector to its own devices, even to regulate itself. Forced on the back-bench, the state remained there until it was called upon to act again to save the world economy from collapsing in 2008. Summoned back, the state acted impressively in both developed and developing countries. China brought the state back with vengeance. The United States (US), by intervening in the financial markets and the automobile industry, dramatically increased the role of the state. Many other countries, including India in Asia and the European Union (EU) in the West, followed the same path. It is interesting to note that even the Chinese had succumbed for a while to a weaker version of The Washington Consensus. There is considerable irony in the fact that an avowedly socialist economy was tempted for a while to adopt some aspects of neo-liberalism for managing the economy. With the state having roared back to life, what will it do to shape the character of the Chinese economy? This is yet another question in this exercise.

Taking a cue from those who have studied various episodes of “catch up” in economic history when some of the economies that lagged behind caught up with the leader, this paper investigates the latest such development. This involves China, which some time in 2010 is expected to become the second largest economy in the world, overtaking Japan which held that position for several decades. This is a particularly relevant occurrence for Asia not because an Asian economy is replacing another. This is significant because the structure of the Chinese economy and its character are changing in ways that will matter enormously for the rest of Asia. While Japan is from Asia, after its economy became “developed”, it joined the ranks of those that were advanced and developed. Japan’s linkages with Asia are weak; but those of China are becoming strong. A good indication of this is the inauguration of the China-ASEAN Free Trade Area on 1 January 2010 that will have profound consequences for the economies in its periphery.

Unlike some of the earlier ‘catch up’ instances, China, having almost overtaken Japan is expected to bypass the US in the next several decades. It will remain a relatively poor country dependent on the rich for markets and technology. This introduces an entirely new dimension in the “catch up” game. For many decades to come, the global economy will be dominated by two economies that will not compete as much as Britain and France did during the first catch up episode a couple of centuries ago, but complement one another. Notwithstanding the current exchange of difficult words between Beijing and Washington, the global economic architecture can neatly arrange itself into three tiers: the US and China at the top (the G2); a number of secondary powers in the middle (a reformulated G20); and the rest of the world forming the base of the pyramid. Those who believe that such a system dominated by two economies will not be stable, derive the wrong lesson from the Cold War when for four decades the US and the Soviet Union confronted one another, sometimes with murderous intent. It was only the mutually assured destruction made possible by the possession of thousands of nuclear weapons by the two sides that prevented the globe from being reduced to a giant mushroom cloud. It is not necessary that a great power must always beat back competition and seek total domination. When competing powers need each other as do the Americans and the Chinese, they will learn to work with each other. This is expected to happen within the context of the architecture outlined in this paper. But the development of such architecture will need deliberate action by some of the more important governments in the world.

While mutual dependence is likely to create equilibrium in the global economy and keep the political system in balance, can the same be expected in Asia? The continent has not one, or two, but three great economic powers. While Japan does not seem concerned with the second rank that it is soon likely to assume in the continent in terms of the size of the economy, will India be content to be the third? More importantly, will it be prepared to be relegated to the emerging second tier in the hierarchical structure for managing global economic affairs? Answering these questions will require deep and intensive research. For the moment, it is important to underscore that for India to gain the economic and political stature it desires, it will need to achieve a number of things: tranquility around its borders; an economic system that delivers to the less advantaged segments of the population, particularly in terms of education and skills development; development of physical infrastructure that can support a rapidly growing and modernising economy; and an economy that is more outward-oriented so that it can take full advantage of the rapidly changing systems of trade and production. If it is able to achieve most of these things, there is no reason why some time in the future the system’s apex cannot expand from the G2 to the G3.

Introduction

Among those who have speculated about the future shape of the global economy are analysts who have suggested that the twenty-first century will be the Asian century.5 They believe that for many reasons, the US has lost or is in the process of losing, the momentum that propelled it forward in the process of economic development and social change during the twentieth century. The dynamics that produced that momentum made it possible for the country to overtake Europe beginning from the early years of the twentieth century. For more than a hundred years, the US was able to maintain its position as the preeminent global economic power. It achieved that status by following a model that can be loosely described as “liberal capitalism”. Its main feature was the confidence that was placed in private initiative. The state had a minimal role, confined to defending the country’s borders and its strategic interest, regulating some aspects of the working of the private sector and providing a limited number of services to the citizenry. The state’s role increased during periods of economic stress – during the Great Depression of the 1930s and, more recently, in the Great Recession of 2007-09 – only to pull back once conditions stabilised.

One important outcome of the Great Recession was the sharpening of the trend in terms of the catching up of Asia or parts of it with the world’s richer countries. Several Asian economies are rapidly closing the economic gap with more developed countries. This was not supposed to happen according to conventional thinking. That thinking held that with the Asian economies so closely tied with the industrial world and so dependent on those markets, they will suffer a great deal as the Western markets contracted. With that engine of growth lost, the Asian train will begin to drift and inevitably slow down. As The Economist wrote in a survey published in August 2009, “Westerners have always been quick to pronounce the death of the Asian economic miracle, but it also reflects some misunderstandings about the ingredients of Asia’s success. This year it was widely predicted that Asia’s economies would not recover until after America and Europe had revived. Yet Asia’s supposedly export dependent economies have resumed growth before the rest of the world.”6 Why were pessimists about Asia once again proven to be wrong? Three things helped Asia: an aggressive role of the state, populations that are still young, and the economies that function well within many regional arrangements. These three elements are working together to develop a pan-Asian market. The significance of this development is often lost on those in the West who are watching developments in the Asian continent. This paper will produce a perception somewhere between the American politicians and the European historians. It will suggest that the US’ decline will not be in absolute terms; it will only be in relative terms. For the rest of this century, it is likely to remain the world’s premier economy but with China close on its heels.

It appears that the Great Recession of 2007-09 may have accelerated the process of what many analysts have called the “decline of the United States”.7 Among those who have espoused this point of view is the British historian Paul Kennedy. His The Rise and Fall of Great Powers (1988) is still widely read. According to Kennedy, ascendancy of states or empires has usually resulted from the superiority of their material resources. However, the wealth on which that dominance has been built up can be eroded because of the huge military expenditures needed to sustain national or imperial power. This burden on the state leads inexorably to the decline and fall of great powers. The debate regarding the US’ possible decline became sharp enough in 2010, encouraging Vice President Joseph Biden to throw his weight in favour of those who maintain that the US was too big a country to lose. Despite the persistent budget deficit and crushing burden of projected debt, Biden does not think that the country is “destined to fulfill a prophecy that we are going to be a great nation that has failed because we lost control of our economy and [got] overextended.”8 Those who see the US sliding with a little chance of recovering its balance do not accept this sanguine view. According to Piers Brendon, another British historian, “in any debate about the development of the US one would certainly tend to side with the detached historian rather than the partisan politician.”9

If the US loses its economic prominence, which countries and regions will benefit from the pull back? What will be the consequences of this change? Will the realignment among countries in the global economic system come about with or without open conflict? What could be the possible institutional arrangements to emerge as the pace of transition picks up while some of the Asian economies take their seats in the front row? These are precisely the issues that were discussed as the Second World War was drawing to a close when the victors assembled at Bretton Woods, a small resort in the state of New Hampshire in the US, to fashion a new global and economic financial order. Will there be a fundamental remaking of the Bretton Woods system created in 1944? Providing some answers to these questions is the main objective of this paper.

One further point needs to be underscored. As discussed in the second section of the paper, Asia is at the forefront of the enormous change that is occurring in the shape of the global economy. There are several reasons for this and these have been identified in a number of scholarly works. Two of these will receive particular attention in this paper. One, the role the countries in Asia have assigned to the state. Two, the enormous demographic change that is occurring in Asia and its impact on the way economies develop. This is a subject often ignored in economic literature. The paper will seek to make a definitive contribution in this regard.

There are many differences in the way the state has helped with the process of economic development in different parts of Asia. That said, one element was common to all the different models that were followed: the state did not surrender most economic authority to the private sector. As already indicated, this was the main feature of the American model particularly during the time that President Ronald Reagan governed from Washington. In fact during that time a consensus had developed among several economic, financial and development institutions dotting the Washington landscape. According to this, the state should leave the private sector mostly to its own devices. This came to be known as The Washington Consensus with Alan Greenspan who served as Chairman of the Federal Reserve Bank as its most ardent advocate.10 Later, when the private sector was seen to have forfeited its claim to unerring rationality by placing so much of the financial sector under great stress, Greenspan and those who believed like him made some adjustments in their point of view. According to Robert Skildelsky who in his book, Keynes: The Return of the Master, studied the circumstances that led to the revival of Keynes, “another line of retreat is to say with Alan Greenspan, that disaster such as the present are (unexplained) once-in-a-century events, and that most of the time markets behave in perfectly rational ways.”11 If this point of view continues to prevail, there will be further distancing between the Western and Asian economies.

The paper is divided into two parts. This first part of the paper begins with an introduction. The section that follows provides a broad outline of the “catch up game”. This draws upon the work of not only Alexander Gerschenkron but also Angus Madison 12, who has used reams of historical data to identify the various “catch-up periods” in economic history. While drawing upon these and other works, a number of new dimensions are added to study the state of flux that currently exists in the global economy as consequences of the rapid economic rise of some of the Asian economic powers. The next section deals with the rise of China as an economic superpower. In discussing this development, the paper departs from conventional thinking and emphasises the role played by Mao Zedong, the founder of the modern Chinese state. A number of recent works on Mao have accentuated the negatives; this paper will underscore some of the positives.

Asia and the Catch-Up Game

Studying catch-up economies became a popular pursuit as economists began to understand the process of economic growth. The first insightful study in this area was done by the Harvard economic historian Alexander Gerschenkron.13 He first studied the industrial revolution in England and concluded that it came about because of a fortuitous combination of a number of seemingly unrelated circumstances. These included, in particular, technological revolution – development of the steam engine, for instance and entrepreneurship. Specialisation in production processes, enlargement of the markets through international trade, and the arms length approach of the state to the private sector were identified by Adam Smith as some of the reasons that made it possible to accumulate national wealth. Smith’s seminal work, The Wealth of Nations, went on to become the bible of economics, more accurately classical economics.14

Having studied the economic rise of Britain, Gerschenkron turned his attention to Western Europe. Once England had shown the way, the countries that had been left behind were anxious to catch up. France was the first to work on that process with the French state playing an active role. Germany was the second country to play the catch-up game. In this case, it was the close relationship between finance and industry, encouraged by the state that helped the country to get even with the front runners. An interesting corollary of Gerschenkron’s interpretation of economic history is that the initial conditions that produce economic advance retain their influence on policymaking for a long time to come. Britain continued to follow the laissez-faire model; France has kept the state actively involved in managing the economy; and in Germany, there continues to be a deep relationship between industry and finance.

The US joined the game in the last few decades of the nineteenth century. In its case, natural endowments, some extraordinary technical advances, and a government structure that allowed a great deal of space to private entrepreneurship, helped. America not only caught up with Europe, it overtook the latter in terms of the size of its national product and average per capita income of its citizens. This happened in the period leading up to the First World War. Europe, weakened by the war, was left behind by America and for about half a century, the US was the sole economic superpower.

Gerschenkron also studied the economic history of the Soviet Union in the catching-up context. Moscow launched a catch-up experiment of its own in 1917 with the Bolshevik revolution, which resulted in an enormous expansion of the state. But the state did not follow the French model which had it pushing the private sector hard. The Soviets wished to leap frog over other relatively more developed economies by pushing aside private enterprise. The state was to do it alone. The Planning Commission manned by both economists and mathematicians was assigned the task of writing the Five-Year Plans. These were in fact detailed production plans that indicated where and what the state was going to invest. The rate of growth of GDP was to be quickened by concentrating on heavy industry. The inputs needed for the planned industries and the outputs they were to provide were worked out in great detail by using the input-output tables that the Soviets had the mathematical skills to run. The model did not succeed and the Soviet Union was unable to engineer a “catch-up” economy. That task was left to the successor Russian state.

After the Second World War, it was Japan that successfully played the catch-up game. By the end of the 1970s, in terms of average per capita income, Tokyo was equal to that of the advanced countries of Western Europe and the US. It was not able to overtake the US in terms of the size of the economy simply because it had a much smaller population. Japan’s extraordinary story of economic success was studied by scholars from several disciplines. Ezra Vogel, a Harvard University sociologist, was one of those whose work, Japan as Number One (1979), became a best seller.15 He argued that Japan, by combining a style of governance with a culture that supported entrepreneurship, had found a unique way to promote economic growth. Vogel thought it would not be long before Japan will have the largest economy in the world and per capita income much higher than that of the US.

The Japanese model of growth involving a significant reduction in the distribution of income and assets; an active role by the state; large investments in the development of human resources; letting the state’s economic policies be formulated and implemented by a highly educated and trained bureaucracy; and focus on exports to provide outlets for domestic enterprises was adopted by several countries in East Asia. They were able to accelerate their rates of growth to the point where, by the first decade of the 21st century, Singapore’s per capita income approached the levels of America and Western Europe.16 The East Asian nations also began to break into what were once exclusive clubs figuring only the rich states. South Korea, for instance, joined the Organization for Economic Cooperation and Development (OECD) in 1996. On 1 January 2010, it was admitted into the Development Assistance Committee (DAC) of the OECD, becoming its 24th member.17 The Paris-based OECD is considered to be the rich countries’ club. Both Singapore and South Korea were included among the countries that came to be called East Asia’s “miracle economies.”18

While China was not initially counted among the miracle economies, its growth picked up in the early 1980s and has been maintained for more than a quarter century. The Chinese economy, in its quest for achieving high rates of growth, has gone through two phases in recent years.19 In the first, the country followed the model of growth pursued by the miracle economies of East Asia by relying on exports to the Western markets. The second phase started with the Great Recession of 2007-09. The Chinese have begun to reorient their economy towards domestic consumption and greater integration with the Asian markets. They have put in place structural changes that will have profound implications for the future of rest of Asia.20

China’s second rise “could accelerate Japan’s economic decline as it captures Japanese export markets, and as Japan’s crushing national debt increases and its ageing population grows less and less productive – producing a downward spiral” wrote Hiroko Tabuchi in The New York Times . “At stake are more than regional bragging rights: the reversal of fortunes will bring an end to a global economic order that has prevailed for more than 40 years, with ramifications across arenas from trade and diplomacy to, potentially, military power.”21 The relative positions of China and Japan have been discussed later in the paper.

India has also begun the catch-up game. This began in the mid-1980s when policy makers in New Delhi abandoned the model of economic growth adopted by Jawaharlal Nehru after the country gained independence in 1947. Nehru was the country’s first prime minister and stayed in that position for 17 years until his death in 1965. Having been greatly influenced by the Soviet model of economic development, Nehru and his economic advisors put the state on the commanding heights of the Indian economy. This is where it stayed for four decades.

The government intervened in the economic process by instituting what came to be called the “license raj”. The state sanctioned the establishment of new industries and the expansion of those that were already working. It also created an elaborate system of controls on external trade including the allocation of supplies needed by industry. In addition to controlling the working of the private sector, the state undertook large investments in industry. The sectors chosen for particular state attention included steel and other metals; manufacture of capital goods; electricity generation, transmission and distribution; and transport, particularly railways and airlines. Finance was added later to the sectors for which the state had the primary responsibility. This happened in 1969 during the tenure of Indira Gandhi, Nehru’s daughter.

While the state began to ease its control over the economy starting in the mid-eighties, it was only in 1991 that the then Finance Minister Manmohan Singh dismantled the “license raj” altogether. The economy responded to this change dramatically and the rate of growth in GDP doubled from what the late Indian economist K.N. Raj called the “Hindu rate of growth”. From 1951 to 1980, India’s GDP increased at the rate of 3.5 per cent a year while its population grew by 2.2 per cent. The increase in per capita income averaged 1.3 per cent a year, not high enough to reduce the incidence of poverty. The proportion of the poor population increased from 45.3 per cent in 1951 to 47.3 per cent in 1980. However, from 1980-81, the rate of economic growth accelerated to 5.7 per cent per annum while per capita income growth increased to 3.6 per cent a year.22 There was a further increase in the rate of growth of GDP expansion during the period 1997-2007. How will India reposition itself in the Asian and global economies in the years to come? What are likely to be its economic relations with China? Will New Delhi gain the position it inspires in the global economic and political systems? These are some of the questions that have not been addressed in this paper but will be done in subsequent studies.

Chart 1 provides projected estimates by Goldman Sachs of national incomes for the 22 largest economies in the world during the years 2025 and 2050. While such long-term forecasts seldom turn out to be correct, what is interesting about the projections are some of the suggested changes that may occur in the ordering of the global economies. There is a fairly significant realignment of the economies during the next 15 years. By 2025, the world economy is likely to be dominated by the US and China, each with national incomes close to US$20 trillion in 2006 prices. Japan, the next largest economy, is likely to be only a quarter of the size of these two economies. India is expected to be in the fourth position with its national income slightly less than that of Japan’s. By that time, the G7 as currently constituted, will not represent the largest economies in the world. Indeed two from the G7 are already from what is called the emerging world.

Eleven of the 22 largest economies are from Asia. In the 25 years that are to follow, there is further realignment with China overtaking the US. China’s GDP is expected to increase to US$70 trillion, three and a half times of its GDP in 2025. The US economy will also increase but only double its size, to US$40 trillion. India, according to these estimates will be almost equal in size to the economy of the US. What do these increases in the size of the economies suggest about their rates of GDP growth? To increase three and half times over a period of 25 years implies an annual average rate of growth of 5.2 per cent. For the US, the implied rate of growth is 2.9 per cent; for India, it is 8.7 per cent. These are in line with the consensus view of most economists. The question is whether these averages can be maintained over such long periods?

There will be other significant changes as well. Japan’s relative decline will continue. It will drop from the third position in 2025 to the eighth in 2050. The country’s rate of GDP growth will be less than one per cent a year. Some other current leaders in the world economy will also see major changes in their relative ordering. Germany will drop from being the fifth largest in 2025 to the tenth largest in 2050, UK from the seventh to the ninth and France from the eighth to the twelfth. Of the many surprises in these estimates is the change in the relative positions of the European economies with Britain becoming the largest in the continent. No European economy will figure among the five largest in the world.

Indonesia and Nigeria will see major improvements in their positions; the former will improve from the 14th position in 2025 to the 7th while the latter will jump from the 18th to the 11th. Some of the Latin American economies are also expected to do well. Brazil and Mexico will become the world’s fourth and fifth largest economies respectively, moving up from the ninth and eleventh positions. Among the world’s five largest economies in 2050, two – China and India – will be Asian, while another two – Brazil and Mexico – will be Latin American and the fifth, will be the US. This will make the current G7 grouping totally irrelevant; the US will be the only country from this group that will still be among the seven largest economies in the world. It is clear that the need for revising the current institutional structure will increase with every passing year.

What are the main drivers of growth visualised by Goldman Sachs? Three of these are critical; expected increases in the size of the population; access to natural resources; and trade competitiveness. More populous countries will do relatively well, particularly those investing in improving the quality of human resources. For countries experiencing declines in population size (this includes all countries in continental Europe as well as Japan) aging populations will begin to weigh increasingly on economic performance. As the centre of gravity of the global economy shifts towards the emerging world, the use of natural resources, in particular oil, will increase. This is one reason why the oil-rich countries do relatively well in these estimates.

For a complete copy of this paper, including charts, please go to: http://www.isn.ethz.ch/isn/Digital-Library/Publications/Detail/?id=115002

The inclusion of international trade as a growth driver suggests further globalisation in production processes. Trade as a proportion of total international output will continue to increase and countries that are geared to take advantage of this development will do relatively well.

The rise of China and which way will it go?

China’s remarkable economic performance has been the subject of much study by the practitioners of many disciplines. There are several ways of looking at the country’s remarkable economic and social progress over the last sixty years. This paper emphasises on the working of the Chinese state particularly during economic stress. The discussion to follow will illustrate how the state has been improving its capacity to manage the economy by mentioning the author’s own experience of dealing with some of the senior Chinese leaders in 1991 when the state, worried by rapid increase in inflation, was anxious to develop a set of instruments for dealing with the problem.

Four distinct phases have been identified in China’s emergence as an economic powerhouse and as a global player.23 It is useful to go back to some of that history since it helps to better understand the problems that China faces today as well as gauging its prospects. It all started with t=he effort launched by Mao Zedong that lasted for almost three decades, from the arrival of the =Chinese Communists in Beijing on 1 October 1949 to the death of the paramount leader on 9 September 1976. During this period, in spite of several policy missteps that resulted in the deaths of millions of people, Mao was able to transform China socially. He brought universal literacy and healthcare to the citizenry and introduced gender equality into the Chinese social system. Without the human base Mao built, China’s second phase, launched by Deng Xiaoping, would not have achieved economic success. However, it is possible to argue that what Mao was able to achieve could have probably been done at a lower human cost. This brings on the difficult realm of counter-factual history with the possibility of deviation from the main objectives of this paper. Deng set the stage for pushing back the worst aspects of Communism in favour of opening the economy to private initiative. This was Deng’s “Communism with Chinese characteristics”.24

Deng’s approach to reform was very different from that pursued by Mao. While Mao believed in revolution to bring about what he considered the desired aim, Deng’s modus operandi was incrementalism. Almost all his major efforts were undertaken first as pilot projects. They were introduced in other parts of the country only if they succeeded initially. The decision to return to the original owners the land acquired by the communes was first tried in Sichuan province. It was a resounding success as both productivity and output increased. Agriculture, with massive increases in output and productivity, was the first to benefit from this dramatic policy change followed by small scale industry and short-distance commerce. At the forefront of this effort was the town and village enterprise, or TVE, owned by the communities. This was a uniquely Chinese business organisation. This second phase lasted for about a decade. The third was also inspired by Deng who encouraged Chinese enterprises to partner with those in the West. There were three reasons why China gave up enforced isolationism of the Mao period in favour of greater openness, including opening to the West, in particular the US. It brought new technologies and management practices to China. It found new markets for the rapidly increasing output of the industrial sector and promoted China as an active actor on the global economic stage. China is now entering the fourth phase and is about to become the second largest economy in the world overtaking Japan sometime this year or in 2011. This has been an amazing trajectory to follow. Will it last?

After growing at rates close to an average of 10.0 per cent per year for the last quarter century, the Chinese economy suffered a slight setback in 2008, largely due to the Great Recession of 2008-09. This was not the first decline in the rate of economic growth the country had maintained for a quarter century. However, the state stepped in to get the economy out of the difficulties it faced as a result of the collapse of the markets in the West. To the surprise of many China-watchers, the economy recovered at an unexpected pace, much higher than estimated by most. That this happened before there was recovery in other parts of the global economy is a testimony to the strength of the Chinese economy. When the Chinese economy began recovering, the global economy was in a deep recession and the Chinese dependence on the markets in developed countries was expected to hurt it badly. That did not happen. China’s GDP expanded by 8.7 per cent in 2009, beating the expectation of most analysts who estimated that the increase will be about 7.2 per cent. The GDP growth, however, was much lower than the 11.9 per cent growth recorded in 2007. It was still remarkable, given the sluggishness in other parts of the world. China achieved this impressive rate of growth in spite of a fall in the rate of real export growth from 20.0 per cent in 2007, to 8.0 per cent in 2008 and -10.0 per cent in 2009. According to one assessment, “China may have accounted for as much 2.0 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009.”25 This was possible since the country does not appear to have been that dependent on exports to the Western markets as was believed earlier. It may lead the emerging economies to move towards “decoupling”, a concept according to which they are no longer very closely linked with the world’s rich nations, moving in tandem with them.

China’s rapid recovery from the setback caused to its economy by the deep recession in the West, in particular in the US, its largest trading partner, is owed to two facts: the aggressive response by the state to the decline in the rate of economic growth and the rapid, but still not fully understood, restructuring of its economy. In 2008, Beijing moved decisively to prevent a sharp decline in GDP by injecting large sums of public funds into the economy. A stimulus package of RMB4,000 billion (US$585 billion) was launched largely to further develop physical infrastructure – roads, railways, airports, ports, bridges and tunnels. The money flowed from the federal budget to the state-owned agencies responsible for building and maintaining infrastructure. Beijing used more than public money to stimulate the economy. The authorities instructed the banks they controlled to dramatically increase their lending for both industrial development and domestic consumption. Banks lent a record RMB9,600 billion (US$1,524 billion) in 2009, bringing the total stimulus to US$2.1 trillion, three times the amount provided by the US. This amounted to an extraordinary 43.0 per cent of the GDP, which for 2010, was estimated at US$4.9 trillion. Even if this amount is spent over a period of three to four years, it will still amount to a significant boost by the public sector to the economy. This was perhaps the largest push ever given by the mangers of a large system to a faltering economy.

The stimulus money was spent quickly by bringing forward the projects that were already included in the current five-year plan or were at the planning stage. In fact, the authorities cut the implementation period of the current five-year plan to three years. Beijing’s main concern was with rising unemployment. Some 20 million workers, mostly migrants from the countryside, were laid off by industries in the private sector that depended almost entirely on exports to the West. Under the Chinese system of human resource management, the unemployed workers were required to return to their villages. The Chinese were fearful that this return would make the countryside restive. Given the country’s history, Beijing is always alert to the possibility of “peasant rebellions”.

Having given up on The Washington Consensus sets of policies it had partially adopted during the first phase of the Chinese economic take-off, Beijing went in for a more state-directed-economy approach during the economy’s “second rise.”26 The state is now playing an important role in helping to revive as well as modernise the economy and is using this opportunity to restructure the production system. It followed the “picking the winners approach” once popularised by Japan, and the miracle economy of South Korea. Like those two countries, the Chinese are also working on building and modernising their economy by focusing on a few sectors. One example of this approach is the state’s intention to turn the automobile industry into a leading sector. The sector was a part of the stimulation package developed by the government to revive the economy. It was also helped by the government’s directive to the banks it controls to provide consumer finance. These measures resulted in soaring sales. In January 2009, the government reduced by one-half the purchase taxes on small vehicles. The move prompted a buying spree that lasted throughout the year and extended beyond small cars to boost sales of vehicles of all sizes. As a result, the number of car sales in 2009 rose by nearly 53.0 per cent to 10.3 million while total vehicle sales – including buses, trucks and the small commercial vans that powered much of the growth in 2009 – rose by 46.2 per cent to 13.6 million. This allowed China to go past America and become the leading global automobile market several years ahead of expectation. US cars and light truck sales were at 10.4 million in 2009.

The focus on the automobile industry was not the only major shift to take place in the structure of the Chinese economy. It also began to give up on low-skilled labour output moving quickly towards high-skilled and knowledge-intensive industries. Short of cultivable land, China is also letting its industry go vertical, producing finished products in high-rise buildings by importing parts and components that need land-using factories to produce. The rise of the “vertical economy” in China will have important consequences for its trading partners especially those that are land rich as well as those (e.g. Singapore) that produce sophisticated components for high value added products. These parts and components in Singapore and other high-tech centres in Asia are also produced in high-rise buildings. These economies have provided China the example of vertically organising its production processes.

The state’s return as a major player in the economy, massive investments in the building of infrastructure, replacing low-wage exports in favour of knowledge-intensive products, temporary incentives for boosting domestic consumption, and others are some of the elements in the fourth phase of China’s economic transformation. Will it succeed once again? Or is China going to experience a bubble? In all probability, the combination of orthodox and unorthodox measures will enable China to contain the inflationary pressures that appeared at the end of 2009.

Year-on-year inflation increased to 1.9 per cent in December 2009. However, during the year, prices declined during February to October and increased during January, November and December. What is worrying, however, is the pace of increase; from 0.6 per cent in November to 1.9 per cent in December. What would be China’s approach to tackle this problem? A bit of history in which the author was personally involved will help in understanding how far the Chinese have come in terms of developing the tools of macroeconomic management and how they may proceed in the future.

In 1991, the author received a call from Zhu Rongji, a senior leader of China who went on to become the country’s prime minister. He requested if the World Bank could advise him on the best way to deal with mounting inflationary pressures. The author was called in his capacity as the in-charge of the World Bank’s China operations. Minister Zhu handled economic issues in the Chinese cabinet. The author assembled a team of five central bankers from several parts of the world including the head of the New York Federal Reserve Bank and the Governor of the Central Bank of Chile. Two meetings were held with Minister Zhu and his colleagues.

The first was on basic information on the economic situation, in particular on price increases. The second had the expert team presenting its proposals. Beijing subsequently carried out an economic stimulus program aimed at increasing employment. This was as a follow-up to the Tiananmen Square crisis of June 1989. That program resembled to some extent what China did in 2009.

The author was familiar with the official Chinese interpretation of what went wrong in 1989 and why so many people were prepared to risk so much to confront the regime. The Chinese leadership in those days believed that much of the discontent had economic reasons. They largely discounted the Western view that this was a pro-democracy movement. High expectations had been created by Deng Xiaoping’s policies that had, among other things, opened the Chinese economy to trade and capital flows. One consequence was the sharp pick up in the rate of economic growth. However, there was no corresponding increase in the level of employment, in particular for the educated. Much of China’s growth at that time came from the low value added manufacturing sector employing unskilled workers. Students were unhappy and were prepared to come out on the streets and protest at having been ignored by the economy. This, they did that summer.

The official response was not limited to sending the army to Tiananmen Square to clear the place from protestors. This is what the world saw on television. Beijing also launched a program aimed at improving the distributive content of its growth policies. As it did to tackle the downturn produced by the Great Recession of 2007-09, the government in 1989 ordered state-controlled banks to lend large amounts of money for projects that had high employment content. One consequence of the action was a rapid increase in the level of prices which had an impact on the real incomes of the less-well-to do segments of the population.

At the time when the author took the central bankers to Beijing, the People’s Bank of China was still in the process of converting itself from a quasi-commercial bank to a regulatory agency that controlled money supply and supervised the commercial banks. One purpose of the mission was to suggest how that process of transformation could be quickened and also what instruments could be used by the central bank to bring money supply under control. Macroeconomic management was further complicated by the fact that tax collection was in the hands of the provincial authorities. The centre received its share by negotiating with the provinces. Unlike other federal systems there were no agreed formulas for the sharing of revenues among governments at different levels. The expert recommendations, therefore, covered both the monetary as well as the fiscal sides of macroeconomic management.

This history is being mentioned to underscore how far China has come in terms of modernising its economy as well as the system of economic management. Even then, it is less advanced than several other large emerging economies. The state plays a much greater role and uses both direct controls and market operations to manage the economy. It is unlikely to continue to follow this approach for several more decades.

The over-heating of the Chinese economy is a matter of great concern for Beijing now. As in most other developing countries, there will be greater impact of inflation on the real incomes of the poor. Beijing is determined to act but will wait until it has more data to suggest that the economy is heating up. If that indeed happens, the authorities will move in two different ways. To paraphrase Deng Xiaoping, it will be macroeconomic management with ‘Chinese’ characteristics. The authorities will use monetary policy to reduce money supply. This is the standard approach most countries use in moments of stress. This was employed in the early 1990s as well. There will also be direct controls on expenditure. With more instruments available now for managing the economy, there will be greater emphasis on direct controls. There is a reason why the Chinese may want to go that route.

By increasing interest rates while the rest of the world, in particular the US continues to keep them low, would invite more capital flows into China and lead to further swelling of its large dollar holdings. This would increase the imbalances in the global economy that are generally considered to have caused the Great Recession of 2007-09. Beijing, therefore, will make a larger use of direct controls. It will send out strong signals to the banking sector, most of which it controls, to reduce lending especially for large projects and the purchase of consumer durables, particularly automobiles. It will also use the fiscal system to withdraw the incentives it had provided to consumers to purchase more durable goods. The provinces will also be told to reduce their development expenditures. Interestingly, the rate of inflation will increase pressure on China to revalue its currency since that will help to lower the prices of imported goods. This has been resisted by China but it may be a bit more accommodating this time around.27

One consequence of this large stimulus to the economy would be a significant increase in the share of the public sector in the Chinese economic system. This would reverse the trend of the last two decades when the authorities encouraged the state sector to shrink in line with the thinking that went under the nomenclature of The Washington Consensus. Initially the Chinese were apprehensive about downsizing the state sector since that would throw a lot of people out of work. However, a series of pilot projects launched in the northeastern states – the country’s heavy industry belt – undertaken with the assistance of the World Bank persuaded the authorities that the people who lost jobs in the state-owned enterprises (SOEs) would find employment in the rapidly expanding private sector. This approach differed markedly from the one adopted by the countries that once made up the Soviet Union and those in Eastern Europe as they switched their ideologies from Communism to Capitalism. Communist Europe adopted capitalism by following the “big bang” approach. The Chinese, ever pragmatic, opted for the gradualist approach. Beijing changed course as it began to deal with the stress created by the Great Recession of 2007-09. Not fully trusting the private sector to keep on creating jobs during economic downturns, Beijing turned to the public sector to play a more aggressive role. Ministries and state-owned enterprises were given the means to employ tens of thousands of people, mostly recently unemployed, to build large infrastructure projects. One consequence of the way the Chinese handled the 2008 economic downturn was to interrupt this process of transferring workers from the public to the private sectors of the economy by creating space for them in the state sector. One unintended consequence of this will be to strengthen the role of the state in the economy, which will be used to handle the opportunities created and the problems posed by the extraordinary changes in the global economic system.

NOTES

1 This is a revised version of an earlier draft which was discussed at an ISAS seminar, “Asia in the Catch-Up Game” held on 9 March 2010. Several helpful comments and suggestions made by participants at the seminar have been incorporated in this version. The future course of the world economy is one of the main issues addressed in the study. The second development was what economists and financial experts call the Great Recession of 2007-09 to distinguish it from the Great Depression that took such a heavy toll in the 1930s. What was ‘great’ about this particular downturn in economic activity was that its origins were not in the normal working of the large economies that produce trade

2 Mr Shahid Javed Burki is a Visiting Senior Research Fellow at the Institute of South Asian Studies (ISAS), an autonomous research institute at National University of Singapore. He was former Vice-President of the World Bank, and former Finance Minister of Pakistan. He can be contacted at sjburki@yahoo.com.

3 Globalisation has attracted a great deal of academic and policy attention ever since the process was recognised as an important contributor to changing the shape and structure of the global economy. It has been studied from both the left and right sides of the political spectrum. For the former, see Joseph Stiglitz, Making Globalization Work, New York, W.W. Norton, 2002. For the latter, see Jagdish Bhagwati, In Defense of Globalization, New York, Oxford University Press, 2004; and Martin Wolf, Why Globalization Works, New Haven, Conn.: Yale University Press, 2004.

4 Not many observers of the Asian scene believe that the regional arrangements are working as well as suggested by their proponents. See, for instance, The Economist, “South-East Asian Summitry: Distant dreams”, 31 October 2009, p.37.

5 There is a growing body of literature on this subject. Some of the more important works belonging to this genre are Fareed Zakaria, The Post-American World, New York, Penguin Viking, 2008; Kishore Mahbubani, The New Asian Hemisphere, New York, Public Affairs, 2008; and Martin Jacques, When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World, London, Allen Lane, 2009. Why were pessimists about Asia once again

6 The Economist, “Briefing: Emerging Asian economies on the rebound”, 15 August 2009, p. 59.

7 See Paul Kennedy, The Rise of the Great Powers (New York, Vintage, 1988). Also among those who have espoused this point of view is economic historian Niall Ferguson in a number of contributions he has made to the op-ed columns of several newspapers, most notably the Financial Times. See for instance, “A Greek crisis is coming to America”, Financial Times, 10 February 2010, p. 11.

8 Piers Brendon, “The US is dead, long live the US”, The New York Times reprinted by The Straits Times (26 February 2010), p. A26. The Biden quote is also from the Brendon article.

9 Ibid.

10 Alan Greenspan, The Age of Turbulence: Adventures in a New World, New York, The Penguin Press, 2007.

11 Robert Skildelsky, Keynes: The Return of the Master (New York, Public Affairs, 2009), p. 46.

12 Angus Madison, The World Economy: A Millennial Perspective/Historical Statistics (Paris, Organization for Economic Cooperation and Development, 2007) and Essays in Macro-Economic History, New York, Oxford University Press, 2007.

13 Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays, Cambridge, Mass. Belknap Press of Harvard University Press, 1962.

14 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, New York, Penguin, 2000.

15 Understandably the Vogel book did extremely well in Japan. See Ezra F. Vogel, Japan as Number One: Lessons for America, New York, Universe, 1999.

16 Some Japanese economists have developed the “flying geese model” of adoption and adaption of their country’s approach to development by other East Asian states. The model was originally conceived in the 1930s by economist Akimatsu Kanane to help Tokyo design industrial policy for accelerating the pace of industrialisation. He developed the notion of “sunrise” and “sunset” industries to distinguish between those activities the state should encourage and those that it should phase out. The model was later extended to see how Japan could help other Asian countries follow the same path. See Pekka Korhonen, “The Theory of the Flying Geese Pattern of Development and Its Interpretation”, Journal of Peace and Research, Vol. 31, No. 1, pp. 93-108 (1994).

17 To become a DAC member, a country’s aid program must either exceed 0.2 per cent of its Gross National Income (GNI) or be more than US$1 billion a year. It must also have appropriate aid organisations and policies and strategies in place to guide the aid program. South Korea’s official development assistance in 2009 amounted to approximately US$830 million or 0.09 per cent of its GNI. However, by 2015 the country plans to increase of its total aid to US$3billion or 0.25 per cent of GNI. It was this plan that won its membership of DAC.

18 The case of the miracle economies has been studied at some length from a number of different perspectives. Among the more insightful works in this context is a study prepared by a group of economists working at the World Bank. The group was led by John Page with the author working as one of the advisors. The group wrote a study that examined the factors that had contributed to the East Asian miracle. See The World Bank, The East Asian Economic Miracle: Economic Growth and Public Policy, New York, Oxford University Press, 1993. The findings of this study continue to influence policy- makers worldwide.

19 There were actually four discernible phases as discussed below in the paper.

20 Shahid Javed Burki, “The Rise of China: How It Will Impact The World”, Institute of South Asian Studies, Insight No. 80, 6 August 2009. http://www.isas.nus.edu.sg/Attachments/PublisherAttachment/ ISAS_%20Insights_%2080_21102009214442.pdf. Accessed on 31 March 2010.

21 Hiroko Tabuchi, “China’s day arriving sooner than Japan expected”, The New York Times, 2 October 2009, pp. B1and B2.

22 Arvind Virmani, Propelling India from Socialist Stagnation to Global power: Growth Prospects, New Delhi, Academic Foundation, 2006.

23 Shahid Javed Burki, Changing Perceptions, Altered Reality: Emerging Economies in the 1990s, Washington DC, The World Bank, 1999.

24 The author saw from very close quarters the way the Deng system of reform was implemented in his capacity as the World Bank’s Director of China Operations for seven years, from 1987 to 1994. During this period, the World Bank’s lending increased from US$500 million in 1987 to over US$3 billion in 1994. The Bank worked with the Chinese on a number of areas of reform and economic modernisation. Among them was housing reforms. The Chinese were persuaded to allow the private sector into the housing area by taking away from state-owned enterprises the responsibility of providing shelter to their employees. This was a major step which Beijing took after experimenting with transition from one system to another in a couple of cities including Qingdao, the home of the famous Chinese beer that carries the city’s name.

25 Stephen Roach, “I’ve been an optimist on China. But I’m starting to worry”, Financial Times, 29 July 2009, p.20.

26 The term “second rise” is used in the context of revival of the Chinese economy from the Great Recession to underscore some of the major structural changes that were underway at this time. See Shahid Javed Burki, “The Rise of China: How it might impact the world”, ISAS Insights, No 86, 6 August 2009. http://www.isas.nus.edu.sg/Attachments/PublisherAttachment/ISAS_%20Insights_%2080_21102009214442.pdf. Accessed on 31 March 2010.

27 It is interesting to note that some Chinese officials may be getting ready to move on the currency front. According to one newspaper report, “Zhou Xiaochuan, governor of People’s Bank of China used an appearance at the National People’s Conference to give the clearest indication that Beijing is preparing to abandon the peg to the US dollar introduced in mid-2008. He told a press conference the currency peg was a ‘special measure’ to help China weather the financial crisis. ‘These kinds of policies sooner or later will be withdrawn’. After several months of tough talk from Beijing about not giving in to foreign pressure, amid accusations that its currency is undervalued, his comments were significant shift in official rhetoric.” Geoff Dyer and Jamil Anderlini, “Hopes fade of rapid removal of peg to US dollar”, Financial Times, 9 March 2010, p. 3.

Emerging Powers in their Regions: China’s Impact on its Neighbours’ Political Systems

Julia Bader

Research fellow at the German Development Institute

Driven mainly by domestic imperatives, China has emerged as a new economic and political player in its region. This rise coincides with a tendency towards autocratisation in Asia that has been facilitated to some extent by a convergence of the interests of China’s and its neighbours’ governments. Faced with this reality, the West should reflect on its strategies for the further enhancement of human development: it should integrate China into the donor architecture, help it to improve its domestic governance and pursue a more principled engagement in Asian developing countries.

China’s domestic politics

China has undergone impressive social, cultural and socioeconomic development during the last three decades. It has liberalized its economy and reorganized its state bureaucracy, and new social classes have emerged. While major transformations of its economic system have significantly affected Chinese society, the country’s political order of single-party dictatorship has remained intact. Despite its shift from totalitarianism to a merely authoritarian regime, the Chinese governance system continues to consist of a double structure in which the Communist Party’s monopoly of power is based on control over state personnel. The stability of this political order, which is built on a highly exclusive party, relies heavily on the repression of political and civil freedoms that might bring about organized opposition.

Consequently, the Communist Party has replaced control over individuals, formerly exercised through the commune system, with a new security apparatus, including tight media control, trained armed police forces and a controlled judicial system. While restricting the political rights of the people, the Communist party leadership justifies its monopoly by referring to its benevolence. As the transformation of the socialist economy advanced, the Chinese government became heavily dependent on the economic prosperity needed to create the jobs that would eradicate poverty and improve living conditions. Its economic success and the enormous progress in poverty reduction notwithstanding, the Chinese leadership has come under pressure from increasingly visible social disruptions, income inequalities and widespread corruption. Confronted with a rising number of public protests, the government has tried to redirect domestic discontent in nationalist campaigns aimed at the outside world and responded to social discontent by promising more social justice and more balanced economic development.

In sum, 30 years after economic liberalization began, China’s considerable international economic weight is not matched by political stability, and its domestic political order rests on a relatively fragile base.

China’s regional policy

China’s external relations, especially with its neighbours, are strongly influenced by its internal development, and its regional policy is guided by its internal needs. Key factors driving the government’s regional policy are the quest for territorial integrity and internal security, domestic pressure to develop Chinese society further by providing jobs and the need for natural resources to feed the economy.

Irrespective of long historical ties, China’s engagement with its neighbours is relatively new, but has developed rapidly. In the first decade of adopting a more open approach, Beijing focused on relations with the USA, paying less attention to the developing world, but during the 1990s the Chinese government developed a pronounced interest in its regional neighbourhood.

Starting in the early 1990s with cautious attempts to normalise its relations with its neighbours, China was brought closer to its region by the Asian financial crisis. Since then, China has actively sought to engage with its neighbours and has increasingly initiated regional cooperation, which has been reflected in soaring bilateral trade and investments in the new millennium.

In China’s regional environment, territorial integrity is not only a reference to the Taiwan issue, a generally dominant consideration in its external relations: it also extends to China’s internal security, especially in the con- text of its huge and sparsely populated Autonomous Regions Tibet and Xinjiang. Rich in natural resources, these vast territories in the West of the country are strategically important. Home to ethnic and religious minorities also to be found in neighbouring Nepal, Tajikistan, Uzbekistan and Kazakhstan, these economically disadvantaged territories are particularly unstable and prone to social or separatist unrest, as the protests in Xinjiang have recently shown. In its effort to remain in political control of these territories, the Chinese government is trying to reinforce its domestic settlement policy of assimilating and demographically crowding out minorities by bilaterally and multilaterally involving its South and Central Asian neighbours in measures to combat the “three evils” of terrorism, extremism and separatism.

From an economic perspective, too, China’s internal development strategy since the mid-1990s has incorporated its regional neighbours more explicitly than before. Its political order remains heavily dependent on its economic growth. An important aspect in this context is the ever growing disparity within the country between its industrialised East and its very backward West. Having directed foreign capital, technologies and know-how towards the country’s eastern coastal area in the first decades of reform, the government has tried to redress the development balance in recent years by enabling provincial governments to cooperate more closely with China’s geographical neighbours. Consequently, in no more than a decade, Chinese provinces have become, for neighbouring Asian countries, a major trading partner, one of the most important foreign investors and a valuable alternative donor. In line with its “going out” policy, designed to enhance the competitiveness of strategic state-owned corporations, especially in the energy sector, the Chinese government is concentrating its economic assistance and regional outward investment on developing new export markets and exploiting natural resources, which usually entails the provision of infrastructure, such as highways, railways, canals, ports and pipelines.

However, China’s cultivation of its regional environment, reflected in ever closer economic ties, goes well beyond economic interests in that it also pays political and geostrategic dividends. Since the Chinese government realised in the mid-1990s that a hostile regional environment could seriously threaten China’s development if it were to endorse the USA’s containment policy, China has launched a charm offensive aimed at its neighbours. The Chinese leadership reacted to their fears of China’s growing economic and military power by peacefully settling its border disputes with all its neighbours except India, by revising its aggressive approach to the disputed oil-rich islands in the South China Sea with a multilateral agreement, by intensifying bilateral diplomatic and economic relations with all its neighbours and by acting as a promoter in such multilateral regional organisations as ASEAN and the Shanghai Cooperation Organisation. In this context, the Asian financial crisis turned out to be a key event in China’s efforts to appease the region, since it presented an opportunity for the Chinese government to prove its peaceful intentions.

With its very successful charm offensive, the Chinese government has laid sound foundations for pursuing its more extensive geostrategic interests in neighbouring countries. Many of China’s foreign infrastructure projects, especially the construction of ports in Pakistan, Cambodia and Sri Lanka, are of a dual-use nature and could be of strategic value for the Chinese navy not only as a means of securing oil-shipping routes through the Indian and Pacific Oceans, but also in the event of military conflict over Taiwan.

China’s footprint in the region

By the end of this decade, the Chinese government will have successfully transformed the hostility inherent in its neighbours’ perception of the “China threat” into an overtly good-natured attitude. Beijing considers political stability in neighbouring countries to be of the utmost importance if it is not only to continue on its domestic development path and to safeguard its own internal security, but also to achieve its external economic and geostrategic goals. Where the political order in its environment is concerned, China’s foreign policy approach is therefore status quo-oriented and is explicitly characterised by a long-term perspective that relies heavily on generational leadership turnover (as in Laos) and long-term demographic trends in Asia, which are expected to be in China’s favour (as in Mongolia). Given the low level of democratisation in the region, this attitude implies de facto a preference for autocratic governments.

Above all, China has acted as a protector of the Burmese and North Korean leaderships, two of today’s most repressive dictatorships. North Korea’s dysfunctional regime would probably already have collapsed if it had not continuously received Chinese food aid and other vital assistance. Similarly, the Chinese government has supplied economic and technical aid and military hardware to the Burmese junta. The main reason for China’s diplomatic protection of both pariahs against UN activities, as in the aftermath of the Saffron Revolution in Burma in 2007, has been its desire to safeguard its own investments in these countries. The Chinese government is consequently opposed to regime change in Burma and North Korea, but would nevertheless welcome economic reforms modelled on its own.

However, whenever there is political turmoil or violent conflict over power in neighbouring countries, China’s attitude is overtly opportunistic. Though rhetorically refraining from meddling in other countries’ internal affairs, it hurries to woo the victors. While Western countries expressed serious concern about human rights issues, China turned a blind eye to the legitimacy question after armed conflict in Cambodia (1997), a coup in Thailand (2006), the replacement of democratic government by an absolute monarchy in Nepal (2005) and the violent repression of the Andijan uprising in Uzbekistan (2005), for example. Occasionally, in defiance of its rhetoric, the Chinese government does come down heavily on the side of one party: in Sri Lanka, for instance, Chinese military support for the government from 2007 onwards and its blockade of UN actions were pivotal in the defeat of the Tamil insurgents and in bringing the civil war to an end. Many of China’s neighbours have, in turn, embraced diplomatic and material support from China as a means of extending their room for manoeuvre domestically and internationally. In economically weak countries in particular, China’s assistance and its maximum-effectswith-minimum-resources strategy effectively enables fragile governments to bolster their domestic power position. This approach is aimed at financing and constructing such high-profile, low-cost prestige objects as civic beautification projects in central Vientiane, the presidential palace in East Timor and the Council of Ministers building in Phnom Penh.

China strengthens authoritarian structures in Cambodia

Historically, China’s regional interests in the context of the containment of Vietnam has had devastating effects on Cambodia and prolonged the Cambodian civil war. The Chinese government was a major military and technical supporter of the Khmer Rouge, but it also courted King Sihanouk. In 1993, the royalists won the elections held under UN supervision, but were forced by the threat of continued civil war into a coalition with former Prime Minister Hun Sen. In 1997, the conflict escalated when Hun Sen’s troops pre-empted an alleged royalist coup. In reaction to the open violence, Western donors withheld assistance flows to Cambodia. The Chinese government, on the other hand, was among the first to endorse Hun Sen as Cambodia’s sole Prime Minister.

Following this turning-point in their relations, Hun Sen, formerly disliked as a Vietnamese puppet, quickly turned out to be one of China’s closest friends in the region. Hun Sen severed relations with Taiwan and was generously rewarded: in 1999, the Chinese government began to provide military assistance to the Royal Cambodian Armed Forces loyal to Hun Sen. Chinese state and private companies also became major investors, notably in the textile industry and agro-business, and acquired numerous land concessions. China is interested in the Cambodian offshore oil and gas reserves that were discovered in 2004. China pledged US$ 600m to Cambodia in 2006 and US$ 250m in 2008, and most recently, in October 2009, a pledge of US$ 850m was announced. This has effectively enabled the Cambodian government to play off old and new donors against each other. While external pressure has forced Hun Sen’s aid-dependent government on several occasions in the past to seek reconciliation with political challengers, to agree to elections and to respect human rights, he recently reiterated his pleasure at the absence of strings attached to China’s development assistance. Some of the infrastructure projects financed and constructed by China at the request of the corrupt Cambodian government are highly questionable, examples being a hydroelectric power station in a national park and protected area, which had been rejected by traditional donors because of its ecological and economic unsustainability.

In sum, China’s investment in Cambodia has paid dividends: Hun Sen’s government acts as China’s voice in ASEAN, China has access to the Cambodian port of Sihanoukville, which could be of strategic relevance, and the Cambodian government has become particularly silent over China’s upstream dam-building projects along the Mekong, although they will certainly have an adverse effect on Cambodians who depend on agriculture and fishing. Concerned about the effects of China’s engagement in Cambodia, traditional donors have tried to integrate the Chinese government into the existing coordination body. So far these attempts have had mixed results.

In addition, most Asian countries have welcomed China’s charm offensive as a counterbalance to the influence of other regionally relevant powers, including Russia (as in Mongolia and Central Asia), India (with respect to Bangladesh, Nepal, Burma and Sri Lanka), Thailand and Vietnam (particularly in Laos and Cambodia), Australia (in East Timor) and, of course, the USA.

In this perspective, China has improved the bargaining position of many contested governments vis-à-vis other regional players and the West by acting as an alternative source of military equipment and as a donor willing to finance formally unconditional assistance projects which, though wanted, are highly questionable. A “win-win” relationship between the Chinese ruling elite and its counterparts in the regional environment has evolved: China’s accommodation of the needs of its counterpart very often converges with Chinese commercial interests, in the Chinese construction sector, for example. Consequently, the Chinese government faces little, if any, resistance when Chinese activities have an adverse effect on the people of neighbouring countries. Very few governments, for example, publicly raised objections to Chinese upstream activities on the Mekong River even though they will seriously affect the livelihoods of millions downstream.

Conclusions

China’s emergence as an increasingly active economic and political player and the role model it provides for development on the one hand and autocratisation trends in the region on the other raises the question of how to react to these parallel tendencies. Given the Western agenda for achieving the Millennium Development Goals and promoting democracy, three considerations seem particularly important:

1. China’s political engagement with its neighbours, and particularly its growing role as a new donor of development assistance and an investor, is a fact. As many developing countries welcome China as an alternative donor and therefore a means of bringing pressure to bear on traditional donors, the most constructive approach would be to integrate China as far as possible into the aid architecture in the medium to long term.

2. In the short term, however, Western donors should not become unprincipled over the competition with China. To create coherent incentives for good governance in developing countries, donors should allocate aid or engage in trade agreements in line with the recipient’s willingness to reform. Bearing in mind that it is not desirable for any of the Asian leaders to be dependent solely on Chinese development assistance, Western decision-makers should not underestimate their own potential leverage.

3. Given China’s recent function as a role model for other developing countries and the spill-over of its governance patterns with its foreign direct investment in the region, the improvement of its domestic politics with a view to good governance would most probably have a positive impact on the region as such. Western policy-makers should therefore encourage the Chinese government to improve its governance, especially in areas in which Chinese influence is prone to be exported with external business relations. Chinese standards in the areas of the rule of law, labour and environmental policies are most often applied in societies with weak labour and environmental protection and law enforcement. Western governments should also continue to call on China to improve its human rights situation and confront the Chinese government with their concerns in an appropriate forum.

South Asia: Overcoming the Past, Meeting the Challenges of the Present and Availing the Opportunities of the Future

by Shahid Javed Burki1

Introduction

This paper is the introductory chapter of a forthcoming book on the proposed title “Can Regionalism work for South Asia?” The book is a collection of essays in which individual pieces stand alone as contributions to the ongoing debate on South Asia’s changing position in the global economy and in the evolving international political order. However, the essays can be read together as a book since one set of themes – an overall logic – constructs a case for how South Asia could take advantage of the rapid changes in the global economic, social and political systems. However, for that to happen, the countries in the region will have to discard the weight of history and work together as a region rather than as individual countries pursuing their separate interests.

South Asia: The Formative Phase

Even a cursory view of any South Asian country leaves one impressed with the region’s diversity. This is particularly the case for three countries in the region – India, Pakistan and Sri Lanka. Bangladesh, Bhutan and Nepal are culturally, ethnically and religiously more homogeneous. The British rulers were also impressed with the diversity encompassed by South Asia. Sir John Strachey, who spent many years in British India and went on to become a member of the Governor-General’s Council, wrote a book about the latest British acquisition that became a primer for all those from his country who wished to learn about their Indian empire. India, he wrote, was merely a label of convenience, “a name we give to a great region including a multitude of different countries”. India, in other words, was a vast geographical place masquerading as a country. “Scotland is more like Spain than Bengal is like the Punjab”, said Strachey. “It is conceivable that national sympathies may arise in particular Indian countries [but] that they should ever extend to India generally, that men of Punjab, the north-western provinces and Madras should ever feel that they belong to the Indian nation, is impossible. You might with as much reason and probability look forward to a time when a single nation will have taken the place of the various nations of Europe.” Introduction This paper is the introductory chapter of a forthcoming book on the proposed title “Can Regionalism work for South Asia?” The book is a collection of essays in which individual pieces stand alone as contributions to the ongoing debate on South Asia’s changing position in the global economy and in the evolving international political order. However, the essays can be read together as a book since one set of themes – an overall logic – constructs a case for how South Asia could take advantage of the rapid changes in the global economic, social and political systems. However, for that to happen, the countries in the region will have to discard the weight of history and work together as a region rather than as individual countries pursuing their separate interests.

South Asia: The Formative Phase 2

Strachey was, of course, both right and wrong. There were many differences in the land the British ruled formally for 90 years, from 18573 to 1947,4 which led to its division into three states after they went home. Some of the Muslim majority areas were taken out to form the independent Muslim state of Pakistan. The “idea of Pakistan” was conceived by Muhammad Ali Jinnah, the father of the country, who proclaimed, to the dismay of the Hindu-dominated All India National Congress (AINC), that British India did not have one Indian nation but two separate ones, one Hindu and the other Muslim. Each needed a state of its own in which they could have their different cultural and social norms projected onto the political system they would eventually evolve for themselves. After a lot of hesitation, both the British and the AINC accepted Jinnah’s “two nations” theory and agreed to the creation of a separate homeland for the Muslims of British India.5 However, Pakistan came divided in two parts: its eastern and western wings were separated by a thousand miles of Indian territory. The two Pakistani wings remained together in an uneasy alliance for a quarter century but went their separate ways in 1971 after a bloody war in which India sent its army to aid the Mukti Bahini, the Bengali Liberation Army. Religion, the people of East and West Pakistan discovered, was not a strong enough glue to keep them together within the boundaries of one state with two very different people. However, I will argue in this work that while religion may be a weak glue, shared economic interests can be much stronger. This is where Strachey went wrong in his prognosis of the probability of a European union. A single European union was in place a hundred or so years after Strachey published his book. The same may happen one day for the states of South Asia.

India, minus Bangladesh and Pakistan, has survived as a nation state, making real what Sunil Khilnani, the Indian political historian, calls the “idea of India”. He attributes it to Jawaharlal Nehru, the first prime minister of the country. According to this, very diverse people could live together as long as they were allowed space within the political system. The “period of Indian history since 1947,” writes Khilnani, “might be seen as the adventure of a political idea: democracy. In this context, India can be considered “the third moment in the great democratic experiment launched at the end of the eighteenth century by the American and French revolutions.” Each of these endeavours “released immense energies; each raised towering expectations.” The Indian experiment “may well turn out to be the most significant of them all, partly because of its sheer human scale, and partly because of its location, a substantial head of effervescent liberty on the Asian continent”.6 The Rise of “the Rest” The elections held in April-May 2009, a subject I will touch upon in greater detail in a later chapter of the book, have lent some substance to the argument advanced by Khilnani. While the idea of India has survived, the “idea of Pakistan” is still being tested, as is the “idea of Bangladesh”. The idea of Bangladesh put out by Sheikh Mujibur Rehman, the father of the nation, was much narrower than the other two ideas. According to this, a large ethnic group, with its language and culture, needed its own political space. The question I will pose in this work is whether these “ideas” of nationhood can be brought together in some sort of “idea of South Asia” without which the countries of the region will not be able to take advantage of the opportunities being created in the rapidly evolving global economic and political systems.

==The Rise of "the Rest" ==7

In this introduction to the collection of essays, I will spell out a number of unifying themes. These will look at the past and present developments in the subcontinent by placing the region in the global context. As has been pointed out and elaborated in a number of recent academic, policy and journalistic works, the shape of the global economic and social systems, and the international political order are changing rapidly. Why this is happening has been extensively discussed from several different perspectives. It would be useful to recall some of the explanations that have been provided. The most popular of these is the notion that, for a variety of reasons, today’s developed countries are dynamic and the future will most certainly see significant erosion in the economic power. In an influential book, Fareed Zakaria calls the current period “the post-American world” which will see the economic rise of what he labels “the rest”. He calls it the third tectonic movement in the history of the globe – at any rate the part of the history dominated by homo sapiens. The first was the rise of the West that began in the fifteenth century and accelerated dramatically in the late eighteenth century. The second was the rise of the United States in the closing years of the nineteenth century and continued throughout the twentieth century. “We are now living through the third great power shift of the modern era. It could be called the ‘rise of the rest’. Over the past few decades, countries all over the world have been experiencing the rates of economic growth that were once unthinkable. While they have been booms and busts, the overall trend has been unambiguously upward. This growth has been most visible in Asia but is no longer confined to it.” Zakaria quotes Antoine van Agtmael, the fund manager who coined the term “emerging markets” to suggest that the 25 multinational companies that will be the world’s leading companies in the next few decades will include several from the emerging world. “His list includes four companies each from Brazil, Mexico, South Korea, and Taiwan; three from India; and one each from Argentina, Chile, Malaysia, and South Africa.”8 Agtmael’s list of the future great global companies is a good indication of the fact that South Asia is losing out to other emerging economies in creating a space for itself in the tectonic shift in the structure of the global economy. Why has that happened and what could change the trend are questions that will be addressed in this work. Real value could be added to this discourse by examining the place South Asia currently has in the changing global environment and the public policy choices that could improve the situation for the South Asian region. However, we will first look at the changes that are taking place in the structure of the global economy, in the international political order, in the way people are now governed and in the way the people from various parts of the world relate to one another.

Demography, Food and Non-renewable Resources

Changes in the global economic and political systems are happening fast. Many of them are driven by demography, the development of the internet and the adoption of a new model of economic development by countries that were part of the entity once called the “Third World”. Even today, after much work by demographers, economists, political scientists and sociologists, we do not fully understand how the change in the rates of population growth and in the sizes of country populations affect economic development and growth. Is a continuous growth in population which results in the doubling of the number of people living in a given area every quarter century or so good or bad for the area’s economy? International opinion a couple of decades ago was focused on the problems such unrelenting increase creates. The conventional wisdom then was that the world was heading towards a Malthusian disaster. However, not everybody agreed. The two best-selling books of those times, the Club of Rome’s Limits to Growth and Lester Brown’s Seeds of Change, looked at the problem of population growth and the availability of food from two very different perspectives.

The first book argued that a continuous high rate of population growth, combined with some increase in income per head of the global population, were together creating a demand for non-renewable resources that would, in the not too distant future, result in their exhaustion. There were two public policy implications of this conclusion – one explicit and the other implicit. The first suggestion was that the international community should work urgently to reduce the rate of population growth, particularly in the developing world. A United Nations population conference was convened to underscore the need for action. The other conclusion – the implicit, since it would not have been politically correct to espouse it – was that much of the world’s population should not aspire to achieve the economic and social standards that were common in rich countries. The globe simply did not have the resources to make it possible for so many people to live in the way the Europeans, the North Americans and the Japanese did.9

Brown and several other analysts did not buy into this gloomy outlook. In his widely read book, Brown reached the opposite conclusion and argued that most problems of scarcity in the past had been resolved by technology. There was no reason why the future should be any different. Price increases brought on by scarcity encouraged innovation. The Green Revolution in several populous South Asian countries in the late 1960s and the early 1970s had resulted in quantum jumps in land and labour productivity. Significantly more quantities of food were produced from the same amount of land and by the application of the same quantity of labour than before. High yielding varieties of seeds developed in research institutions in Mexico (for wheat) and the Philippines (for rice) had spared a number of countries from Malthusian famines.10 The optimists did not think that the Green Revolution was a “once-in-history” kind of event. It would be repeated again and again every time the increase in population produced food scarcity and put pressure on prices. The genetic engineering in producing even higher yielding and “designer” crops can be seen as continuing the trend that began with the green revolution.

Given the experience with demographic change and its consequences for various parts of the global economy of the last quarter century, some of the earlier conclusions do not seem all that obvious. In the last 25 years, we have seen a significant decline in the average rate of human fertility. That has occurred all across the globe. There are a number of consequences of this development not foreseen in the 1970s when there was such a great deal of talk about the “population bomb” ticking in the globe, ready to explode. One of these is that, in a number of European countries and in Japan, populations have begun to decline in size. Russia has the worst case of population collapse in Europe, but in its case, mortality increases related to alcohol abuse have added to fertility declines to bring about a rapid and continuing reduction in the size of the population. This raises an important question. Can declining national populations with a constantly increasing proportion of older people who need to be supported by a continuously declining share of the young remain economically viable and socially dynamic? The answer is no, unless these countries allow large-scale migrations from the more populous countries in the world. This was the approach adopted by the United States in the pre-9/11 era while Western Europe, fearful of the cultural impact of an increasing proportion of immigrants in their populations, followed a much more constrained approach. In Europe, there is a particular fear associated with the increase in the proportion of Muslims in their population. This fear has earned a name of its own, Islamophobia.

The second consequence of the change in fertility was that of “demographic inertia”. This means that even if the rates of fertility have begun to decline in the developing world – as they have in all Asian countries – because of the high birth rates in the past, the proportion of the young in the population would continue to increase for a few more decades. This has created a window of opportunity for a number of populous countries in South Asia. This is the case, in particular, for India, Pakistan and Bangladesh, all of which have a long tradition of international migration. Moving out of crowded places has always provided a relief – this was the case in the pre-9/11 world. Populations with a high proportion of young – Pakistan for instance, has a median age of 17 years – can become an economic asset or a burden depending upon the public policy choices made by the state in the past. Countries such as India and the Philippines have used their young populations to provide high economic returns by participating in the process that The New York Times columnist, Thomas Friedman, has called the ‘flattening” of the world.

According to him, “a combination of technological, market and geopolitical events at the end of the twentieth century has levelled the global economic playing field in a way that was enabling more people more than ever from places more than ever to take part in the global economy, and in the best cases, to enter the middle class.”11 However, not all populous countries have benefited. Some, like Pakistan, by seriously under-investing in human resource development, created an environment that invited a segment of the youth to join the forces of extremism. A combination of a low rate of economic growth, low rates of job increases and poor opportunities for skill development led many young people to join the ranks of the extremists.

Globalisation, the Internet, Changes in Industrial Processes and Development of New Trading Patterns

The internet, a remarkable communication technology developed over the last three decades, had its origins in the United States. It has transformed the global economy by making it possible to transfer information instantly. Among the many consequences of this development, one of the more important one was that workers did not have to be located in one place. Work could be disbursed wherever human talent and physical resources were available. This introduced the concept of “outsourcing” and created an entirely new process of production. National firms became global firms and nationalism began to give way slowly to “globalism”. In the 1997 World Development Report, analysts at the World Bank suggested that the changes in the system of global production were also producing changes in the global political order. Two developments were taking place simultaneously. One was to turn a number of areas of policymaking into international institutions. The other was to devolve more financial power and political authority to governments at the sub-national levels.12 This trend was visible in both the developed and developing countries. It was in some cases the result of the support given by the political elite, and in some others, by developments at the grassroots level. The 2001 Local Bodies Ordinance, promulgated by the military government led by General Pervez Musharraf in Pakistan, is an example of the first case while the gradual transfer of power in India from the central government to governments at the state level is an example of the latter. The 2009 elections in India were expected to nudge it further towards regionalism. This, as discussed in a later chapter, did not happen.

Redesigning the Nature of the State

There is now consensus emerging among economists and political scientists that one of the important aspects of change in the global political order is the gradual withdrawal of the nation-state from governance. The nation-sate is being squeezed from both sides. The space in which it currently operates is being gradually taken over by multilateral systems and the systems of local government. Multilateralism is taking several forms. It is taking the form of the surrender of some sovereign rights to such multilateral organisations as the United Nations’ Security Council and the World Trade Organization (WTO) – under the 1995 Treaty of Marrakesh that had the WTO supplant the General Agreement on Tariffs and Trade. Under Chapter 7 of the United Nations’ Charter, the Security Council can authorise military action against errant states. The WTO acts as a court when individual states litigate against one another.

However, for the purpose of this study, it is the regional cooperation for trade and economic development that holds special appeal. The European Union is the most successful organisation in this context. From a humble beginning as an organisation set up to coordinate European trade in coal and steel, it has evolved into a supra-state institution. The attempt to write a European constitution started in the early 2000s is currently suspended but at some point in the not too distant future, it will resume and provide the members of the European Union with a governing document that will take away some powers from the member states and locate them in a central place. The area of international trade has already been surrendered by the European nation states to the European Commission located in Brussels. The next to come may be the making of foreign policy.

The other encroachment on state power is coming from the opposite end. According to the World Bank in the above cited report, “a state that ignores the needs of large sections of the population in setting and implementing policy is not a capable state. And even with the best will in the world, [the] government is unlikely to meet collective needs efficiently if it does not know what many of these needs are. Reinvigorating public institutions must, then, begin by bringing the government closer to the people. That means bringing popular voice into policymaking – opening up ways for individual users, private sector organisations and other groups in civil society to have their say. In the right setting it can also mean greater decentralisation of government power and resources.”13

South Asia’s Response to Globalisation and other Global Changes

The changes discussed above have been provoked by a number of developments, some of which that happened because of the way economies and societies have always evolved in human history. The process generally referred to as “globalisation” is one such determinant of change. Some have been the consequence of human action – especially actions by world leaders. One example of this is the way the American administration under President George W. Bush, the country’s 43rd president, fought what he called the “global war on terror”. Public policy looked at from this perspective takes two forms. It focuses on the strategic interests of the countries that make up a region. For a region whose recent history has been dominated by intense rivalry among different states, a country-centred strategic approach could be seen as a zero-sum game. One country’s gain would be another country’s loss. This was the case in Europe before the Second World War and has been the case in South Asia since it achieved independence from colonial rule in the late 1940s. Each capital in such regions will seek to improve its position with respect to all others in the neighbourhood. The other context in which regional policy could be formed is regional. The assumption in this case would be that each capital will place the interest of the region ahead of its own in the belief that the outcome will be a plus-sum game. Economists have a term for this kind of approach – Pareto optimality – when a given solution brings benefit to all participants in the transaction. Nobody suffers. If this approach were to be applied to the making of public policy in South Asia, what the various governments will be pursuing would be very different from the way national policies are currently shaped and the ends at which they are directed. For a very long time – in fact since the time the area now called South Asia acquired its present political shape – the countries in the region have largely focused on internal issues. If they looked beyond their borders, they did it to protect themselves from sometimes real and, at other times, perceived security threats.

The current debate on what approach Pakistan should follow in dealing with the scourge of Islamist extremism is a good illustration of this conundrum for at least two, if not three (if we also count Afghanistan as part of the region) South Asian countries. As the group that calls itself “Taliban in Pakistan” expanded its physical presence beyond the traditionally troubled tribal belt in the country’s northwest, the question was raised whether Islamabad, in particular its military leadership, was prepared to throw its assets to beat back this serious threat to national security. In the spring of 2009, when the snows melted in the mountains that form the border between Afghanistan and Pakistan and the passes through which people moved cleared, this conflict escalated. The question arose as to how much of its enormous power the Pakistani military was prepared to use to stem this tide. The military’s less than full-throated response has been interpreted in several different ways. The Americans, in particularly General David Patraeus, the man most closely associated with the development of the conceptual underpinning and implementation of the American surge in Iraq, was one leader who was convinced that the military leadership and a segment of the political elite were still not convinced that the Taliban were Pakistan’s real enemies. The military believed that the real enemy was in the east – India. It believed that it was right for Pakistan to orientate its military strategy toward minimising the threat India posed to its security. The army had to be trained, equipped and motivated to deter India. The Taliban were essentially a side show.

There was some truth in this interpretation of the Pakistani military’s world view,14 a point that I will develop in a later essay. However, the Pakistani leaders – not just the military leaders but some thinking people in the political field and some influential civil society organisations as well – had a more nuanced view of the situation. They saw the Taliban onslaught as a consequence of a dynamic that had been in place for decades, if not for centuries. The Taliban (literally ‘the students’ but in effect those who were educated in the seminaries that were set up in the refugee camps that accommodated 3.5 million people displaced by the Soviet invasion of Afghanistan in 1979 and the country’s subsequent decade-long occupation15) were the product of the fiercely independent Pushtun culture which fought against all foreign threats. The Pushtuns were not prepared to accept the occupation of the areas in which they lived by the use of military force by a foreign power. For several decades, they resisted the gradual advance of the British into their territory until the British decided to divide the Pushtun tribes by drawing the Durand Line16 which effectively became the border between Afghanistan and British India, and later between Afghanistan and Pakistan. The Pushtuns were also not keen on seeing their own culture being encroached upon by foreign influences. In looking at such perceived threats, they did not differentiate between the American forces, the forces under the command of the North Atlantic Treaty Organization and what they saw as the Punjabi-dominated Pakistan’s army. How should an approach that satisfied the aspirations of the various people involved in this growing conflict be developed? To use a popular American phrase, the situation demanded thinking out-of-the-box.

Taking the regional approach would be one element of such thought. A bit of this was done by President Barack Obama’s administration in the context of its extensive review of the Americans policy towards Afghanistan. Instead of looking only at Afghanistan, the new policymakers in Washington decided to focus on what they called the “AfPak” problem. The reason behind the enlargement of the geographical scope of the new approach was a simple one. The almost evenly split Pushtun population, estimated at some 40 million people between Afghanistan and Pakistan, meant that the two countries had to develop similar approaches to addressing the grievances and aspirations of this ethnic group. This was especially the case since, after having failed spectacularly to bring the Pushtuns under their control in the last nineteenth century, the British, by drawing the Durand Line in 1893, had divided them into two – the Afghanistan and Indian groups. In 1947, Pakistan inherited the Indian Pushtun group. However, the Pushtuns did not wish to be divided. Kabul did not accept the Durand Line or the incorporation of the Pushtuns living in the areas south of the Hindu Kush mountains into the new state of Pakistan. Afghanistan was the only country that opposed the entry of Pakistan into the United Nations when the latter presented its credentials for admission in 1949.

One could go on analysing the Pushtun problem but it is strictly not germane to the argument being presented here. The argument is to push for regionalism as a way of dealing with some of the more intractable problems South Asia faces today. This applies not just to the Taliban problem but also to the problem of Kashmir,17 to the way the long-enduring Sri Lankan problem is moving towards its climax, and towards the difficult relations between Bangladesh and India.

To take one more example of how a problem that was generated and developed in one country can spill over into another is to look at how the Tamil rebellion in Sri Lankan reached a bloody conclusion. According to one report, about 100,000 Sri Lankan Tamils have left their homes and taken refuge in India, using the “last spit of the coast in Mullaitivu District on the north-eastern corner of the Island” as the spring board for making the escape. 18 Would India remain neutral to the way the conflict has approached its denouement? It was, after all, the arrival of reportedly millions of East Pakistani refugees into Bengal and Assam that prompted the country to intervene in Pakistan’s 1971 civil war and to the creation of Bangladesh as a separate state. In the concluding phase of the Indian elections of 2009, several Tamil leaders advocated the use of Indian force to protect the Tamil community in Sri Lanka. Using India’s readiness to insert itself in Pakistan’s civil war in 1971, J. Jayalalitha, the Tamil Nadu opposition leader, “argued that India should send troops to the island to establish an independent state for the Tamils, if they are not granted some autonomy by the majority Sinhalese.”19

There are, in other words, several episodes in South Asia’s recent history in which individual states have worked against each other in pursuit of national interests rather than with one another in pursuit of regional goals. One recurrent theme in this work is to suggest that South Asia will only be able to take advantage of the opportunities that have been created by the changes in the global economic system and the evolution of the international political order if the countries in the region act together rather than against one another. The Obama administration’s initial take on the rise of Taliban in Pakistan and Afghanistan was to draw India formally into its search for a solution. India resisted and Washington changed the terms of reference for Richard C. Holbrooke, the special envoy to the region. An opportunity for using a regional approach was thus lost.

Many of South Asia’s security problems, therefore, need a regional context to be successfully addressed. Is that possible given how long hostilities have existed among the countries of the region and how fixed some of the country positions have become over the last many decades? What could be the catalyst to move the countries away from pursuing narrowly defined national interests and towards pursing a path that allows some give and take? How could the perception that the interaction among the countries of South Asia is essentially a zero-sum game be changed into one that sees Pareto optimal solutions? This could happen if two countries in the region – India and Pakistan – bring about a fundamental change in their thinking about each other and the region to which they belong. However, the conclusion in this work is that India will have to take the lead.

The Need for Indian Leadership

Only India, which, along with being the region’s largest country by far (accounting for 74.5 percent of the population) and its largest economy, is the only South Asian state to have won the epithet of a near superpower (as the only G-20 member from the region), can play that role. The problem is that the country is at the centre of many of the political disputes that have made it so difficult for the states of the region to work together. Kashmir is one such dispute but not the only one. There is a deep suspicion among the Sinhalese of Sri Lanka who constitute the country’s majority, that if not India, then at least the state of Tamil Nadu, has been supporting the Tamils. The opposite impression also prevails. It was a young Tamil woman, a suicide bomber, who assassinated Rajiv Gandhi while he was campaigning to be prime minister in the 1991 elections.

India, having midwifed the birth of Bangladesh in 1971 by supporting its civil war against West Pakistan, could have expected to be on easy terms with the new country and its new leaders. That was not to be the case. Although the Awami League, the party of the martyred Sheikh Mujibur Rehman who spearheaded the movement for the independence of Bangladesh, has relatively decent relations with India, it has not concluded a natural gas deal with its neighbour. Bangladesh has vast surpluses of natural gas while India has serious deficits. A pipeline between the two countries would benefit both. It would be a Pareto optimal solution. Although the deal has been attempted several times, it has not been consummated due to intense suspicions on both sides.

Nepal, on India’s northern border, is the world’s only other Hindu-majority country. In fact, the proportion of Hindus in its population is far greater than in India. It too has resources in surplus which India badly needs. Its fast running rivers carrying huge amounts of water along steep slopes can be harnessed for generating power. However, these deals have been difficult to negotiate. Furthermore, the Nepalese authorities claim that they face all kinds of non-tariff barriers in their trade with India. Sometimes, their exports are sent to distant laboratories for testing before certificates of acceptance are issued. Similar complaints are heard in Dhaka and Colombo. I heard several of these in 2004-05 when I led a team of regional economists that worked on a United States Agency for International Development (USAID)-sponsored study on the possible contributions the South Asia Free Trade Area (SAFTA) agreement, which is still in development, could make to the region.20 In a meeting with Prime Minister Manmohan Singh in New Delhi in December 2004 to discuss the study, he asked if I could perhaps tell him how countries in the subcontinent felt about India. I had just concluded a visit to all the countries neighbouring India. My answer surprised him. I told him that while all countries were suspicious of New Delhi, one that felt warmly towards it, was prepared to forget the past and look at the future through a different prism, and was anxious to develop strong economic and cultural relations with its neighbour. That was Pakistan.

Pakistan’s encounter with Islamist extremism in the early 2000s persuaded several influential people within its policymaking circles as well as among the numerous civil society organisations that had begun to play an important role in the country’s political life to look to India as a balancing influence. The will seems to be there on the Pakistani side but India, understandably, troubled and irked by a series of terrorist attacks carried out by Pakistan- based groups, remains highly suspicious of Pakistan and its intentions. In a series of conversations with then-President Musharraf and current President Asif Ali Zardari, I got the same response to my suggestion that Islamabad should try hard to develop better relations with India. Both said that they had reached out to India but New Delhi had failed to reciprocate. If it is beyond the two countries to sort out their differences themselves, is it possible for some foreign mediator to intermediate and prepare the ground? To the Indian ears, this suggestion would sound preposterous. However, that is not what history tells us. On at least four different occasions, New Delhi was prepared to allow outsiders to help reach an understanding with Pakistan on exceptionally contentious issues. It happened in 1949 when the United Nations Security Council ordered a ceasefire between the Indian and Pakistani forces over what had become the disputed state of Kashmir. It happened again in 1960 when the Word Bank became involved in the settlement of the division of the Indus River system waters. It was at the prodding of the World Bank that President Ayub Khan of Pakistan and Prime Minister Jawaharlal Nehru of India signed the Indus Water Treaty in 1960 at a ceremony in Karachi, then capital of Pakistan. The Indus Treaty has survived a least two wars between India and Pakistan, and several near-wars. The World Bank still remains engaged as an arbiter when there is a dispute concerning the use of water.

The third instance of foreign assistance came in the fall of 1965 when the two countries had fought an inclusive war, once again over Kashmir. This time it was Russia that offered its good offices. Its prime minister, Alexis Kosygin, hosted Prime Minister Lal Bahadur Shashtri of India and President Ayub Khan of Pakistan at the city of Tashkent which resulted in the signing of a treaty. The fourth time was in 1999. This time it was the Americans who became involved when, over the 4 July weekend in 1999, President Bill Clinton hosted Prime Minister Nawaz Sharif of Pakistan to de-escalate the Kargil conflict. This time no treaty was signed. Given this history, India should be able to set aside its reservations. The decisive victory of the Congress Party-led by Dr Singh, offers an opportunity that India could exploit. However, if foreign help is to be sought, who could provide it?

Pakistan also needs a significant reorientation in its approach towards India. It needs to recognise the importance of working within a regional economic framework to deal with some of the structural problems the country currently faces. Its policy towards India for many decades was that of a competitor rather than a collaborator. In the first quarter century after independence, India was caught in what its own economists called the “Hindu rate of growth”21 (about 3 to 3.5 percent a year growth in gross domestic product [GDP], not much more than the rate of population increase) while Pakistan was averaging a growth rate of 5 to 5.5 percent a year. It appeared to the Pakistani leadership groups that not only was the “idea of Pakistan” working but that the model of growth the country had adopted was also producing better results than the Indian approach to economic development. A number of foreign analysts agreed. Several books were published by the members of the Harvard Development Advisory Service, the Development Advisory Service, detailing and applauding the approach adopted by the country.22 In that period, Pakistan was able to close the economic gap between itself and India in terms of the income per head of the population. Briefly its per capita income in purchasing parity terms overtook that of India. However, the Pakistani circumstances changed quickly. Why that happened would be analysed in greater detail in a later chapter.

Now Pakistan is South Asia’s sick man. Its political system is less well developed than that of most of its neighbours; its economy marches to the brink of bankruptcy and disaster every few years, only to be saved by foreign helping hands; and its very existence is threatened by an Islamist insurgency that is pursuing its own and not national interests. In this situation, the country has to recognise that its survival as a nation state as well as its economic and social future lie in pursuing an entirely different set of objectives and strategies. An integral part of this has to be close and cooperative economic relations with India, the country with which it has had several long-running disputes.

It would help Pakistan if those who lead it, including the military that has played such an important part in its politics and in its economic life, recognise that the country should assign a high priority to developing a framework within which relations with India could be recast. This could be done in the context of a regional arrangement that initially seeks cooperation in economic matters, to be expanded later to include other areas. The experience from other parts of the world shows that smaller countries benefit from regional associations centred around an anchor economy. For South Asia, India is such an economy. This works not only for the developing world but also for the world’s developed regions. Mexico has derived enormous benefits from the North America Free Trade Area, much more than the arrangement’s largest and richest member, the United States. In Mercosur, a trading arrangement centred around Brazil has benefitted smaller countries such as Paraguay and Uruguay. Even Argentina, after initial hesitance, has warmed up to the idea of Mercosur. Such an arrangement already exists in the form of the SAFTA which was launched in 2006. However, the SAFTA has made little progress in bringing the South Asian countries together. How it can be strengthened is an important part of this work.

Possible Catalysts for Bringing Peace in South Asia

Given South Asia’s troubled history, it may be exceedingly difficult for India to take the lead in developing a regional outlook to replace the country-centric approach in place today, and re-position the region firmly in the changing global system. Some of the smaller countries in the area may not be very willing to have India play the leadership role in organising South Asia. As the political theorist Hedley Bull wrote several decades ago, “the deepest fears of the smaller units in the global system are their larger neighbours.” If India is unable to provide the lead, this role could, in theory, be played by a country that has a strong strategic interest in the region and is in favour of having a regional approach to guide its relations with the rest of the world. Four countries could possibly be cast in that role – the United States, China, Russia and Saudi Arabia. Their intervention may be welcomed by the smaller countries but would not be acceptable to India. The reasons for India’s unwillingness to countenance the presence of any of these players on the South Asian stage are based in its belief that the region is its “sphere of influence”. While New Delhi does not a yet feel that it has the political, economic and military strength to project a Monroe Doctrine of its own concerning South Asia, I believe, it thinks that an outside catalyst would only reduce its growing stature. For different reasons, the four countries mentioned above would contain Indian ambitions in the region.

Even after the fundamental transformation of American-Indian relations during President George W. Bush’s second term (2005-09) when Washington and New Delhi signed a pact that allowed India a near-formal position in the restricted club of nuclear nations, the Indians are not willing to play the second fiddle to the United States in South Asia. As Gideon Richman of the Financial Times wrote in an article published after the 2009 Indian election results were announced, “India is a major power with its own interests and its own distinct take on the world. It will not fall automatically in line with Western policy.”24

China would be an even greater problem since its rapid economic and military rise in the last quarter century poses a challenge for India to which it still does not know how to respond. Admitting China as an arbiter in South Asian affairs would present a challenge for India which it would find hard to stomach. After the spectacular growth of the Indian economy in 2003-08, where the growth rate in its GDP averaged close to nine percent a year, the country considers itself on par with China. It may be a competitor but certainly not a collaborator in South Asian affairs. There are many influential voices in India, including those belonging to India but operating from outside the Indian borders, who believe that the Indian model of development which is based on democratic decision-making is much superior to that of China. The Chinese political system will find it difficult to absorb the strong internal dissensions like those that almost tore the country apart at the time of the Tiananmen crisis of June 1989. This view is powerfully articulated by the Nobel Prize winning economist of Indian origin, Amartya Sen. This became abundantly clear when the Indian emphatically opposed the Obama administration’s attempt to insert the United States in the machinations over the long-running Kashmir issue as part of its strategy to deal with Islamism extremism in the border areas between Afghanistan and Pakistan.

The much weakened Russia once had strong interests in South Asia for more than a century. It played the “Great Game” with Britain as the two European imperial powers were competed for influence in the Asian mainland. The British departure from the area eased the pressure on Russia which by then had changed into the Soviet Union. The pressure was eased but Moscow did not lose interest in the area. Aggressively pursued by Jawaharlal Nehru, India’s first prime minister (he was in that position for 17 uninterrupted years from 1947 to 1964), the Soviet Union first served as a model of economic growth that the first generation of India leaders, Nehru in particular, found very attractive to follow. Moscow was also a counterpoint to the growing influence of Washington after the Second World War. Although Franklin Roosevelt, the American president, was very supportive of the Indian independence movement, Nehru kept his distance from the United States. Temperamentally, Nehru was not an aligner. His role as one of the leaders of the Non-Aligned Movement (NAM) served Nehru’s purpose well and he ended up becoming a bit of a thorn in the American side. Although the “if you are not with us, then you are against us” approach to foreign policy was to be articulated clearly as America’s strategy by President George W. Bush in 2001 following the 9/11 attack on the United States, even in the early post-World War II period, Washington did not look kindly at those who did not align themselves closely with its world view. The containment of the Soviet Union and halting the spread of communism was an important part of the American world view of that era. Nehru’s India did not share that outlook. The Soviet Union took advantage of the Indian position and saw the NAM as a movement for a loose association with Moscow. India was to become a strong associate of the Soviet Union right up to the point of its dissolution in 1991. Pakistan, on the other hand, went in the opposite direction and became closely aligned with the United States to the point of joining two Washington-led pacts, the South East Asia Treaty Organization and the Central Treaty Organization.26 Because of this history, Russia, the successor state of the Soviet Union, is not seen as a neutral player in South Asia. It is unlikely that it could serve as the catalyst for bringing about a change in the South Asian mindset.

Saudi Arabia is the fourth country in my list of possible catalysts. It has many interests in the region. South Asia has the world’s largest Muslim population estimated at about 475 million out of a total of between 1.4 to 1.6 billion people of Islamic faith. The Saudi Arabian monarch, currently King Abdullah, counts the “keeper of Mecca and Medina”, Islam’s two holiest sites, in his official title. However, given that the rise of extremist Islam is one of the most serious problems faced by the South Asian subcontinent at this time, Saudi Arabia could not possibly be the catalyst for change. It does, however, have some other credentials as well. It is now home to millions of South Asian workers who supply a number of essential services to the Kingdom’s citizens in addition to working in its factories, transport system and on the thousands of constructions sites. The workers send tens of billions of dollars as remittances to the various South Asian countries. The Kingdom is also an important source of oil for South Asia, sometimes provided on concessional terms. This has especially been the case for Pakistan. At the “Friends of Pakistan” meeting held in Tokyo on 7 April 2009, where the cash-strapped country secured pledges amounting to more than US$5 billion, Saudi Arabia was one of the half dozen important donors. However, the reason that has brought the Kingdom closer to the region – the religion of the state – is precisely what will make it difficult for the country to become an arbiter.

The conclusion I would draw from this analysis is that in creating a working economic and political region, South Asians will have to find the leaders from within their own system. This is precisely what happened in the case of some of the other successful regional enterprises. The European Union owes its present structure and strength to a few visionary leaders from France and Germany who, after seeing their countries at war for decades if not for centuries, decided that regional integration was the only way forward. Beginning hesitantly, they have been able to create by far the most successful politico-economic region in modern history. The evolution of the European Union has pushed back crude nationalism, and as it advances, the nation-state will slowly retreat in importance.

South Asia may be getting ready: A Realignment of the Stars

The alignment of stars may have changed in South Asia in the 15-month period between February 2008 and May 2009. There is some hope that the countries in the region may have withdrawn from the move towards the accommodation of religion in politics and arrested the drift towards regionalism in the area’s larger countries. These changes provide some hope that the South Asian countries may begin the work towards greater economic integration. This began more than a decade ago when General Zia ur Rehman, then president of Bangladesh, persuaded the other countries of the area to begin the process of regional cooperation. In 1986, seven South Asian countries – Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka – came together to form the South Asia Association of Regional Cooperation (SAARC). The SAARC was a modest start but with ambitious goals. It was agreed that the countries will begin work on creating a free trade area in the region and eventually a mechanism for resolving economic and political disputes among the countries of the region. Kathmandu, the Nepalese capital was selected as the SAARC headquarter. The leaders also agreed to hold a summit every year, rotating the location among the member countries. But for 18 years, no significant progress was made, largely (but not entirely) because of the continuing hostility between India and Pakistan. In 1999, Pakistan’s army launched an operation in the Kargil area in northern Kashmir which almost led to a war between India and Pakistan. It took active intervention by President Clinton to diffuse the situation. The American president invited Sharif, Pakistan’s prime minister, to confer with him on 4 July 1999.27

The process of healing in South Asia may have begun in 2008-09 with a number of positive developments in the countries of the region. The stage may have been set for addressing their long-enduring differences. The beginning of real change in South Asia can be dated 18 February 2008 when Pakistan held elections and began the process of transferring power from the military to the elected representatives of the people. Such transfers had happened before, as in 1971 when the military surrendered power to Zulfikar Ali Bhutto whose Pakistan Peoples Party had won a decisive victory in West Pakistan in the elections held a year earlier. However, Bhutto was overthrown by the military in July 1977 which went on to govern until August 1988 when General Zia-ul-Haq, its commander, was killed in an air crash. Eleven years of civilian rule followed but the military retained its influence. It was behind the four dismissals of elected prime ministers during this period. The military returned to power in October 1999 and stayed in place for nearly nine years. It was only after President Musharraf resigned from office in August 2008 that civilian rule came back. Is the return of the elected representatives of the people a permanent change in the Pakistani landscape?

Four factors indicate that the change this time around may prove to be more durable. The first is the maturation of the political parties that seem prepared to resolve their many differences without calling upon the army to intervene. It was these invitations in the past that created a space the military was happy to occupy. Second, after a remarkable campaign that lasted for more than a year and half, Pakistan seems on the way to evolving a system of independent judiciary which may no longer be prepared to countenance military interventions on the basis of the “doctrine of necessity”. According to this doctrine, it was not prudent for the judiciary to intervene and reverse a political order which may not have been established in a strictly constitutional manner. The third development is the rise of an aggressively independent media that has shown impressive resilience even when faced with serious executive pressure. The fourth factor, of course, is the strength of the civil society. This was instrumental in restoring the judges of the Supreme Court and the Provincial High Courts who were summarily removed by President Musharraf in the twilight period of his nearly nine years of rule.

Another important change has also occurred in Pakistan. In early May 2009, the political leadership of Pakistan ordered the military to root out Islamist extremism from the country’s northern areas, in particular, from the “settled” districts of the North Western Frontier Province (NWFP). The administrative division of Malakand in the east of the NWFP was being run over by a group that had aligned itself with the “Taliban of Pakistan”. Using the district of Swat as the base, they had begun to fan out to other areas of Malakand. In Swat, the NWFP government had agreed to the militants’ demand to reintroduce the Sharia system of justice. This agreement was seen as a license by the militants to extend their influence to other parts of the NWFP and eventually they hoped to take over Punjab, Pakistan’s most populous and richest province. In a detailed five-hour-long briefing given on 15 May 2009 to the political leaders representing all the parties, General Ashfaq Pervez Kayani expressed confidence that the army’s mission will be completed in not “months but in weeks”, after which the police will be called in to maintain law and order.

This development has brought relief not only to a large middle class in Pakistan which is mostly secular in outlook. However, it has also brought hope to the Indians who had suffered many acts of terrorism inspired by the militants trained by religious groups operating from Pakistani territory. Developing a force of jihadis was once a part of the strategy pursued by the military in Pakistan. It was also supported by the United States in the 1980s when it needed exceptionally committed foot soldiers to fight the Soviet Union’s occupation of Afghanistan. That such an approach would have unattended consequences such as the spread of the militants’ ideology in Pakistan was not realised at that time.

There were some positive moves in some other South Asian countries that may also change the political environment in the region and set the stage for the development of a regional outlook. The military in Bangladesh, having briefly intervened in the political life of that country, went back to the barracks after supervising another general election that brought the Awami League back to power in Dhaka. The Awami League, headed by Sheikh Hasina Wazed, the daughter of the country’s founding father, has a more secular outlook compared to some of the other large parties in the country. It is also in favour of close relations with India. The King of Nepal was persuaded to surrender power to an elected parliament. In May 2009, the Sri Lankan army declared victory over the Tamil Tigers and appear to have ended the 25-year long civil war in the country.

This period of positive change in South Asia continued with the return of the Congress Party of India in the elections held in April and May 2009 and the reappointment of Dr Singh as prime minister on 22 May 2009. The Congress Party was expected to win but the scale of its triumph caught most observers and political analysts by surprise. What is particularly significant is the reversal of the fortunes of the religious parties that had campaigned aggressively for the creation of distinct Hindu entity in India. According to one newspaper analyst, “what the elections have shown is that Congress is still the only major party that plays to India’s core instincts, complete with all its warts.” The opposition was not helped by the anti-Muslim rhetoric of Varun Gandhi, Rahul Gandhi’s estranged cousin. The latter is likely to be the country’s prime minister in a couple of years. The Congress’s win indicated that “India’s majority Hindus tend to be deeply religious but blend their religiosity with a fundamental tolerance”.28

In the absence of survey data that would assess the sentiments in the various countries in the region about their attitudes towards one another, we can only speculate about the direction in which South Asia may go in the years and decades to come. All the events discussed above may possibly have created an environment in South Asia that lends some dynamism to the process of regional integration that has at best made a hesitant progress for more than a decade. If that were to happen, South Asia may be getting ready to participate in the global economic system that offers it opportunities which it has not fully exploited.

These eight themes will be woven together to tell the story of South Asia from the time it attained its current political shape to the present and where it may go in the future. The last will depend upon what kind of public policies are adopted by the countries in the region. There is an emerging consensus among the analysts from several disciplines which suggests that the American domination of the global system will end in the near future, if that has not happened already.29 The “rest” are rising. Demography, an often ignored determinant of change, favours South Asia as does its location close to areas that have surpluses of energy and adjacent to East Asia, currently the most dominant player among the “rest”. The progress towards this post-American era would have been less chaotic had it not been interrupted by the great financial and economic crisis that started last year and is likely to turn a corner in 2010. One consequence of this crisis is the redefinition of the role of the state, an area in which the countries of South Asia have taken the lead. However, South Asia’s future depends on its ability to resolve differences that persist among the countries of the region. The most significant of these is the dispute between India and Pakistan that has a long history and cost both countries blood, tears, money and a series of lost opportunities. What complicates this relationship is the fact that both countries have large arsenals of nuclear weapons. As Richard Cohen, an American columnist, put it recently, the “two countries have what it takes to blow each other to kingdom come. They also have the reason. They hate each other.”30 However, hate is not permanent feature of relations among nations. The Europeans have demonstrated this vividly. India and Pakistan also have the reason to work together. Without a workable South Asian economic region, the countries will lose out in a rapidly changing global economy. There are immense opportunities available but they will only come South Asia’s way if the states in the region place economic benefits above national politics. They must understand that relations among nations are a plus-sum and not a zero-sum game.

NOTES

1 Mr Shahid Javed Burki is a Visiting Senior Research Fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. Mr Burki was the Former Vice President of the World Bank, and the Former Finance Minister of Pakistan. He can be contacted at isassjb@nus.edu.sg.

2 John Strachey, India, London, Kegan, Paul, Trench, 1888, pp. 2-5.

3 This was the year when the Indians rose up in arms against the British. The rebellion was confined to the north-eastern part of the territory that the East India Company owned by stockholders in London now possessed in the South Asian subcontinent. It was cantered around Delhi the capital of the fast fading Mughul empire and the province now called Uttar Pradesh. The British called the uprising The Great Indian Mutiny; the Indian historians called it The First War of Independence.

4 The year the British departed India leaving the government in the hands of two successor states. Pakistan attained independence on 14 August 1947, a day earlier than India. The earlier date for Pakistan was to accommodate the travel schedule of Lord Louis Mountbatten who was to administer the oath of office to the officials of the two new governments.

5 Much has been written about the Pakistan movement and how, within a short period of time, Muhammad Ali Jinnah, the father of the Pakistani nation, was able to persuade the British to leave the reins of one part of British India in his hands. At the same time, he was able to convince Mohandas Gandhi and Jawaharlal Nehru, two towering heroes of the Indian independence movement, to accept the idea of partitioning the Indian “motherland” and agree to live with two parts of the Muslim state of Pakistan on either side of independent India. The first full account to appear in print of the movement that created Pakistan is Khalid bin Sayeed, Pakistan: The Formative Phase, London, Oxford University Press, 1964. Chaudhi Muhammad Ali, Pakistan’s Finance Minister from 1951-54 and briefly the country’s Prime Minister, was a senior official in the colonial government. Once the British declared their intention to leave India, Ali was deputed to help the government in yet-to-be born Pakistan to be organised. He reflected on his experiences in a book, Chaudhri Muhammad Ali, The Emergence of Pakistan, New York, Columbia University Press, 1967. Later, Ayesha Jalal, The Sole Spokesman: Jinnah, the Muslim League and the Demand for Pakistan, New York, Cambridge University Press, 1985, presented a revisionist theory according to which Jinnah did not really want to create an independent homeland for the Muslims of British India but used the Pakistan campaign in order to achieve a better deal for his community in independent India. However, the Hindu leaders called his bluff and gave him what he himself described as a “moth eaten” Pakistan.

6 Sunil Khilnani, The Idea of India, New York: Farrar, Straus, and Giroux, 1997, p. 4.

7 The term is borrowed from Fareed Zakaria, The Post American World, New York, W. W. Norton, 2008.

8 See for instance, the important contribution made by Zakaria in his recent book, The Post-American World, New York, W.W. Norton, 2008.

9 See the Club of Rome, Limits to Growth.

10 See Lester Brown, Seeds of Change.

11 Thomas L. Friedman, Hot, Flat and Crowded: Why we need a green revolution and how it can renew America, New York, Farrar, Straus and Giroux, 2008, p. 29.

12 The World Bank, World Development Report: The State in a Changing World, Washington, D.C., 1997.

13 Ibid.

14 For the way the Pakistani military has evolved its thinking since the country’s founding in 1947, see Shuja Nawaz, Crossed Swords: Pakistan’s military and the wars within, Karachi: Oxford University Press, 2008.

15 The story of the emergence of the Taliban as a political force that was able to use a fierce ideology to turn a ragtag army of young students into a conquering force that occupied all of Afghanistan (including Kabul, the country’s capital) save a small bit of land in the northeast that remained under the control of a group of warlords that called themselves the Northern Alliance, is well told in several books, including Ahmad Rashid, The Taliban and Steve Colls, The Ghost Wars.

16 The boundary was named after Sir Mortimer Durand, a British official, who drew it on the map to divide the areas over which the British administration operating out of New Delhi had established some control and the areas that clearly were still under Kabul’s influence.

17 In a study prepared for the United States Institute of Peace, I argued that a different approach could set the stage for the eventual solution of the Kashmir problem but it would need the recognition that both Pakistan and India – Pakistan much more than India – had suffered enormous economic losses for continuing to keep the issue alive. See Shahid Javed Burki, Kashmir: A Problem in Search of a Solution, Washington D. C., United States Institute of Peace, 2007.

18 Somni Sengupta, “Tamils nightmare run for the Indian coast”, International Herald Tribute, 6 May 2009, p, 12.

19 Joe Leahy, “Sri Lankan conflict intrudes of final round”, Financial Times , 14 May 2009, p.5.

20 The study was published by the USAID in October 2005. See South Asian Free Trade Area: Opportunities and Challenges, Washington D. C.

21 The term was coined by the late Raj Krishna who briefly worked at the World Bank.

22 Among the books written by the Harvard Development Advisory Service, the most widely read was by Gustav F. Papanek, Pakistan’s Development: Social Goals and Private Incentives, Cambridge, Mass. Harvard University Press, 1967.

23 Hedley Bull, The Anarchical Society: A Study of Order in World Politics, London, Macmillan, 1977.

24 David Pilling, Indian democracy has an ugly side”, Financial Times, 19 May 2009, p. 11.

25 See Amartya Sen, The Argumentative Indian.

26 Pakistan’s reasons for taking that route are well spelt out by Field Marshal Muhammad Ayub Khan, the country’s president at that time. See his Friends Not Masters: A Political Autobiography, London, Oxford University Press, 1969. This policy stance was opposed by Ayub Khan’s own foreign minister who, having resigned from his position in 1969, when the military government was celebrating its “decade of development”, went on to put forward his own theory of foreign policy for a relatively small nation such as Pakistan. The approach he advocated was much closer to the one Prime Minister Nehru had followed in India. See Zulfiqar Ali Bhutto, The Myth of independence, Karachi, Oxford University Press, 1969.

27 The story of those negations is told in great detail by Strobe Talbot who as Deputy Secretary of State participated as a member of the American team. See Strobe Talbot, Engaging India: Diplomacy, Democracy and the Bomb, New York, Random House, 2002.

28 Ravi Velloor, “Congress Party played its cards right”, The Sunday Times, Singapore, 17 May 2009.

29 A good representative of this line of thinking is Andrew Bacevich, The Limits of Power, The End of American Exceptionalism.

30 Richard Cohen, “In a nuclear minefield”, The Washington Post, 19 May 2009.