Thursday, April 23, 2020

POST COVID-19: EMERGING GEO-STARTEGIC TRENDS AND IMPACT ON ECONOMY AND CORPORATES USI Website Apr 2020


POST COVID-19: EMERGING GEO-STARTEGIC TRENDS AND IMPACT ON ECONOMY AND CORPORATES
By
Col Akshaya Handa
Introduction
Geo-strategic trends have nearly always impacted the national and corporate economics. Turbulent times more often than not, change the existing geo-strategic trends and lead to unexpected results, sometime turning earlier expectations on their head. Corporates too need to be nimble enough to react to the changes, for seeking the old, often relegates them to dinosaurs. The ongoing CoVid-19 pandemic has unleashed one such phase. A world struggling with reduced growths has effectively been pushed into a recession by circumstances affecting supply, demand and market simultaneously, a situation with no precedence. Global leaders are under suspicion of being unable or incompetent of looking after their populations and of fudging data. Whilst populations are struggling to keep body and spirit together, the blame game has begun and accusations & suspicions are rampant. Social media is making its own contribution by adding fuel to fire. The world will sooner or later get over this Pandemic – modern science will ensure that – but the economic realignment that it will cause, will have much larger repercussions than just recession. 
Hyper localization and counter globalization were a reality even before the pandemic. Many commentators trace its origin to 2010 when China abruptly halted the export of rare earth ores, salts and metals to Japan, a primary consumer, as a response to the disputed interests in the East China Seas. Since, then large numbers of small and large trade wars have occurred between nations, culminating in the mother of all, US – China trade war. These also catapulted many nationalist leaders to power across the globe, seeking to promote local interests while swearing by a globalised world. The closed borders caused by the pandemic and the consequent supply chain disruptions will only exacerbate the trend more.

Likely Geo-Strategic and Economic Trends
General
CoVid – 19 may not be totally eliminated any time soon. As and when the vaccine is available, it will be costly and will take time to reach everyone. Building herd immunity will also be time consuming. The difference would be in that, the disease will be treatable, not threatening to overwhelm the medical resources and fatality rate would fall, albeit; isolation of patients and contacts, will still remain the norm. This may lead to an era where organizations are faced with disruptions when human resources are suddenly unavailable for short periods.
Multilateral organisations like the WTO will be over stretched to resolve disputes and implement agreements. With the effort of each country to boost its own economy, if need be, at the cost of others, quantum of disputes before such organisations will rise. Dispute settlement may therefore be delayed and may become unsatisfactory. It may further become a problem if major donors hold back funding in response to adverse decisions.
Governments’ internal legitimacy as well as international standings will depend upon their ability to ramp up the health services, rejuvenate industrial production, enable least restrictive control measures and the rates at which they manage the recovery of the local economies.
Surveillance technologies and their demonstrated power to fight pandemics will be more widely accepted than earlier. Artificial intelligence and surveillance would provide a potent dose both for the economy as well as industry and commerce.
China
Suspicion of China and accusations will grow. The world wary of their dual currency system and BRI fuelled debt trap will seek but get few answers of the earliest days of the Pandemic. Its behaviour thereafter – of selling medical equipment donated by Italy back to the latter and territorial forays in South China Seas against both Vietnam and Philippines will exacerbate the same. It will be viewed as profiting from the pandemic. Albeit, its economic strength will remain a factor, when, nations deal with it individually. Though an increasingly wary world will attempt to seek and build alternates.
In the regions where China has already built capacity through BRI (Latin America, SE and Central Asia and parts of Africa) China will gain ground and attempt to monetise it through control over markets and resources.
Developed World
The industrial deficiencies of the developed world including US and Europe have been exposed. Major policies changes will be sought by their populations who so far have borne the brunt of the pandemic. Regime changes in a few are a distinct possibility.
The Eurozone has already seen the return of borders in its attempt to contain the spread. Simultaneously, mutual mistrust is rising as the rich North is increasingly seen as unwilling to finance the suffering South. While, its limitations on economy (which was its main business are exposed) the lack of availability of uniform health facilities too has become an issue. Undoing the damage to the concept of EU, will take an effort larger than just battling the pandemic.
Middle East
Governments in Middle East will face multiple pressures – the drop in oil incomes will impose budgetary constraints on the one hand while the inability of some to tackle the pandemic will raise questions on their legitimacy. Add to it the world wary of those considered supporting terror or their ideology will not be automatic partners to a world closing its borders. The reduced consumption of oil with emergence of alternatives and reduced travel will add to it. To strengthen legitimacy where required few may turn to ideology while some may turn to increase in terror activities.
Asia
Asia is likely to recover faster than the rest of the world. East (especially South Korea and Taiwan) with its robust response, SE with its response and population surveillance measures and South Asia with its inherent market and success in viral containment may well the leaders. However, with high debt to GDP ratios of many, may create problems and would need to be watched.
National Economies
Increased unemployment and lower budgetary availability with governments will be a stark reality. Governments will have to make the difficult choice between bailouts to the unemployed for immediate relief or subsidising the employment creating industries for long term benefits. The recovery is more likely to be a fattened U requiring repeated stimulus by the governments. Cash therefore will be king not only for corporates but also the treasuries.
National and local economies will become much more important than global recovery. Countries will simply have less capacity – both in time of resources and time – to cooperate on economic interests. With local economies strained, Governments will be hard pressed to invest capacities in any problem not involving national interests.
All nations will try to rejuvenate their own economies and promote national exports by any means. IMF chief has already said that the world is into a recession. To boost GDP and employment at such times, world governments would have to employ all tools in their arsenal. Import substitution and export promotions would certainly be considered seriously.
Governments will feel the need to raise additional resources and for this they are likely to look towards non-taxed areas as also resort to additional printing of money. The latter, unless micro-managed, may lead to inflationary pressures and additional pain for the under stress populations. Therefore offshore companies accessing the local markets and contributing little to the national kitty will be considered albeit; this will raise tensions with other nations.
Calls for protection of the local industry will increase. As demand for products reduces, sales will be under pressure. Simultaneously, certain nations may directly or indirectly subsidise their exports and further pressurise local sales and by extension the local industry. As the issue will directly affect employment, calls for protection of the local industry will rise. Very few, if any, national governments will be able to resist them and buy and spend locally will be the order of the day.
Export oriented economies will struggle to find markets for their goods. Countries like China and Germany produce much in excess of what their local markets can consume. Whenever, demand for their products reduces, their economies have suffered. This was a painful lesson learnt during the 2008 recession. To protect their markets these countries have adopted various tools. While the EU market became the panacea for Germany, China reacted with BRI and RECP (Regional Comprehensive Economic Partnership). While the former ensured market access and employment; the still under negotiation latter, aims to reduce tariffs. Export oriented countries are likely to push these efforts to early conclusion while the rest are likely to resist them and wrest more concessions.
In a bid to rejuvenate the national economies, countries who have given loans, may seek better returns. This maybe, in terms of redemptions, takeover of assets or, cornering critical supplies. In some cases, it may lead to interference in national sovereignty. China with its BRI, already has put in place a structure wherein a more than a few countries are in its debt. In the case of Hambantota, it has already displayed an inclination of taking over assets if returns are unsatisfactory.
Countries with high debt to GDP ratios as also high economic dependency on one nation are likely to suffer the maximum sovereignty erosion, especially if investments from the latter have been taken for assets. The higher the debt level, the more costly and economically damaging would social distancing be. Pressure would exacerbate, if assets are already owned by a foreign power and / or it has large number of foreign origin first generation citizens running or owning businesses. The likely candidates can be found in South Asia, Africa, Europe and South America.
While the secular commodity super cycle is over, certain commodities (like rare earth minerals, lithium etc) – which have near monopoly availability in the market – will see artificial scarcity and therefore rise in prices. For the balance commodities, supplies would increase as the countries attempt increasing their exports and, therefore further reduction in prices. 
Sovereign debt defaults would increasingly be likely. Lebanon and Argentina have already defaulted, others may follow. These may lead to flight of capital from other nations too as the financial institutions try to recover their investments in time. Commodity exporters engaged in dollar funding are likely to be the most vulnerable as commodity prices decline. Many others who borrowed substantially in dollar may also feel the heat in meeting their debt obligations.
These trends may trigger realignments where blocks of interdependency are defined by proximity, natural resources, markets access and security interests.
Banks holding large debts may well be faced with increasing NPAs. To save the savings as also the banks, nations and central banks may try to print their way out of the problem. This would fuel inflation and dampen the effect of lower commodity prices.

Implications for Corporates
Intermittent shutdowns involving opening up, returning to work followed by a repeat shutdown is likely to be the order of the day.
Sudden non-availability of some personnel may continue for a few years at the minimum. While the latter can be managed for a few, by permitting remote working, it cannot become a norm for the common blue collar employee. Contractual employees not provided adequate security in such times may drift away to other jobs, if an option is available, leading to loss of talent. The trend is already visible in terms of non-availability of labour for the harvest of standing crops.
Supply chain disruptions would continue to be plague most organisations. Just in time supply chains would face the maximum pressure necessitating certain minimal levels of stocking. Albeit, the lower prices of commodities would certainly help cut costs. Availability of multiple suppliers too would be a necessity so that temporary shutdown of one does not lead to a cascading effect for industries higher in the supply chain.
Social distancing norms will have to be followed for at least the medium term. Industries wanting to return after lockdowns would have to ensure them both on and off sites. These would require additional investments. Smaller businesses, in the supply chain of the industry, may not have the fund availability and would require, help from the bigger players higher up in the chain.
Small businesses which invariably are the least liquid and yet an important component of both the supply chain and market access mechanisms are likely to feel the maximum heat. They would therefore require help not only from the Government but also the industry and companies they support.
Within an industry too small businesses will lose to the bigger ones leading to creation of virtual monopolies or duopolies. Timely legal mechanisms and Governmental actions would have to be used to avoid such situations.
Manufacturing would increasingly move towards automation. This would reduce the scope for both small businesses as well as the unskilled employment. Skill upgradation for industry requirements would therefore become essential.
As the confidence in technology increases, the companies dealing in automation, robotics and Artificial Intelligence will see an opportunity. This would change the contours of education as the demand for these skills increase.
Reduced demand and protection for local industries would imply that exports would be under stress. Corporates catering for the local markets, with efficient local network and last mile connectivity would reap the benefits.
Corporates with debt portfolios requiring interest outgo larger than the earnings would be under pressure and may not be able to service their debt. This in turn would impact the lenders and unless the national governments and central banks intervene (by either printing more currency and /or open market operations) the individual savings maybe adversely impacted.
A sense of suspicion would remain with respect to the nations which are suspected to have hidden or fudged data regarding this pandemic. Corporates are likely to be discouraged by their national governments to have too large a dependence on such nations.
Corporates catering for off shore markets would try their best to regain and increase their market share even at some additional costs. For this they would be ready to accept additional restrictions or regulations, if any are imposed by the local governments.
For nations like India who missed the manufacturing cycle and are striving to profit from it, this would be a good opportunity to seek local manufacturing as well as increased local content, from the off shore manufacturers. Large markets will be able to leverage the same and ensure not only employment but comparatively earlier recovery compared to the rest of the world.
Business travel will reduce and this would adversely affect the travel industry. Simultaneously, the travel industry would voluntarily and possibly under legislation, incorporate medical norms which would raise its costs.

Conclusion
Turbulent times more often than not cause upheavals in the Global order. Simultaneously they provide an opportunity to both nations and organisations, which if availed, can help them leapfrog to a higher pecking order. The ongoing CoVid pandemic is one such upheaval. Recognising and utilising the trends to leverage the strengths and overcome weaknesses can help growth and recovery in these times of recession.



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Tuesday, July 28, 2015

Article: What The Chinese Stock Market Crash Foretells: USI Jul 15


Introduction
The Shanghai Composite Index soared 150 per cent over the past year before shedding 30 per cent in a little more than three trading weeks[i]. For a world concerned about Greece, it was another plausible jolt. The hawks predicted death of the Chinese economy. Rest were a little more circumspect, explaining it as a routine bull-bear cycle of a stock market, the flip side of which was that they ignored the market surge even while economic growth diminished – an unsustainable situation in any economy. Amongst the various arguments the rollercoaster has exposed chinks in the Chinese economy, uncontrolled, which can adversely affect their society and the neighbourhood in turn.
China’s Economy
Experts believe that stock market returns are a strong predictor of GDP growth[ii] and its macro trend contextually to the economy and its role therein needs understanding. In brief, markets rise when money flows in and fall when it flows out. The aspirations and fears which cause this in/out flow therefore need to be understood.
            Social instability in China, unless controlled, potentially can overthrow regimes and fragment China[iii]. The present regime has tried to maintain it through 100 per cent employment, low inflation[iv] and control over the Armed Forces. The three are thus critical for a stable China.
            To maintain full employment China needs to create roughly 10 to 12 million[v] new jobs annually. It is estimated that a minimum 7 per cent annual growth is required for China to create 10 million jobs and, its tolerance below 6.5 per cent levels is questionable[vi].
            Economically, China essentially follows what is called the East Asian Model. Plagued with high population densities and labour intensive agriculture, these societies have suffered unrest due to governmental failure to maintain employment. Hence, governments’ have aimed at harnessing savings and controlling the financial systems to ensure credit expansion for infrastructure, industrial capacity expansion and becoming export-oriented manufacturers[vii]. The problem is that the model discourages development of domestic consumption[viii]. Therefore during recession in view of weak demand, increased investments become unsustainable. Such recessionary phases hence require a transition to stabilise and boost domestic consumption while allowing tapering off of fixed investments.
            China too has an export economy, in need of such a transition. For long, investment and exports drove the economy[ix]. It was thus dependent upon the world's willingness to buy, a direct outcome of price differential due to its low wages and interest rates[x]. The world economic slowdown and rise of wages in China led to decreased exports. China thus needs to boost its domestic consumption. This requires a raise of average incomes making non-essential purchases feasible and instilling a sense of financial security to convince people to spend[xi]. The options to achieve this are either a ‘rise in wages’ and/or ‘interest rates on savings’ or ‘investment opportunities’. As the former undermines its exports, China chose the latter – specifically real estate and stock markets[xii]. Stock markets further gained importance due to the protracted decline[xiii] in real estate.
Non-Performing Assets (NPAs)
The above has occurred in the backdrop of rising NPAs in its banking system. The investment-led growth strategy of China has implied that each downturn has been confronted with increased investment. Apart from government revenues, banks were encouraged to lend to companies, especially state owned enterprises (SOE's)[xiv] – who made little attempts to improve efficiency. This increased the risk of loan default. When NPA's of Chinese banks became untenable, these were removed from the banks’ balance sheets and placed in special firms called Asset Management Corporations (AMCs). This allowed banks’ balance sheets to be cleaned and raising of new funds by them.
            The AMCs were supposed to recover the loans by 2009; however, the actual recovery was limited to 22.4 per cent[xv]. Hence, in 2009 the debt was rolled over for another 10 years. Around the same time faced with another financial crisis, credit was again increased. A S&P study[xvi] estimates that NPAs in Chinese Banking Sector alone would be RMB 2.7 trillion in addition to more than RMB 3.5 trillion held with the AMCs[xvii]. This works out to 5.6 per cent of the total Chinese economy[xviii]. Controlling this starves the small and medium enterprises of capital, even whence there is no dearth of liquidity[xix], thereby affecting their employment generation capability.
            Majority of these debts are likely to come up for repayment around 2019. While Beijing holds large FOREX reserves using these to repay local debt would imply their conversion to local currency which in turn would lead to an increase in money supply and consequently inflation.
          Acknowledging the need to curb wasteful state-led investment, reducing the state-sector's reliance on cheap financing and improving the ability of banks to price risk[xx], the CCP in its 2013 conclave, declared that it would let market forces play a decisive role in allocating resources[xxi].  Hence, the government promoted the stock surge with an aim to boost local consumption, make private capital available for industry and also reduce NPAs[xxii]. Hence, even though it is small by world standards[xxiii], a bear run in its stock market can harm the Chinese economy by hampering attempts to increase domestic consumption. In turn it adversely affects inflation and capacity to generate employment – either of which can lead to social unrest.
            That Beijing is sensitive to the issue can be garnered from the large number of steps it has taken to try and stem the fall. Interestingly, what is different from the rest of the world is that the interventions are directly into the markets with little effort to address the underlying causes. These include: -
(a)       Cutting benchmark interest[xxiv] and reserve requirement ratios[xxv].
(b)       Loosen restrictions on margin loans[xxvi].
(c)       Government backed purchases - $19.4 billion funds from Brokerage Association in addition to Sovereign Wealth fund and pension fund purchases[xxvii].
(d)       Buyback of shares by SOEs[xxviii].
(e)       Investigate potential market manipulation and speculators[xxix].
(f)        Prosecute those spreading rumours[xxx].
(g)       Halt trades on many counters[xxxi].
(h)       Suspend IPOs[xxxii].
Social Unrest
Gini coefficient is commonly used as a measure of inequality of income or wealth[xxxiii]. It is believed by Social Scientists that a Gini coefficient higher than 0.4 and inching towards 0.5 can lead to social unrest and above 0.5 a major social upheaval may follow. 
          Data released by China’s National Bureau of Statistics in the third week of Jan 2014 suggested that the Gini coefficient for 2012 was 0.474[xxxiv] up from 0.4248 in 2005 and 0.355 in 1993[xxxv]. The data supports the fact that reportedly between 1993 and 2005 – 4,19,700 incidents of mass disturbances[xxxvi] were reported whence the coefficient rose from 0.355 to 0.4248. It also implies that this trend of mass disturbances would increase as it has worsened further. The high inequity combined with inability to generate adequate employment and inflation would aggravate such disturbances.
          Social unrest in China has often been quelled by the PLA. President Xi Jinping in a speech in Dec 12 said ‘the lesson for China from the disintegration of the Soviet Union is that we must stand firm on the Party’s leadership over the military’[xxxvii]. His statement[xxxviii] is a clear indicator that the Chinese leadership wants to retain complete control of the party on the PLA as also use it to quell unrest. Any increase in social unrest would hence lead to an increased importance for the PLA.
            In the run up to 2017-18, when the new politburo and politburo standing committee are to be elected, PLA leaders would try to correct the imbalance of their representation[xxxix]. Its increased importance by maintaining social stability caused due to a government sponsored economic transition, would translate into a higher assertiveness of PLA leaders focused on achieving their goals. This would not bode well for the neighbourhood. The threat of increased inflation due to repayment of debts in 2019 would make the situation even worst.
Implications
China cannot afford a simultaneous protracted downturn in real estate and/or stock markets. It would hence, continue to intervene and prop up either one or both of these.
            While China is unlikely to be next Greece and collapse, the world has to closely watch for a drop in growth and consequent increase in inflation and/or unemployment. This would only lead to a more assertive PLA.
Conclusion
The Chinese dilemma is that the factors which are causing social unrest are actually the drivers of its economic growth. In a period of economic slowdown, attempts to increase the growth leads to increased unrest while attempts otherwise leads to job losses. Whether the outflow of money from the stock market and the consequent fall in indices reflects concerns about the economy or not, they certainly reflect the economic dilemma of the economy. This has been highlighted by the government intervention. Growth, inflation and unemployment would be key features to watch as they can contribute to rise in unrest and a consequently a more assertive PLA to the discomfort of the neighbours.

End Notes

[iii] Since the time of the Zhou Dynasty the Chinese rulers invoked the concept of the Mandate of Heaven to legitimize their rule. It was believed that a ruler had lost the Mandate of Heaven when natural disasters occurred in great number, and when, more realistically, the sovereign had apparently lost his concern for the people. In response, the royal house would be overthrown, and a new house would rule, having been granted the Mandate of Heaven. Traditionally, rulers were judged by their concern for or indifference towards the people. Government by Virtue and Social harmony were key components of the idea. By implication if a ruler was out of sync with the heavens, then chaos in society was sure to follow. What was feared most in this system was instability and chaos. Instability was the result of any number of factors, including famine, invasion, unfair conscription of labourers and troops, over-taxation, and incompetent, corrupt, or malicious rulers. When conditions become unstable, popular uprisings can result that may prove difficult or impossible to quell. For a detailed discussion of the issue, please see the author’s book ‘China’s Geo-Strategy and International Behaviour’ published through USI by Vij Books.
[iv] After initial opening up in 1979 there have been three major inflationary bouts - 1985 when inflation touched 10%, 1988-89 when it touched nearly 20% and 1993-96 when inflationary pressure touched 25%. Each of these was economically and socially disruptive period the eighties leading to Tiananmen while the nineties leading to shedding of 30 million workers between 1996 – 2000 (See Albert Keidel Senior Associate, Carnegie Endowment for International Peace in his paper ‘China’s Social Unrest: The Story Behind the Stories’). Presently while threat of a runaway inflation is minimal concerns persist over price spikes in critical areas whipping up social unrest.
[v]  https://books.google.co.in/books?id=Zoouvv_4QfUC&pg=PA208&lpg=PA208&dq=number+of+new+job+entrants+every+year+in+china&source=bl&ots=kuS76t9kD-&sig=lYfLyYKd1hJH9MHjevrOqyuuKhI&hl=en&sa=X&ei=HcKeVMKZE4uuuQSHroLgCQ&ved=0CCcQ6AEwAg#v=onepage&q=number%20of%20new%20job%20entrants%20every%20year%20in%20china&f=false
[vi] Wharton Business School Report ‘How China’s Economy Can Weather a Long, Slow Fall’http://knowledge.wharton.upenn.edu/article/chinas-economy-can-weather-long-slow-fall/
[vii] It was also defined as state-led investment in commanding sectors for growth and was export-driven. Seehttp://www.c3sindia.org/economyandtrade/3695
[viii] GDP – the measure of growth – is by definition the sum of consumption, investment, net exports and government spending and is an essential component to study the growth structure of an economy. See http://en.wikipedia.org/wiki/Gross_domestic_product.
[ix] K.Subaramanian  ‘China: External Economic and Financial Relations under the New Leadership’http://www.c3sindia.org/india/3456
[xi] Ibid
[xii] Ibid
[xiii] Ibid
[xiv] The overall scheme was to fund plan programs to promote growth. Bank deposits were diverted for funding them. They were channeled through Development Banks. The National Development Reform Commission vetted the disbursements, which is comparable to our Planning Commission. There are administrative procedures to evaluate the cost effectiveness and sustainability of loans/projects. The Communist Party of China (CPC) and the government keep pressure on the SOEs to fund ongoing projects and also to open new operations in new areas. Credit plans are drawn up in accord with Plan priorities and become the basis for bank lending. In the earlier years, the control was rigid. However, over the years, it has turned into what is called “window guidance.” Counties and Town and Village Enterprises (TVEs) are also associated with the process. This has provided great flexibility and dynamism to project funding and to growth. There is intense competition among Counties, TVEs, etc to seek credit from banks. For instance, when the global crisis struck, China was able to pump in investments valued at $590 billion in a record time and it cushioned the shock within the country and also lifted the global economy. When there is need to curb excessive credit growth, it can be done administratively through banks. At the same time, the system is known to have bred cronyism, corruption, etc. and to overheating. Currently, China is ruing the excess of credit growth and leveraging which is the flip side of its bailout program. See http://www.c3sindia.org/economyandtrade/3695
[xv] http://www.academia.edu/4632107/Public_asset_management_companies_in_East_Asia_-_Case_studies_1
[xvi] http://www.pkusz.edu.cn/uploadfile/2013/1008/20131008052136524.pdf
[xvii] Ibid
[xviii] Which is quoted at $17.6 trillion[xviii] and a conversion rate of RMB 0.16 being equal to 1 USD
[xxii] As it encouraged SOEs to sell equity and retire their debt, some called it the largest debt to equity swap. See http://knowledge.wharton.upenn.edu/article/whats-behind-chinas-stock-market-gamble/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2015-07-15
[xxiii] Market capitalisation is approximately one-third of its GDP and less than 1% of population participates in the stock market. See ibid.
[xxiv] Ibid
[xxvi] Ibid
[xxviii] Ibid
[xxxiii] A Gini coefficient of zero expresses perfect equality, where all values are the same (i.e. where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (i.e. where only one person has all the income). A low Gini coefficient indicates a more equal distribution, with 0 corresponding to complete equality, while higher Gini coefficients indicate more unequal distribution, with 1 corresponding to complete inequality Seehttp://en.wikipedia.org/wiki/Gini_coefficient.
[xxxiv] China: External Economic and Financial Relations under the New Leadership by K.Subaramanianhttp://www.c3sindia.org/india/3456 . Also see K.Subramanian ‘China In Transition: Implications for Asia- Economic Dimension’http://www.c3sindia.org/economyandtrade/3948
[xxxvi] Defined as those involving 15 or more people. See Albert Keidel Senior Associate, Carnegie Endowment for International Peace in his paper ‘China’s Social Unrest: The Story Behind the Stories’.
[xxxvii] DS Rajan ‘China: Post- Party Congress Scenario: Policy Indicators in Two Speeches of Xi Jinping’http://www.southasiaanalysis.org/node/1170
[xxxviii] In the Soviet Union, the military was depoliticized, separated from the Party and nationalized and the party was disarmed. A few people tried to save the Soviet Union; they seized Gorbachev, but within days it was turned around again, because they didn’t have the instruments to exert power.  Yeltsin gave a speech standing on a tank, but the military made no response, keeping so-called ‘neutrality.’ Finally, Gorbachev announced the disbandment of the CPSU.  A big Party was gone just like that. Proportionally, the CPSU had more members than the CCP does, but nobody was man enough to stand up and resist
[xxxix] It presently has no representation in the seven member Politburo Standing Committee while the politburo has two PLA members out of twenty-five.



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Wednesday, July 15, 2015

Greek Tragedy: Implications For India - Article on USI Website 15 Jul 15

Greek Tragedy: Implications For IndiaColonel Akshaya Handa@
Introduction
The Greek economic crisis is being enacted. The popular verdict has been that the crisis is essentially economic and India with its minimal exposure is unlikely to be affected. Albeit, the assumption that the implications would be essentially economic needs examination as this crisis is a tsunami wave which can unravel the WTO   order and trigger a convergence of Russo-German interests, last visible just prior to WWII.
Genesis - EU Project
The problem is rooted in the European Union (EU). Having suffered centuries of wars and numbed by the industrial level killings in the two world wars, the European leaders sold a dream of a united Europe, encompassing the dreams and aspirations of the various nationalities. With its motto ‘United in Diversity’ it sought to create a peaceful zone of unhindered free movement of men, technology, capital and goods. The common currency ‘Euro’ was its logical outcome.
            In a sense Europe was thus striving to be what India was – a land of many cultures and languages where men, technology, capital and goods[1] could move freely. However, the two differed in one significant way, the European Union did not have a strong centre which could step in and support/reprimand an errant state. The early summer rains and consequent farmers’ suicide is an example where, in India, the centre picked up the tab. However in Europe some nations (primarily Germany) combined the free movement of goods and capital with their more advanced technologies and efficient production systems, to enhance their own export advantage.
Greek Financial Mess
The story of excessive and inefficient expenditure by Greece being the primary cause is known. However, the flip side of the story, that of German exports, is not that well known. German exports rose from 18.7 per cent of their GDP in 1980 to 45.6 per cent in 2013[2]. Of these, close to 50 per cent are exclusively to the EU[3]. On the back of this Germany posted record current account[4] surpluses[5]. This has risen steadily since 1999, the year when Euro became effective. This is shown in the chart below[6].

EU and German Exports
A sovereign nation normally has the following safeguards for its economy: -
a)    Current account deficits[7] are curtailed by currency devaluation[8] and increased tariffs[9], which in turn helps bridge the deficit. However in EU the value of the Euro is not affected by the performance of individual regions and being a free trade zone, governments cannot raise tariffs.
b)    Flight of capital is curtailed by capital controls on converting local currency into international forms. However, free movement of Euros within EU is the norm.
            These restrictions combined with German surpluses affected not only Greece but all those in EU which received German merchandise. During the sovereign debt crisis of 2000s these came to be known as the PIIGS[10] (Portugal, Ireland, Italy, Greece and Spain) economies. Greece, with its liberal expenditure precipitated the crisis; however, the PIIGS are also unhealthy[11]. Hence, Greece is just a precursor. What happens in Greece would define the way sovereign debt is handled in the future within EU.
            Unintentionally Germany too has become a hostage[12] to the region, if these economies manage to stop importing, Germany may witness a recession. Hence, the Free Trade Zone is a necessity for Germany and changes to it would alter its behaviour, aligning its interests to economies which can offer substitute markets.
               The options for Greece are not yet fully clear. While the lenders would like to impose a Cyprus[13] like solution[14]thereby force measures necessary to insure repayment of loans. Greeks are looking at relief from austerity. However, from the PIIGS point of view, any solution should permit balancing their deficits whether within EU or a Grexit[15] like situation. Loan waivers, aid, direct investment, and/or capital controls, raised tariffs by the PIIGS economy are just tools for the same. 
Implications
Increased Capital Controls and Tariffs    
a)        As the battle lines become sharper increased capital controls and tariffs seem likely. If Greece successfully follows this model, the PIIGS economies and slowly the rest of the world may start increasing these.
b)        The WTO is based on the concept of lowering tariffs equally across the world. A contrary trend would make multilateral trade agreements archaic and replace it with bilateral or zonal free trade agreements. Another indication of this trend is the fact that China[16] and US[17] have already finalised many such agreements.
c)         Alarmingly India is yet excluded from most. This would have adverse consequences for India which is a comparative new entrant to the free market economy. India thus needs to take an early view of its natural resource requirements as well as potential markets and ingrain itself in the free trade agreements of the region.
Realignment of Europe   
a)        All options would reduce the exports and current account surplus of Germany and increase unemployment there. Germany would thus be forced to look for other markets. Eastern Europe and Russia are the only regions in the vicinity which can offer such markets at comparable transportation costs.
b)        This would force Germany to strategically get closer to Russia. Denied access to NATO, it would endear the Central Asian Republic (CAR) and Eastern Europe in the Russian camp. With China and Russia already aligning their interests in the region, it can lead to problems for India in the strategic and natural resources rich region. German success with high end technology with the resources of Russia and China can potentially change the strategic landscape.
c)         The potential conflict over markets between Germany and China can be used by India to secure its own interests especially with regard to access to state of the art technology and denial of the same to potential competitors.
Credit  
a)                From the individual’s perspective, the lesson is to keep debt strictly under control. This has implications for the credit fuelled economies. In the regions which have suffered financial melt downs in the recent past, purchases on credit have drastically reduced. This is an additional barrier when selling high value capital goods necessitating a reorientation of what to sell, even as the ‘Make in India’ concept seeks to promote India as the world’s manufacturing hub.
b)               Export orientated manufacturing would do better in products that are either sold at government levels or in direct across the counter sales.
Conclusion
The strategic implications of the Greek problem would emerge not from what is presently happening in Greece but from how they ultimately balance their economy and what lessons are drawn by other heavily indebted nations. Understanding its causation at this stage is essential to safeguard our interests in the future.

End Notes
[1] Free unhindered goods movement in India is not yet a fact but the vision of the GST bill in the parliament.
[2] All figures as per world bank see http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?page=4 
[3] https://www.imf.org/external/pubs/ft/wp/2014/wp14130.pdf, https://books.google.co.in/books?id=bCoxGE338u0C&pg=PA124&lpg=PA124&dq=german+exports+to+euro+area+as+percentage+of+total+exports&source=bl&ots=OsDRXB72k0&sig=UdPG6pjqrl_83UspSlzToumZKLw&hl=en&sa=X&ei=b7qTVc-5NsSIuAT9qr2gDA&ved=0CCkQ6AEwAzgK#v=onepage&q=german%20exports%20to%20euro%20area%20as%20percentage%20of%20total%20exports&f=false
[4] The difference between net exports and imports.
[5] In 2014 it was nearly 7.4% of its GDP http://www.bloomberg.com/news/articles/2015-02-09/germany-posting-record-surplus-gives-fodder-to-economy-s-critics
[6] http://www.tradingeconomics.com/germany/current-account
[7] As the PIIGS economies have faced.
[8] Making their own exports attractive and imports expensive
[9] To protect its industry and trade.
[10] Portugal, Ireland, Italy, Greece and Spain.
[11] The sovereign debt to GDP ratios in 2014 were 177.1% for Greece, 130.2% for Portugal, 109.7% for Ireland, 132.1% for Spain and 97.7% for Italy. In comparison that of India was 67.72%. See http://www.tradingeconomics.com/ireland/government-debt-to-gdp
[12] http://www.stratfor.com/weekly/similarities-between-germany-and-china#axzz3GhLFXSka
[13] In 2012-13 the Cyproit Government agreed to confiscate private wealth to repay the lenders. See https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financial_crisis
[14] Many believe that this was possible only due to pro EU leaders in the government and led to rise of anti EU leaders in countries like Greece see https://www.stratfor.com/weekly/beyond-greek-impasse?utm_source=freelist-f&utm_medium=email&utm_term=Gweekly&utm_campaign=20150630&utm_content=readmoretext&mc_cid=cb02e5b4b7&mc_eid=ea7bc0ea94
[15] Acronym being used for a possible Greek exit from the euro free trade zone; a possibility which some analysts have pegged at over 60% presently.
[16] China has finalised these with ASEAN, Pakistan, Chile, New Zealand, Singapore, Macau, Peru, Costa Rica, Switzerland, Ireland, Korea and most recently Australia see http://fta.mofcom.gov.cn/english/index.shtml
[17] US has finalised these with 20 nations already, See http://www.trade.gov/mas/ian/tradeagreements/fta/tg_ian_002401.asp



@ Colonel Akshaya Handa is a member of USI
Articles Uploaded on  Jul 15, 2015


http://www.usiofindia.org/Article/?pub=Strategic%20Perspective&pubno=45&ano=2784

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