I have been investigating the economic basis of.global power, with the focus on nation-states, not regional groupings, though in the many talks I have given the issue of EU always comes up. If we have a chance I will say something about that. We start with the basic economics of comparison, which is the size of an economy measured by the GDP at purchasing power parity, and then we go on to look at the two simple components, arithmetic components of this, which is population and per capita income. Then we go on to look at and to show how this is changing with globalization and policy reform, That is, we analyse the relationship between globalization policy reform and growth (very briefly). We need to do this because we have to forecast these and on the basis of the forecast we present a Mean scenario which one has constructed and to draw out its implications. Before I do that, however, I also give what I call the Conventional Wisdom (CW), I always liked this word which has coined by Newsweek many years ago. Conventional Wisdom, which I will show you is I understand still the widely prevalent, with maybe 90-95% of analysts still believing it. So, the scenario which I am going to give you and the implications are in some sense unconventional and you have to take with your own pinch of salt. These are my scenarios and you can decide whether you believe them or not. Most of the world I think still doesn't believe it. So, the implication which I draw from this mean scenario is two-fold: One, that the world economy is multi-polar, and will remain so, and two, that global power will go from being uni-polar to tri-polar. These are two of my conclusions, as I said I don't think too many people in the world still accept them.
Okay, we start by looking at a very simple thing, which is the share of world GDP at purchasing power parity of about 20 countries (Figure 1). I looked at the 25 largest countries in the world and here I show them ordered from the largest to the smallest. Not much of a surprise but I think it's useful to note that the largest country is the USA and the second largest, China is about half the size of the US economy at present and then Japan is a little more than half that of China. And then you get India and Japan next with around a quarter of the US economy. Then come the other rich countries, Germany, France, UK, Italy, etc.
Now, the GDP in very simple arithmetic terms is the multiplication of the population with the per capita income. So, we have looked at the world GDP and then we go on to look at the two components of GDP and finally we'll draw some implications. So, on to the world population shares (Figure 2). Now, here of course as most of you are generally aware the picture is quite different. The two countries with the largest shares of world population, are China and India, each about 20% of World population. The USA in this case is one-fifth the size of the largest country. That's one important point. The second point is that on the right of the USA is a country which is often missed, Indonesia, which is actually the fourth-largest in the world. Next come Brazil and Russia, which have been mentioned a lot and this is one of the reasons why they are mentioned a lot, because they come next (5th and 6th). But Indonesia, which is more populous, has been missed in many of these discussions, and it's going to be important. This may not however happen in the next 25 years, but later. So that's one of the reasons why it's not been focussed on actively. Further to the right you see mostly the rich countries and then it's a sharp drop off, very-very small proportions to the right.
Figure 3 shows us the second component of GDP, the per capita GDP of the country. The same set of countries that we have seen in the earlier figures are presented here, but they are now ordered by the per capita income at PPP. So, again, on the left we have the USA the richest country form among the set of large countries. Each country’s per capita GDP is shown as a ratio to the US, from now on most of the things you'll see will be as a ratio to the US, and I will explain why, later. You see here, the US is 100% while most of the rich countries are 80% of the per capita income, starting from Canada, Netherlands, Australia, Germany, etc. are about 80% of the per capita income of the US. And then if you move to the extreme right, you have India with only 8%, Indonesia with 9% and China with 13%, of the per capita income of the US. Now, this has two implications. One is of course, the obvious one which everybody knows about, that we are a relatively poor country, among the large countries, we are the poorest actually. But the other side of this coin is the potential for catch-up, which is where the future projections comes in and that's where we are going from here. But let me point out again, that Indonesia is second from the right here. It also has this huge potential. I repeat again the same thing, a country which has been missed in much of the discussion on the global plane, whereas Russia and Brazil, you all probably heard of the BRICS study, a lot has been made of that. China of course, is there with still a lot of catch up potential, next only to India among this set of countries.
Now, in the next two graphs, what I do is, I put country’s share of GDP and population either side by side or subtracting one from the other. The first graph here (figure 4) puts together the world of GDP and the world share of population; these are the red and the pink graphs, for each country. Again, the same set of countries. Now, I want you to focus in the middle here, for a minute, you see Brazil and Russia the shares of world population and world GDP are almost identical, there is not much of a gap. And this is what leads into one of my conclusions which will follow, that in the case of these two countries there is not much of a gap to be changed. On the left of course, you see, both positive, the US with the large very large positive gap and China, India with very large negative gaps. That comes out very clearly in figure 5, the next graph, where I take the countries with the largest gaps - both positive and negative and put them on this graph here. So, the rich countries - USA, Japan, Germany, France, UK, and Italy, are the countries with the largest positive gaps between the GDP share, world GDP share and the world population share and three countries on the right of figure 5, with the largest negative gaps are India, China, and Indonesia. So India has the largest gap, China, the second-largest, Indonesia is the third-largest. And one of the theses of my talk and the papers I've written over the last 18 months is that these gaps are going to narrow over this century. Much of this is going to happen over the next 50 years and I will explain why. The question you can ask is, why it will happen now? Well, these gaps have actually existed since the Industrial Revolution; they actually opened up during the Industrial Revolution in the 17th century and they have existed for centuries. So, it's not obvious that these gaps would close, and the reason why I assert that they will, is kind of shown in Table 1. The reason is the past and projected growth of per capita GDP (in PPP). Everybody is aware that China has been the fastest growing economy in the world, and India here is in 9th position/rank. Lot of people are beginning to be aware of this, but perhaps many are still not. These are real growth rates.
We can go into the issue of PPP and Market exchange rate based GDP, it turns out to be a very interesting issue, which I will perhaps take up later, when I give you the Conventional Wisdom. It turns out that all real growth rates are the same as per the World Bank World Development Indicators. That's something which other studies do not seem to be aware of, which creates certain problems in projections which these studies seem to be totally ignorant of; but I will mention that when I show you the projections, what I call the Conventional Wisdom.
So, the reason that we expect the gaps to be eliminated is because over the last 25 years, the countries that have the largest negative gaps (figure 5) from among the set of large countries are the ones that have been among the fastest growing countries in the World. Table 1 shows the average growth rate over the last 25 years not over the last 10 years, not 15, but 25 year average. China at 1st place, India at 9th place, and Indonesia in the 11th place here. So, that's an important thesis of the papers which I have written over the last two years, which, as I said, I'll be summarising here, is that these gaps are going to close over the next 50 years. Indonesia I'll leave out from here on because it's going to be a slow process because of the Asian crisis and the political developments that followed it, so it will not have a big impact on the global economy over the next 15-20 years, so we won't discuss that much but I want to say that from diplomacy perspective it's an important country for India.
Okay, so this is the current picture as I gave you, in the five figures and one table, the GDP shares, population shares, and the gaps, and how they have been closing. Now we go into the future projection which was the primary purpose of my analysis when I started it. So we will now reverse the process, we'll start by looking at the population projections, then look at the per capita income projections and finally put them together into the GDP projection. We will then conclude by tracing out what that implies for the global economy.
Figure 6 shows the share of world population as projected by the UN. I have not changed it, massaged it, I've just taken the projections from the UN, and used them. Now, what is interesting about this, firstly, the orange bar there is India and green is China, so the first thing you notice is that the relative population share is going to invert over the next 50 years. The inversion point is somewhere around 2035. There is a slightly revised projection which has come out since I made these original projections but that doesn't matter, it doesn't change it substantively, actually it just brings the transition point where India's population goes above China a little earlier, which is now around 2030 but that does not matter. So, basically, the way to look at it is that India's and China's population will be around the same over the next 50 years. The second thing to note is the third bar which is this purplish one is the US. The US share of world population remains almost the same. You can see that it remains just below the 5% line in all three periods shown (2020, 2025, 2050).
The third, much more important point, that has recently started appearing in reports, is if you look at either Japan which is the light blue bar, or Russia, which is the slightly darkish green bar. The blue and green, you can see them they're more or less together there, and you go forward and see the dramatic change in the share of the population of Japan and Russia. Each shows a decline of about 25%. This is a very important factor when we discuss Russia, the future of Russia; this is going to have big impact on Russia's position in the world in future. And then there are the rich countries. Most of the European countries, Germany and others, will also have declining shares of world population. Recall that the US GDP was the largest, even though its population was and is the third-largest. Now, the important takeaway from here is that if you look at it from the population perspective and if you put the catch up story with the population, China and India, have to have a per capita income that is only one-fifth of that of the USA because their population is about five times that of the US, they only have to have one-fifth the per capita income of the US to equal it in size. Okay, so, that is the first important point that emerges, that China and India have the capability of equal in the US economy in size, because they only need to catch up to one-fifth of US per capita income. The second point which appears from this population perspective is, that really there is no other country which can equal the US without exceeding its per capita income, just a simple obvious point but important to note because, leaving aside Indonesia for the moment that is the bar to the right of the USA, the other countries are just too small. The per capita income would have to be far in excess of the US to equal the US economy in size.
Okay, so, that is one thing which emerges clearly from this population perspective, going into the future, let me summarise. In my view, what this shows you is, that only tri=polarity is possible in terms of nation-states; remember, I am talking about nation-states only which is what we have been looking at. The scope of catch up, India is currently a low income country, so there is a big scope and that is going to happen, China is currently a lower middle income country so the scope is slightly less, but it will also catch up. Consequently the key issue is going to be the trends in growth of per capita GDP in these two countries, over the next 25-50 years or whatever time horizon we are interested in. Among the issues which arise are how quickly will China slow down and can India maintain his growth rate. Now within my 20 minutes, I think I have already used up 15, I am not going to be able to go into the details, but perhaps we can discuss that if somebody is interested in question and answers and finally, you know when I first gave this talk, a lot of people from the EU were very offended, at my leaving out the EU. In principle, if EU become what I call a “virtual state” if it acts in external relationships as the single country then it would be a fourth pole but having said that, and we can discuss that later, I will stick with the nation-states.
Okay, so, population projections I have given, and table 2 presents my own per capita GDP growth projections. A number of people ask me the basis for these projections, you know this is a number, it's a summary of all the forces driving growth in economy. I have done these projections from a macro-economic perspective, based on my studies of the growth experience of India, China and Asia. But you know, people talk about energy, and other sector and micro factors. in some sense, I am summarizing all those factors into this growth rates. We can of course discuss each of those individual factors if one wants to discuss. Now, two or three points here, because I think I have to speedup a bit here, firstly in my projections, China and India are the two fastest growing and Russia the third fastest. One interesting thing to observe here is, if you look at the third column of these projections, India's growth rate will go above China some time in the middle of the next decade and therefore, you see in the third column that represents the period 2016 to 2025 India will be growing faster than China, according to my projections. As I said, these are based on a whole bunch of analysis of the Indian economy and a smaller but equally detailed analysis of the Chinese economy, on which of course, different experts may have different views, you know, this is one scenario.
Russia will be third fastest growing economy among the set of large countries, but its position doesn't change all that significantly; for the reasons I have already told you relating to population. Brazil here is at the bottom and Mr. Bery is a Brazil expert and I am sure he'll talk about it, but I did. Do some modified simulation, given his earlier comments which he made, if we double this growth rates, it doesn't significantly change the global picture, even though Brazilian economy becomes larger than a 2-3 other countries in 2050. Now using these same growth rates, it turns out if you look at the real growth rates, however you look at them, you look at them in as it's called local currency units, you look at them in PPP terms, or in terms of some kind of a real GDP at current exchange rates, they are all the same. I should mention, all this data I've been showing you, all the past, actual data are from the world development indicator of the World Bank and the projections are based on this data. So, it's all standard data, I don't try to adjust any country’s data to correct for it. And therefore, even the China data has not been adjusted for the widely accepted problem of overestimation.
Figure 7 depicts what I would say, was the 100% Conventional Wisdom among informed people, including analysts who had even done their own projections. You know, there are some sophisticated analysts in the US, there is also as you are aware the CIA. This is the kind of picture which I believe that they had in 2004 and probably 95% of the analysts in the US and those who think about it in UK and Europe, still have this kind of picture of the future, while mine is very different. Now, what I've done here, and this relates to Mr. Bery’s point, is that I've applied the growth rate projections given in table 2, to the GDP expressed in US dollars using the current exchange rate to convert from local currency units to US dollars. This is done just so that you know what I've done here, and what is the picture which comes from this conventional wisdom (which in my view is fallacious) What I believe is the correct measure for comparing size or economic power, is to use the GDP at PPP, which we will show below. The main elements of this convention view are, one that China (the pink line in figure 7), will continue rising but even 25 years from now, it would only be 30% of the size of the US economy. That's one critical difference from my own conclusions, which you'll see later when I give you the PPP projections. Remember now, all these measures which I am going to give you now, are going to be relative to the US, because power is always relative. There's no such thing as absolute power. It's power relative to somebody else, whether you are talking of economic power or other powers which I'll...at the end if I have a little time, I'll talk about.
So, the first thing to note is that among the US analysts China was clearly recognised as the rising power, but it was thought that it would be no threat to the US as it would just be 30% of the US, 25 years later. Second, the bottom line here, the green line, is India. So, conventional wisdom about India, was of a small country, 5% of the size of the USA. The countries in the middle are the well known rich countries UK, France, Germany etc. which would more likely be competitively challenged by a rising China, but not really the super-power. India at the bottom, not really a significant player, but maybe, at the end of these 25 years, with about 15% of the GDP of the US, it would be kind of ‘swing state’. The last is a word I actually heard in 2004, in Vienna from a very respected US analyst who I believe also has done work for the CIA. So that was the picture in 2004.
Now, what is the projection which I have? Figure 8 is my projection which use the same growth rates from table 2, exactly the same growth rates but now applied to GDP at purchasing power parity (PPP), and again shown relative to the US. So, US is also growing but here it's shown as 100, that middle blue line is the US, because we want to see the relative size of the economies. Now, there are just two things which stand out, one the size of the Chinese economy becomes larger than that of the USA within about 10 years i.e. 2015 and by the middle of the century it's going to be twice the size of the US economy. That is something I believe nobody had perceived. I am asserting this though I could also be wrong, I mean as I said, you have to make your judgement. But this is the first time, in my December 2004 paper and again in the March 2005 paper, that I brought this out. The second point that emerges, the orange line is India, according to this projection, is that India's GDP would be around the size of the US by 2035, that is in about 30 years' time.
And finally, for those of you who are interested in Russia, these are the crosses at the bottom. According to this projection which was made before this recent oil price increases, they would just kind of catch up with Japan in about 50 years. And always remember the population has lot to do with it; they are shown in my projections as the third-fastest growing economy. So it's not that I am saying they won't grow faster. The oil price changes and the natural resource price changes can change this a bit; The crossover point may be a bit earlier, 5-10 years at most. But it doesn't change fundamentally this big picture.
That was the economy and I move on to the power of nation-States. I have developed what I call an index of power potential (VIP2),
Virmani Index of Power Potential: VIP2 = (Y/Yus) * (y/yus)a
Y =GDP at PPP, y = Per capita GDP at PPP, a = technology weight = 0.5
I don't think I'll go into the details because I don't have the time. So, the basic feature of this is, that it adds a technology factor to the basic size, which I show can be estimated by the per capita income of the country. This is an index of power which is the multiple of the GDP which are those Ys over there at the bottom, the big Ys, and the small ys to the power of a, so this is a factor which comes from technology. Again, I think given the time, we can discuss it later, but if you look at this picture, now we are getting into the evolution of what I call power potential. So, I use the economic arguments to define an index of power potential, which is this VIP squared.
The picture that emerges is shown in figures 9 and 10. Figure 9 is scaled to bring out clearly what is the position of India as per this Mean forecast. That is the pink line. What it shows you is, that the power potential of India will equal that of Japan, which is that blue line on top, in about 16-17 years from now. The same growth projection used earlier (table 2) is used in this power projection index. Figure 10 brings out clearly the bigger picture. Overall and this is more important, according to this forecast, China's power potential will equal that of the USA by 2030, and this is a major contrast to the conventional view presented earlier and in my view, was kind of major shock to many people in the USA, even though we have had people in the US, the neocons, etc. talking about China. The implication of this scenario for the USA is that China is going to be a major threat to their power in Asia in the not too distant future. I believe, this is the first time anyone had made such a projection. As I said earlier, you have to judge weather its right or wrong, but according to me, this was the first time that this kind of scenario had been built.
The second point that emerges very clearly fro both figures is that India in this forecast in my view would become a great power before the middle of the century. That is the second line. Finally I have just put India relative to China in figure 11, just to get a picture, and you see that both these the pink one is just the size, the GDP which I mentioned earlier and orange one is the power potential, based on that index. You can see that this follows straight from the growth projection which I mentioned that India's size and power relative to China would keep declining till around the middle of the next decade, and then would start to catch up. But even 50 years from now, India would, according to these projections, be only 70% of that of China, so it's a long haul.
I have also after this gone on to develop an index of ‘actual power’. The starting point remains the size of the economy, from which the power potential based on the economics is derived as shown above. Then we bring in strategic factors, you know, defence technology, nuclear technology, etc. I will just leave it, and come to the conclusions.
Basically, the conclusions from the Mean scenario and the current situation is that, we have a multi polar world economy, that is in purely economic terms when we are talking just economics and not power. I think EU does constitute an economic force; there is a belief among the supporters of EU is that 70% of the economic decisions of the EU are now with the EU Secretariat what you say and not with the nations which cost with the EU. If that is correct then at least as for as economics is concerned, you can consider the EU as a single power and there for a pole of the world economy. So I will go along with these experts because they get very offended when you question them, So, economic multi polarity already exists and will be strengthened by the rise of India. So, India is right now just entering into the economic game and over the next 25 years, it would become a significant pole in the world economy.
But as far as the power structure is concerned, in my view, in my conclusion, the world is clearly uni-polar and in fact has been for far longer than most people imagine. In the last paper which I did before leaving ICRIER, Working Paper 175, where I showed, I applied the VIP index backwards in history, till the 18th century or 17th century and what come out from there is that Russia lost its power, I believe even before it collapsed in 1990. So I believe that in some sense inherently, the world had become unipolar even before what people generally think. So, the world as I describe it now is uni-polar world with a multi polar fringe by anology with the concept of monopoly with a competitive fringe (in economics). In the World we have the middle powers competing against each other but no match for the USA in terms of the concepts of power that have been used here. These concepts do not incorporate aspects connected to non-state actors, which may be relevant.
And therefore, by around 2025, the world will, in terms of power structures, become bipolar with the rise of China, and somewhere between 2035 and 2040 it will become tri polar. Now, please, you must remember, because some people.very easily confuse the actual present with a forecast future, one has to be very careful in remembering and distinguishing between the position today and the forecast. It is very important not to confuse the two. It is essential ones feet are firmly placed on the ground and are grounded in the present but ones head has to be up in the sky if one wants to achieve anything. But it is extremely unproductive, perhaps even dangerous, if your whole body is lifted into the clouds along with your head. This can give you very misleading answers to what you should or should not be doing currently and I am saying this because I often read in the press, articles by various analysts repeatedly confusing between where we are today and where we might be 25 years from now. We have to be aware of both when planning current approaches and actions. Thank you.
An essential element of power is the “will to power”. A country has to have the will; there is absolutely no doubt about it and the two countries which stand out, that are at opposite poles over the last 30 years or so are Japan and Russia. Japan, consciously for many reasons, decided to play a secondary role. In fact over the last 30 years, Japan could have been a major global power but for various reasons choose not to.
On the other hand Russia as indicated by its economic size and strength is not very strong now and was not even at the peak of itsr power. The last paper I did showed that in the peak of its power, the USSR had 40% of the power potential of the USA. Russia by itself had even less. If you treat the USSR as what I call a ‘virtual state’ because Eastern Europe could be said to have been the colonies of Russia because basically they were part of the Russian/USSR system they had 40% of the power potential of the US. Yet they were able to convince the world they were equal in power and lot of that has to do with the strategic and military assets, which we really didn't talk about.
As far as growth is concerned, you know, it's not a question of tripolar it's a question of the growth: Education, skills, etc., go into the production of growth, so, there is a whole different topic, what is it that India needs to do to grow and just to very briefly answer, education is clearly one of them, that in fact in a separate paper, I identified seven policies which are critical to India's future growth and one of them is education policy reform.
Table 1: Real Per Capita GDP Growth – 1980 to 2003
Figures 1 to figure 11
Saturday, February 25, 2006
Monday, August 22, 2005
Employment Generation versus Employment Guarantee
Over three decades ago PM Indira Gandhi introduced the policy of “poverty alleviation.” The rationale bears repetition as it has remained unchanged for decades and underlies the EGS. It was argued that, “Economic growth does not lift all boats equally. As poverty is pervasive, all these people cannot be left to suffer while we wait for poverty to be eliminated by economic growth. We therefore need targeted programs for the poor to give them relief till such time as poverty is eliminated.” During that period of Indian socialism, the rate of growth of per capita income was 1.3% per annum and poverty was on an uptrend. Dozens of poverty alleviation programs have been introduced by successive governments. We may recall that “those who ignore history are condemned to repeat it.” My fear is that unless the EGS is seen in an overall context of policy and institutional reform it will become just another poverty alleviation program to be supplanted by new ones by the next government. Then, ten-fifteen years from now a new set of brilliant young academics will be agitating for another revolutionary new program to alleviate the suffering of the poor.
Most people would agree with the contents of a 1988 Planning Commission paper “Efficient Labour Intensive Growth: Key to Accelerated Poverty Reduction.” Among other things it suggested a change in labour policy that is discouraging organised manufacturing industry from hiring unskilled labour and making it impossible for India to compete with other countries in mass (unskilled) labour intensive manufacturing. If the poor are to participate in the modern manufacturing or service sectors they must also have Basic/Primary education and information about job opportunities suitable for them across the country. However, even if these and other reforms for accelerating labour intensive growth eliminate poverty in fifteen years, there will be geographical (remote areas), seasonal (between sowing and harvesting) and cyclical (drought years) pockets of unemployment. Therefore in a 1999 Finance Ministry paper, “From Poverty to Prosperity: Reforms for Accelerating Growth,” I recommended an Employment Guarantee Scheme and a Right to Information Act along with other reforms for accelerating (employment) growth.
There are four elements of a successful EGS. First it must replace the dozens of poverty alleviation schemes in existence today. This can be done by amalgamating and integrating these schemes into the EGS, with a minimum 75% of EGS funds coming from these dissolved schemes. To ensure that the employment builds infrastructure assets that have a long term benefit to the local population, all local infrastructure building programs (village/block roads, water harvesting, irrigation & drainage, sewage & sanitation systems, school/PHC building & maintenance) should be within its purview. The concerned schemes departments must be required to provide their expert advise and assistance (consultancy) to the EGS scheme so that it builds productive assets.
Second, the EGS wage rate should be less than or at most equal to the local off-season market wage. If the former is raised above the latter, Rents rise and so does the incentive for corruption, with less chance of the poor getting any employment. In addition with a higher wage, even employed people will be drawn away from productive private jobs to the “sarkari jobs” where shirking is a birthright and accountability is low. The uniform minimum wage of Rs. 60 (about 3/4th of daily per capita GDP) may prove to be too high for high poverty districts making EGS as ineffective as earlier schemes (15% to poor).
Third, full disclosure must be built into the EGS rules. Thus the names of every person employed in the EGS, the hours worked and wages paid and the assets built, must be posted in a public place and be available for cross-checking by NGO’s subsequently.
Fourth, incentive compatibility must be ensured between the funding and the implementing agencies. A 90:10 Center:State funding ratio provides little incentive for the State government machinery to ensure that funds are spent efficiently. These could be corrected by merging the local area development programs of the State government into the EGS.
If these four elements can be ensured the scheme could be a very successful one. If not, a few years of good performance are likely to be followed by a sharp fall in effectiveness, as happened in the Maharashtra EGS. A mere law, even the Supreme Court, cannot ensure that every person in every remote village gets employment.
Most people would agree with the contents of a 1988 Planning Commission paper “Efficient Labour Intensive Growth: Key to Accelerated Poverty Reduction.” Among other things it suggested a change in labour policy that is discouraging organised manufacturing industry from hiring unskilled labour and making it impossible for India to compete with other countries in mass (unskilled) labour intensive manufacturing. If the poor are to participate in the modern manufacturing or service sectors they must also have Basic/Primary education and information about job opportunities suitable for them across the country. However, even if these and other reforms for accelerating labour intensive growth eliminate poverty in fifteen years, there will be geographical (remote areas), seasonal (between sowing and harvesting) and cyclical (drought years) pockets of unemployment. Therefore in a 1999 Finance Ministry paper, “From Poverty to Prosperity: Reforms for Accelerating Growth,” I recommended an Employment Guarantee Scheme and a Right to Information Act along with other reforms for accelerating (employment) growth.
There are four elements of a successful EGS. First it must replace the dozens of poverty alleviation schemes in existence today. This can be done by amalgamating and integrating these schemes into the EGS, with a minimum 75% of EGS funds coming from these dissolved schemes. To ensure that the employment builds infrastructure assets that have a long term benefit to the local population, all local infrastructure building programs (village/block roads, water harvesting, irrigation & drainage, sewage & sanitation systems, school/PHC building & maintenance) should be within its purview. The concerned schemes departments must be required to provide their expert advise and assistance (consultancy) to the EGS scheme so that it builds productive assets.
Second, the EGS wage rate should be less than or at most equal to the local off-season market wage. If the former is raised above the latter, Rents rise and so does the incentive for corruption, with less chance of the poor getting any employment. In addition with a higher wage, even employed people will be drawn away from productive private jobs to the “sarkari jobs” where shirking is a birthright and accountability is low. The uniform minimum wage of Rs. 60 (about 3/4th of daily per capita GDP) may prove to be too high for high poverty districts making EGS as ineffective as earlier schemes (15% to poor).
Third, full disclosure must be built into the EGS rules. Thus the names of every person employed in the EGS, the hours worked and wages paid and the assets built, must be posted in a public place and be available for cross-checking by NGO’s subsequently.
Fourth, incentive compatibility must be ensured between the funding and the implementing agencies. A 90:10 Center:State funding ratio provides little incentive for the State government machinery to ensure that funds are spent efficiently. These could be corrected by merging the local area development programs of the State government into the EGS.
If these four elements can be ensured the scheme could be a very successful one. If not, a few years of good performance are likely to be followed by a sharp fall in effectiveness, as happened in the Maharashtra EGS. A mere law, even the Supreme Court, cannot ensure that every person in every remote village gets employment.
Tuesday, August 9, 2005
Next Steps in Strategic Relations: Completing The Triangle
A recent research paper forecast that the World will become bipolar in 25 years and Tripolar by the middle of the 21st century and that this possibility would lead to greater technological cooperation between the USA and India. In this context, the two recent US-India framework agreements (defense & nuclear) are just the beginning of a far reaching transformation of the global order. Realization of potential into reality requires work not only on India-US relations, but more importantly on India-China relations over the next 12-18 months, to reap the benefits.
First we should turn our attention back to the second pole China by implementing the agreements reached earlier this year between Dr. Man Mohan Singh and PM Wen Jibao. One was an agreement to enhance economic cooperation and double the volume of bilateral trade. The India-China study group (of which I was a member) had identified several constraints and barriers to trade in goods and services. India and China must work together to ensure that the route map outlined for addressing these issues is followed and the full potential of trade in goods in services is realized expeditiously.
The second was a framework agreement on defining the India-China border. Its importance can be gauged from the fact that since PM Rajiv Gandhi’s pioneering visit to China, two decades of meetings on the border issue had failed even to define the line of control between the two countries. As India is quite used to the concept of ‘LOC’ (a la J&K), some Chinese objective or fear must have prevented this from happening. The framework agreement therefore reflects a change in China’s approach to India and this must be followed up to a successful conclusion. The key to an India-China border settlement and lasting peace is secure and defensible borders, not how much territory is exchanged. A fair, just and equitable settlement of the border that reduces the risks & enhances the security of both is in the long term interests of both countries.
The third is to carry forward the strategic dialogue. We could perhaps propose a bilateral agreement on non-proliferation of WMD’s and nuclear/space technology to each others neighbors (e.g. Pakistan, Bangladesh; Vietnam, Taiwan). To avoid any ambiguity such an agreement should have an explicit, detailed list attached. Such an agreement would reduce suspicion and enhance mutual trust.
Our communist parties, the CPI and the CPM, can play a vital role in this process by convincing their fraternal party the Communist Party of China of the fundamental need for better India-China relations.
The successful completion of these three steps would set the stage for a comprehensive co-operation agreement (/FTA) covering goods, services, FDI and skilled personnel, between the two countries. An India-China joint study group for the same could be set up by the end of 2006-7. This could lay the foundation for the formation of an (East) Asian Economic Community.
There is also a lot of work to be done on the Indo-US front. Indian business, including US MNCs in India, must work with the NRI/PIO community in the USA to persuade the US Congress to change US laws and rules to provide India full access to Civilian Nuclear and all ‘Dual Use’ technology. At home transparent rules and regulation for private investment (including FDI) in nuclear power must be put in place. A Commercial Nuclear Power Corporation could be set up with 49.9% govt. equity and 50.1% private equity (investors, Indian companies and FDI). Some government re-insurance (for major catastrophe) as well as risk cover for loans and/or central purchase of nuclear power may be necessary initially (for the first few private nuclear power plants). The great advantage of such plants is that they can be subject to international rules and safeguards without affecting our existing nuclear establishment in anyway. Logically we can be “no worse off” than before, if we keep our current facilities as non-commercial ones for the time being. Subsequently we can declare one or more (Tarapur, RAPP) as commercial ones, if and only if it makes us “better off.” The choice is ours (nuclear experts), not that of the US or another country.
We must also activate our diplomatic machinery to free up the flow of civilian nuclear technology from Japan, Russia, UK, France, Germany and other EU members. If this can be done by the time the US Congress approves the promised changes, India will reap the maximum benefit of competition among them to supply materials, equipment and power plants to India. We could similarly promote greater competition in defense technology transfer and co-production by signing appropriate agreements with Japan and others where they are needed to lubricate flows of defense technology or equipment.
Though media reports suggest that F16/F18 deals are imminent, considerable staff work has to be done to give substance to the Indo-US defense agreement, so that the benefits begin to flow to both countries. We should also expand the discussion from air to naval equipment and components, without which a ‘minimum nuclear deterrent’ and ‘No first use,’ nuclear policy is not credible to any recognized nuclear power.
If these and related issues are pursued with seriousness and determination, the Indo-US strategic partnership will help accelerate the transformation of the World from a uni-polar one into a stable tri-polar one, with the USA, China and India as the three poles. President Bush and Dr. Man Mohan Singh must be congratulated for taking bold decisions that may well determine their place in history.
First we should turn our attention back to the second pole China by implementing the agreements reached earlier this year between Dr. Man Mohan Singh and PM Wen Jibao. One was an agreement to enhance economic cooperation and double the volume of bilateral trade. The India-China study group (of which I was a member) had identified several constraints and barriers to trade in goods and services. India and China must work together to ensure that the route map outlined for addressing these issues is followed and the full potential of trade in goods in services is realized expeditiously.
The second was a framework agreement on defining the India-China border. Its importance can be gauged from the fact that since PM Rajiv Gandhi’s pioneering visit to China, two decades of meetings on the border issue had failed even to define the line of control between the two countries. As India is quite used to the concept of ‘LOC’ (a la J&K), some Chinese objective or fear must have prevented this from happening. The framework agreement therefore reflects a change in China’s approach to India and this must be followed up to a successful conclusion. The key to an India-China border settlement and lasting peace is secure and defensible borders, not how much territory is exchanged. A fair, just and equitable settlement of the border that reduces the risks & enhances the security of both is in the long term interests of both countries.
The third is to carry forward the strategic dialogue. We could perhaps propose a bilateral agreement on non-proliferation of WMD’s and nuclear/space technology to each others neighbors (e.g. Pakistan, Bangladesh; Vietnam, Taiwan). To avoid any ambiguity such an agreement should have an explicit, detailed list attached. Such an agreement would reduce suspicion and enhance mutual trust.
Our communist parties, the CPI and the CPM, can play a vital role in this process by convincing their fraternal party the Communist Party of China of the fundamental need for better India-China relations.
The successful completion of these three steps would set the stage for a comprehensive co-operation agreement (/FTA) covering goods, services, FDI and skilled personnel, between the two countries. An India-China joint study group for the same could be set up by the end of 2006-7. This could lay the foundation for the formation of an (East) Asian Economic Community.
There is also a lot of work to be done on the Indo-US front. Indian business, including US MNCs in India, must work with the NRI/PIO community in the USA to persuade the US Congress to change US laws and rules to provide India full access to Civilian Nuclear and all ‘Dual Use’ technology. At home transparent rules and regulation for private investment (including FDI) in nuclear power must be put in place. A Commercial Nuclear Power Corporation could be set up with 49.9% govt. equity and 50.1% private equity (investors, Indian companies and FDI). Some government re-insurance (for major catastrophe) as well as risk cover for loans and/or central purchase of nuclear power may be necessary initially (for the first few private nuclear power plants). The great advantage of such plants is that they can be subject to international rules and safeguards without affecting our existing nuclear establishment in anyway. Logically we can be “no worse off” than before, if we keep our current facilities as non-commercial ones for the time being. Subsequently we can declare one or more (Tarapur, RAPP) as commercial ones, if and only if it makes us “better off.” The choice is ours (nuclear experts), not that of the US or another country.
We must also activate our diplomatic machinery to free up the flow of civilian nuclear technology from Japan, Russia, UK, France, Germany and other EU members. If this can be done by the time the US Congress approves the promised changes, India will reap the maximum benefit of competition among them to supply materials, equipment and power plants to India. We could similarly promote greater competition in defense technology transfer and co-production by signing appropriate agreements with Japan and others where they are needed to lubricate flows of defense technology or equipment.
Though media reports suggest that F16/F18 deals are imminent, considerable staff work has to be done to give substance to the Indo-US defense agreement, so that the benefits begin to flow to both countries. We should also expand the discussion from air to naval equipment and components, without which a ‘minimum nuclear deterrent’ and ‘No first use,’ nuclear policy is not credible to any recognized nuclear power.
If these and related issues are pursued with seriousness and determination, the Indo-US strategic partnership will help accelerate the transformation of the World from a uni-polar one into a stable tri-polar one, with the USA, China and India as the three poles. President Bush and Dr. Man Mohan Singh must be congratulated for taking bold decisions that may well determine their place in history.
Thursday, July 14, 2005
Historic Transformation of US-India Relations and India’s Role in Asia?
US President Nixon transformed US relations with China, with his breakthrough trip to China. This led after a decade or so to a transformation of China’s role in Asia. President Regan transformed US relations with the USSR, contributing to the disintegration of the Soviet empire. Will President Bush similarly transform the US relationship with India leading to a transformation of India’s role in Asia? A change in objective conditions, presented in several of our papers (WP #160, March 2005 and WP# 150, December 2004), suggests that this is likely. There are however obstacles on the US side that will have to be overcome before this can happen.
President Clinton, after his statement about China and USA being strategic partners and jointly deploring India’s 1998 nuclear tests, repaired relations by condemning Pakistani aggression in Kargil and supporting the Strobe Talbot – Jaswant Singh talks. These talks along with candidate Bush’s advisory group ‘Vulcans’ (that included Profs Condolezza Rice of Stanford and Prof Robert Blackwill of Harvard) laid the foundations for a changed approach of USA towards India. President Bush envisaged a much bigger role for India in Global affairs than his predecessors. PM Vajpayee reciprocated by calling India and USA “Natural Allies.” This resulted in the initiative labeled “Next Steps in Strategic & Technological Partnership (NSSTP).” The process was however side tracked by 9/11 as the US focus shifted to Afghanistan & Iraq and Pakistan made itself indispensable to the US.
The transformation had therefore to await President Bush’s second term and the visit of Secretary Rice to India in March 2005 (followed by the background briefing recognizing India’s potential power). A major landmark will be the visit of PM Dr Manmohan Singh to Washington starting on July 16th 2005. A key test will be US support for a permanent (veto bearing) UNSC seat. A possible deliverable is the formation of an India-US study group for a CECA. The transformation will likely (with 75% probability) be in place by the time President Bush visits India at the end of 2005-6, with the key test being an effective agreement to free the flow of nuclear plants, equipment and materials from the USA to India.
As shown in the author’s ICRIER working papers #150 (December 2004) and #160 (March 2005), the global economy is undergoing a dramatic transformation. Over the next 35 years both Chinese and Indian economies will become larger than the US economy in size (measured in PPP). In the case of China this will happen in a decade while in the case of India it will take an additional 25 years. At the same time Japan’s economy will decline gradually and Russia’s rise slowly (relative to the US) as the population of both declines by 25% over the next 50 years. The large economies of Europe will see varying population declines that will reduce their GDP relative to the USA.
The impact on the Global balance of power will be equally dramatic. This is shown by our ‘Index of Power Potential’ based on the economic projections. Currently the USA is the strongest power in the World by a wide margin and the World is correctly described as being Uni polar (the constraint imposed by terrorists, Jehadis and rogue states notwithstanding). With the rise of China and India the World will first become Bi polar (by 2025) and then Tripolar by 2050. This poses a serious challenge to the global order in general and to the USA in particular. Historically, the rise of a new power has invariably led to conflict with the established power. This suggests that China will very likely challenge US power in Asia during the next 20 years and conflict between the two on Taiwan cannot be ruled out. If the USA withdraws from Asia then the imbalance of power will put great pressure on the freedom and independence of China’s neighbors’ in Asia.
There is one exception to the generalization of inevitable conflict between the incumbent and the challenger. The declining colonial power Britain gradually ceded power to the rising USA in the late 19th and early 20th century. There are several differences between that situation and the one today. Firstly, both the USA and UK were English speaking democracies with a large cultural and philosophical overlap. This is not true of Marxist-Leninist (Communist) Party ruled China and the USA. Second China considers Taiwan, parts of N. India, the South China Sea and other areas as wrongfully taken from it. It has historical grievances against Japan that persist to this day. Unless these issues are resolved peacefully they retain the potential for igniting conflict. Third, the degree of globalization and economic interdependence is now much higher (Exports, FDI, investments). Fourth is the existence of nuclear weapons and their deterrent effect. The first two factors suggest that US-China conflict is more likely and the next two that it is less likely than in the US-UK case.
In either case the balance of power in Asia will be critical to peace in Asia and India’s power potential will be greater than Japan’s and Russia’s by 2025. A natural balance of power, in which India and China (with equal population in 2030) have similar levels of per capita GDP will make peaceful evolution of global relations more likely. This requires an expeditious closing of the technological and economic gap between India and China. The recognition of this fact by President Bush and his advisors is the key factor underlying the transformation of US-India relations. The fact that the USA and India share fundamental human and democratic values provides a basis for mutual trust.
From India’s perspective the key to a US-India partnership is technology transfer and technological co-operation. This requires a complete exemption of India from the denial regime set up by the USA and its allies after India’s 1974 atomic test, which played a role in the opening of the China-India GDP gap. In particular India must get civilian nuclear technology on conditions no more stringent than China. President Bush’s past actions suggest that he has the guts to change a dis-functional regime that has allowed NPT members to transfer weapons designs and/or technology to Pakistan, Libya, N Korea and Iran while stopping the supply of nuclear fuel to India’s power stations.
The Indian public seems to sense this possibility. That is why global polls show Indians giving the USA and its president the highest positive ratings among all countries. Indian’s are well aware of the US blind eye towards Pakistan military/ISI’s sheltering of Taliban & Al Qaeda leaders and training & financing of anti-India terrorists. But they hope that, despite the large current asymmetry in GDP and power, President Bush can transform India-USA relations to one that bring equal benefits to both.
President Clinton, after his statement about China and USA being strategic partners and jointly deploring India’s 1998 nuclear tests, repaired relations by condemning Pakistani aggression in Kargil and supporting the Strobe Talbot – Jaswant Singh talks. These talks along with candidate Bush’s advisory group ‘Vulcans’ (that included Profs Condolezza Rice of Stanford and Prof Robert Blackwill of Harvard) laid the foundations for a changed approach of USA towards India. President Bush envisaged a much bigger role for India in Global affairs than his predecessors. PM Vajpayee reciprocated by calling India and USA “Natural Allies.” This resulted in the initiative labeled “Next Steps in Strategic & Technological Partnership (NSSTP).” The process was however side tracked by 9/11 as the US focus shifted to Afghanistan & Iraq and Pakistan made itself indispensable to the US.
The transformation had therefore to await President Bush’s second term and the visit of Secretary Rice to India in March 2005 (followed by the background briefing recognizing India’s potential power). A major landmark will be the visit of PM Dr Manmohan Singh to Washington starting on July 16th 2005. A key test will be US support for a permanent (veto bearing) UNSC seat. A possible deliverable is the formation of an India-US study group for a CECA. The transformation will likely (with 75% probability) be in place by the time President Bush visits India at the end of 2005-6, with the key test being an effective agreement to free the flow of nuclear plants, equipment and materials from the USA to India.
As shown in the author’s ICRIER working papers #150 (December 2004) and #160 (March 2005), the global economy is undergoing a dramatic transformation. Over the next 35 years both Chinese and Indian economies will become larger than the US economy in size (measured in PPP). In the case of China this will happen in a decade while in the case of India it will take an additional 25 years. At the same time Japan’s economy will decline gradually and Russia’s rise slowly (relative to the US) as the population of both declines by 25% over the next 50 years. The large economies of Europe will see varying population declines that will reduce their GDP relative to the USA.
The impact on the Global balance of power will be equally dramatic. This is shown by our ‘Index of Power Potential’ based on the economic projections. Currently the USA is the strongest power in the World by a wide margin and the World is correctly described as being Uni polar (the constraint imposed by terrorists, Jehadis and rogue states notwithstanding). With the rise of China and India the World will first become Bi polar (by 2025) and then Tripolar by 2050. This poses a serious challenge to the global order in general and to the USA in particular. Historically, the rise of a new power has invariably led to conflict with the established power. This suggests that China will very likely challenge US power in Asia during the next 20 years and conflict between the two on Taiwan cannot be ruled out. If the USA withdraws from Asia then the imbalance of power will put great pressure on the freedom and independence of China’s neighbors’ in Asia.
There is one exception to the generalization of inevitable conflict between the incumbent and the challenger. The declining colonial power Britain gradually ceded power to the rising USA in the late 19th and early 20th century. There are several differences between that situation and the one today. Firstly, both the USA and UK were English speaking democracies with a large cultural and philosophical overlap. This is not true of Marxist-Leninist (Communist) Party ruled China and the USA. Second China considers Taiwan, parts of N. India, the South China Sea and other areas as wrongfully taken from it. It has historical grievances against Japan that persist to this day. Unless these issues are resolved peacefully they retain the potential for igniting conflict. Third, the degree of globalization and economic interdependence is now much higher (Exports, FDI, investments). Fourth is the existence of nuclear weapons and their deterrent effect. The first two factors suggest that US-China conflict is more likely and the next two that it is less likely than in the US-UK case.
In either case the balance of power in Asia will be critical to peace in Asia and India’s power potential will be greater than Japan’s and Russia’s by 2025. A natural balance of power, in which India and China (with equal population in 2030) have similar levels of per capita GDP will make peaceful evolution of global relations more likely. This requires an expeditious closing of the technological and economic gap between India and China. The recognition of this fact by President Bush and his advisors is the key factor underlying the transformation of US-India relations. The fact that the USA and India share fundamental human and democratic values provides a basis for mutual trust.
From India’s perspective the key to a US-India partnership is technology transfer and technological co-operation. This requires a complete exemption of India from the denial regime set up by the USA and its allies after India’s 1974 atomic test, which played a role in the opening of the China-India GDP gap. In particular India must get civilian nuclear technology on conditions no more stringent than China. President Bush’s past actions suggest that he has the guts to change a dis-functional regime that has allowed NPT members to transfer weapons designs and/or technology to Pakistan, Libya, N Korea and Iran while stopping the supply of nuclear fuel to India’s power stations.
The Indian public seems to sense this possibility. That is why global polls show Indians giving the USA and its president the highest positive ratings among all countries. Indian’s are well aware of the US blind eye towards Pakistan military/ISI’s sheltering of Taliban & Al Qaeda leaders and training & financing of anti-India terrorists. But they hope that, despite the large current asymmetry in GDP and power, President Bush can transform India-USA relations to one that bring equal benefits to both.
Saturday, May 21, 2005
A Tripolar World: India, USA and China
With the collapse of the Soviet Union in 1990, the World has become unipolar, with USA as the predominant power. Russia and France, along with rising powers such as China, have resisted this reality by pushing the concept of a multi polar world. Henry Kissenger had earlier written about the four powers, USA, EU, China and Russia and maybe a fifth India. Till about 9 months ago the US establishment was confident that the USA would remain the predominant world power and that China did not pose a serious threat to it during most of the 21st century. There was also a feeling that India could become a swing state in terms of the power balance in Asia in the second half of the century and therefore an improvement of India-US relations was desirable.
In a recent paper (ICRIER WP #160, March 2005) I have projected that within 25 years, China will become strong enough to challenge US power in Asia and India will become the third most powerful country in the World. This process will continue in the next 25 years so that by the middle of the century the World will become Tripolar. The USA, China and India will be the three great powers during most of the 21st century. A recognition of this fact will have a profound effect on the foreign and security policies of USA, India, EU and Japan. There is an important caveat: The projections for India depend on continuing reform of economic policy as well as reform of government institutions and political systems. Similarly we assume that single party (Chinese Communist Party) rule will remain in China and it will continue to introduce market reforms to correct the weakness of socialist policies. Though the European Union (EU) could be the fourth power if Germany, UK, France and Italy surrender their individual power to a EU “virtual” State, this appears unlikely (at present).
Though the size of a Nation’s economy has always been an important basis of its global power this will be more so in the 21st century. The size of a nation’s economy (GDP at ppp) is the multiple of its population and Per capita GDP (average income). If we compare each country’s share in World population and in World GDP we find four countries with the greatest imbalance. The USA and Japan’s share of world GDP is more than their respective shares of population by 16.5% & 5%, while China and India’s share of World GDP is less than their share of population by 11% and 9% respectively. Germany, France, UK, Italy also have significant positive and Indonesia a negative imbalance (there is no imbalance for Russia and Brazil). These imbalances will get reduced or eliminated during this century of globalization (free flow of technology). The reason for this are policy reform and catch-up growth by the three laggards, India and Indonesia, which are low income countries and China which is a lower middle income country: Since 1980, China, India and Indonesia have ranked 1st , 9th and 11th in terms of the average rate of growth of per capita GDP.
Over the next two decades, China and India will remain among the 5 fastest growing economies in the world and will therefore continue to close the per capita income gap with the USA. According to our mean scenario, in 2050, China and India’s per capita GDP ppp is projected to become 57% and 36% respectively of that of the USA. As China’s and India’s population would be 3.4 and 3.75 times that of the USA (respectively), their GDP at purchasing power parity will become about 1.9 and 1.3 times that of the USA in 2050. In contrast the GDP of the fourth largest country, Japan would be 1/5th that of the USA.
Though the size of the economy forms the basis of Global Power it may not be an adequate measure of power given that even in a Globalized world, each country has to develop its own strategic technology. We therefore measure the potential power of a country through a Power Potential Index (PPI) that gives additional weight to technological capabilities and national resources. The index shows that by 2050 China’s power is likely to be about 40% higher than that of the USA. China will therefore be able to challenge US power in Asia within 20 years, when its PPI will be about 70% of the USA. We also find that India’s potential power will be about 35% of USA in 2025 and 90% in 2050. If our projections come true, India will become a global power during the second quarter of this century and the World will become tripolar.
History shows that the risk of war rises when a new great power (now China) emerges to challenge an existing one (USA). In Asia, these risks are heightened by the imbalance between China and India. India’s economy will reach a low of 40% of China’s in the middle of the next decade, before starting to close the gap. However, even in 2050 the Indian economy is projected to be only 70% of China’s economy. Part of the reason for this gap is that the rich countries have denied India for 30 years the technology that they have allowed China to access. It is in the interest of the USA, EU, Japan and Russia to ensure that the technological and economic gap between India and China is closed as quickly as possible. They must lift the controls and restrictions on transfer of Dual use, nuclear and space technology to India, imposed after our first atomic test in 1974. The Bush administration seems to have recognized this imperative, as reflected in the statements of Secretary of State Condalezza Rice on her visit to India in March and the subsequent backgrounders by US spokesmen in Washington. India must use this opportunity to develop an ‘Indo-US partnership for peace’ that is mutually/equally beneficial to both. At the same time efforts to develop closer technological collaboration with Russia, Japan, France, UK and other countries must continue. We need to jettison the victim mindset engendered under the East India Company/British Raj and learn to act like a big power.
Normalization of relations between India and China will be critical to peace in the Tripolar World. We must enhance our economic ties through removal of bilateral impediments and development of inclusive structures such as an Asian Oil community and an (East) Asian Economic Community.
In a recent paper (ICRIER WP #160, March 2005) I have projected that within 25 years, China will become strong enough to challenge US power in Asia and India will become the third most powerful country in the World. This process will continue in the next 25 years so that by the middle of the century the World will become Tripolar. The USA, China and India will be the three great powers during most of the 21st century. A recognition of this fact will have a profound effect on the foreign and security policies of USA, India, EU and Japan. There is an important caveat: The projections for India depend on continuing reform of economic policy as well as reform of government institutions and political systems. Similarly we assume that single party (Chinese Communist Party) rule will remain in China and it will continue to introduce market reforms to correct the weakness of socialist policies. Though the European Union (EU) could be the fourth power if Germany, UK, France and Italy surrender their individual power to a EU “virtual” State, this appears unlikely (at present).
Though the size of a Nation’s economy has always been an important basis of its global power this will be more so in the 21st century. The size of a nation’s economy (GDP at ppp) is the multiple of its population and Per capita GDP (average income). If we compare each country’s share in World population and in World GDP we find four countries with the greatest imbalance. The USA and Japan’s share of world GDP is more than their respective shares of population by 16.5% & 5%, while China and India’s share of World GDP is less than their share of population by 11% and 9% respectively. Germany, France, UK, Italy also have significant positive and Indonesia a negative imbalance (there is no imbalance for Russia and Brazil). These imbalances will get reduced or eliminated during this century of globalization (free flow of technology). The reason for this are policy reform and catch-up growth by the three laggards, India and Indonesia, which are low income countries and China which is a lower middle income country: Since 1980, China, India and Indonesia have ranked 1st , 9th and 11th in terms of the average rate of growth of per capita GDP.
Over the next two decades, China and India will remain among the 5 fastest growing economies in the world and will therefore continue to close the per capita income gap with the USA. According to our mean scenario, in 2050, China and India’s per capita GDP ppp is projected to become 57% and 36% respectively of that of the USA. As China’s and India’s population would be 3.4 and 3.75 times that of the USA (respectively), their GDP at purchasing power parity will become about 1.9 and 1.3 times that of the USA in 2050. In contrast the GDP of the fourth largest country, Japan would be 1/5th that of the USA.
Though the size of the economy forms the basis of Global Power it may not be an adequate measure of power given that even in a Globalized world, each country has to develop its own strategic technology. We therefore measure the potential power of a country through a Power Potential Index (PPI) that gives additional weight to technological capabilities and national resources. The index shows that by 2050 China’s power is likely to be about 40% higher than that of the USA. China will therefore be able to challenge US power in Asia within 20 years, when its PPI will be about 70% of the USA. We also find that India’s potential power will be about 35% of USA in 2025 and 90% in 2050. If our projections come true, India will become a global power during the second quarter of this century and the World will become tripolar.
History shows that the risk of war rises when a new great power (now China) emerges to challenge an existing one (USA). In Asia, these risks are heightened by the imbalance between China and India. India’s economy will reach a low of 40% of China’s in the middle of the next decade, before starting to close the gap. However, even in 2050 the Indian economy is projected to be only 70% of China’s economy. Part of the reason for this gap is that the rich countries have denied India for 30 years the technology that they have allowed China to access. It is in the interest of the USA, EU, Japan and Russia to ensure that the technological and economic gap between India and China is closed as quickly as possible. They must lift the controls and restrictions on transfer of Dual use, nuclear and space technology to India, imposed after our first atomic test in 1974. The Bush administration seems to have recognized this imperative, as reflected in the statements of Secretary of State Condalezza Rice on her visit to India in March and the subsequent backgrounders by US spokesmen in Washington. India must use this opportunity to develop an ‘Indo-US partnership for peace’ that is mutually/equally beneficial to both. At the same time efforts to develop closer technological collaboration with Russia, Japan, France, UK and other countries must continue. We need to jettison the victim mindset engendered under the East India Company/British Raj and learn to act like a big power.
Normalization of relations between India and China will be critical to peace in the Tripolar World. We must enhance our economic ties through removal of bilateral impediments and development of inclusive structures such as an Asian Oil community and an (East) Asian Economic Community.
Friday, May 20, 2005
Can Oil Prices motivate Radical Energy Policy Reform?
Oil Prices touched $50 a barrel last year while the International Energy agency confidently forecast that prices could go below $25 a barrel. This year oil prices touched $57 a barrel. Though prices are currently down below $48 don’t be surprised if they again shoot up in the next six months. Will we passively watch these developments or take action to reduce our dependence on oil? If the latter, what can we do? The most important action is to reform our coal, electricity and oil policies. Otherwise we will continue to remain at the mercy of the oil cartel.
India is among the ten largest oil importers in the World. A rise in global oil prices is a tax on the nation paid to the oil cartel. So far we have tried to absorb this tax within the budget, either directly by lowering import duties or by reducing government owned oil company profits and consequently their dividends to the exchequer. This means that these revenues are no longer available to build infrastructure or carry out the social expenditures enumerated in the CMP. Further as the prices paid by consumers of Kerosine, LPG, Diesel and Petrol do not rise there is no incentive to be careful in their use. It is a known economic fact that short term price elasticity of demand for oil products is much lower than the long term elasticity. If oil price increases are not reflected in consumer prices the demand response and the technical change that it induces will be delayed even further. Thus oil dependence will continue to grow and so will the tax that citizen’s pay to the oil cartel.
The solution is to, (a) Allow complete and automatic pass through of international oil prices to domestic users. (b) Set all oil related import tariffs at the peak rate (now 15%) (c) Put a resource rent tax on domestic oil producers that applies above a base oil price (set in the exploration contract) and varies with the international price of oil. The revenues from this tax can be earmarked for development and introduction of energy conservation technology and alternative energy resources. (d) Replace differential pricing of Kerosene, whose adulteration of diesel is destroying Bharat III engines, by a direct subsidy to BPL house holds.
The nationalization of coking (non-coaking) coal mines in 1971 (1973) was justified (among other reasons) by the need to use our abundant coal reserves optimally for the good of future generations (50-100 years). The talk now, thirty years after nationalization, is about how coal imports are needed because the coal is of poor quality and how it will not last very long in any case. What happened? Nationalization created a monopoly, that along with the Ministry of Coal and the regulators appointed by it constituted itself into a monolith that has destroyed this great national resource. Greedy politicians (from coal mine areas or coal ministers), the coal mafia and the public coal monopoly have milked this national resource in the name of the people. A former vigilance head of Coal India confirmed to me that the stories one had heard and read about the ‘Coal Mafia” (which controls the labor force in the mines) are indeed true. Is it any wonder that the Coal Mine Nationalization Amendment Bill had been stuck in parliament since 2000 and was allowed to lapse, without re-introduction, in 2004!
The solution, (a) Amend the Coal Nationalization Act to allow private entry into coal mining. This will end the State monopoly and introduce true competition into the coal mining industry. It will allow specialized companies to come in, reduce demand risk through diversification of buyers, exploit economies of scale, make long gestation investments in mining & processing of high ash coal and in R&D for more effective use of available (quality/type) coal. (b) Sell 49.9% of the shares of public coal mining companies to the public/people. This does not disturb the government’s management control (mafia control?), but will provide an incentive to the people and the financial media to shed light on the worms operating under the stones. Hopefully the performance of the State companies will improve to the point they can compete with imports. (c) Reform and strengthen the coal regulatory system by making it independent and professional.
The electricity Act (2003) is an important step in the direction of electricity reform. But large private investments will not flow unless three critical problems are addressed and policy and regulatory risk is reduced. The most fundamental problem is electricity Theft. With 50% T&D losses Delhi electricity privatization will eventually loose support unless this problem is tackled. The Theft and Dacoity carried out by the electricity mafia is legendry. Several years ago, a central electricity minister, who had himself been a DESU union leader, had no hesitation in confirming this fact. This problem is not unique to Delhi but perhaps Delhi can show the way by taking on and destroying the electricity mafia and thus reducing the cost to honest users by about 40%. Full success would eliminate the need for cross-subsidies and allow a uniform price for all electricity users.
The second issue is that of the cross-tax subsidy to be paid by independent power producers for open access to the existing controlled government distribution system. Unless the methodology is clearly specified and is reasonable and limited by some upper bounds, the risk of arbitrary imposts will remain and deter investment. The third issue is the setting up of an independent and professional regulatory system. This requires regulatory law(s) ensuring sufficient delegation in all matters related to standards, norms, interconnection, pricing and quality of service and clear rules and procedures for financing of regulators, selection of chairman & members and adequate professional staff. State Governments and politicians are loath to loose control of the levers of power and pelf and the setting up of this system in the major states is going to be a long and painful process. Unless all this is done the regulatory and policy risks will remain.
With the best of intentions, these reforms will take about 10 years to fructify. In the meanwhile a radical solution is required. The government should declare a 10 year regulatory holiday for all new private generation, distribution and transmission companies (starting from date of first completed project). Producers/distributors would be free to supply electricity to any buyer at mutually agreed prices, terms and conditions. On completion of the regulatory holiday, normal regulatory systems, which by then will be fully in place across the country, would become applicable. By then the power shortage would be eliminated.
India is among the ten largest oil importers in the World. A rise in global oil prices is a tax on the nation paid to the oil cartel. So far we have tried to absorb this tax within the budget, either directly by lowering import duties or by reducing government owned oil company profits and consequently their dividends to the exchequer. This means that these revenues are no longer available to build infrastructure or carry out the social expenditures enumerated in the CMP. Further as the prices paid by consumers of Kerosine, LPG, Diesel and Petrol do not rise there is no incentive to be careful in their use. It is a known economic fact that short term price elasticity of demand for oil products is much lower than the long term elasticity. If oil price increases are not reflected in consumer prices the demand response and the technical change that it induces will be delayed even further. Thus oil dependence will continue to grow and so will the tax that citizen’s pay to the oil cartel.
The solution is to, (a) Allow complete and automatic pass through of international oil prices to domestic users. (b) Set all oil related import tariffs at the peak rate (now 15%) (c) Put a resource rent tax on domestic oil producers that applies above a base oil price (set in the exploration contract) and varies with the international price of oil. The revenues from this tax can be earmarked for development and introduction of energy conservation technology and alternative energy resources. (d) Replace differential pricing of Kerosene, whose adulteration of diesel is destroying Bharat III engines, by a direct subsidy to BPL house holds.
The nationalization of coking (non-coaking) coal mines in 1971 (1973) was justified (among other reasons) by the need to use our abundant coal reserves optimally for the good of future generations (50-100 years). The talk now, thirty years after nationalization, is about how coal imports are needed because the coal is of poor quality and how it will not last very long in any case. What happened? Nationalization created a monopoly, that along with the Ministry of Coal and the regulators appointed by it constituted itself into a monolith that has destroyed this great national resource. Greedy politicians (from coal mine areas or coal ministers), the coal mafia and the public coal monopoly have milked this national resource in the name of the people. A former vigilance head of Coal India confirmed to me that the stories one had heard and read about the ‘Coal Mafia” (which controls the labor force in the mines) are indeed true. Is it any wonder that the Coal Mine Nationalization Amendment Bill had been stuck in parliament since 2000 and was allowed to lapse, without re-introduction, in 2004!
The solution, (a) Amend the Coal Nationalization Act to allow private entry into coal mining. This will end the State monopoly and introduce true competition into the coal mining industry. It will allow specialized companies to come in, reduce demand risk through diversification of buyers, exploit economies of scale, make long gestation investments in mining & processing of high ash coal and in R&D for more effective use of available (quality/type) coal. (b) Sell 49.9% of the shares of public coal mining companies to the public/people. This does not disturb the government’s management control (mafia control?), but will provide an incentive to the people and the financial media to shed light on the worms operating under the stones. Hopefully the performance of the State companies will improve to the point they can compete with imports. (c) Reform and strengthen the coal regulatory system by making it independent and professional.
The electricity Act (2003) is an important step in the direction of electricity reform. But large private investments will not flow unless three critical problems are addressed and policy and regulatory risk is reduced. The most fundamental problem is electricity Theft. With 50% T&D losses Delhi electricity privatization will eventually loose support unless this problem is tackled. The Theft and Dacoity carried out by the electricity mafia is legendry. Several years ago, a central electricity minister, who had himself been a DESU union leader, had no hesitation in confirming this fact. This problem is not unique to Delhi but perhaps Delhi can show the way by taking on and destroying the electricity mafia and thus reducing the cost to honest users by about 40%. Full success would eliminate the need for cross-subsidies and allow a uniform price for all electricity users.
The second issue is that of the cross-tax subsidy to be paid by independent power producers for open access to the existing controlled government distribution system. Unless the methodology is clearly specified and is reasonable and limited by some upper bounds, the risk of arbitrary imposts will remain and deter investment. The third issue is the setting up of an independent and professional regulatory system. This requires regulatory law(s) ensuring sufficient delegation in all matters related to standards, norms, interconnection, pricing and quality of service and clear rules and procedures for financing of regulators, selection of chairman & members and adequate professional staff. State Governments and politicians are loath to loose control of the levers of power and pelf and the setting up of this system in the major states is going to be a long and painful process. Unless all this is done the regulatory and policy risks will remain.
With the best of intentions, these reforms will take about 10 years to fructify. In the meanwhile a radical solution is required. The government should declare a 10 year regulatory holiday for all new private generation, distribution and transmission companies (starting from date of first completed project). Producers/distributors would be free to supply electricity to any buyer at mutually agreed prices, terms and conditions. On completion of the regulatory holiday, normal regulatory systems, which by then will be fully in place across the country, would become applicable. By then the power shortage would be eliminated.
Sunday, May 15, 2005
Economic Reforms During The Past 12 Months
Soon after the UPA Government took office, the stock market crashed because investors expected a sharp slow-down in reform, given the UPA’s dependence on left parties. At that time, I had written that in areas in which markets were expecting a halt in reform namely labor laws and PSU privatization, there had not been little actual policy action in the previous 2-3 years. So even if there were no labor policy reform this would not amount to a slow down. Further, though privatization was ruled out, disinvestment of shares was still possible. These unjustified apprehensions were dispelled after the first budget and the market recovered and exceeded expectations in the subsequent six months.
Taking stock of the entire one-year period, the pace of reform has been in line with the average pace seen since 1992-93. Once the crisis driven spurt in 1991-92 was over, the pace of reform has been modest under every government. This slow and steady pace has continued under the UPA government. For instance, the SSI reservation list has been gradually reduced with the removal of remaining labor intensive textiles and other exportables. Similarly peak non-agricultural tariff reductions have continued with a reduction to 15% in the last budget.
There have also been sporadic policy reform initiatives from other ministries. Thus the FDI limit in domestic airlines was raised to 49% and in Telecom to 74%. In Telecom indirect channels of foreign investment were simultaneously closed thus increasing transparency. The permission given to private Indian airlines to fly on foreign routes and the open skies agreement with the USA could transform foreign air travel over the next few years. One hopes that private investment in upgrading major airports will finally get underway after 5 years of policy circumlocution. The SEZ law could similarly have resulted in a revolution in labor intensive exports, but the dropping of the labor clause has made this a little uncertain.
The performance on tax reform has been mixed. In CENVAT the reduction in rates on polyester etc. has been offset by a move away from genuine CENVAT in textiles. Income tax reform has been a mixture of simplification (saving exemptions) and new complexity (securities transaction tax, fringe benefit tax). The latter will have to be reformed 5 years later. The harmonization of States’ sales tax rates that passes under the name of VAT has finally got under way, a great political achievement. From the economics perspective however, a genuine equitable State VAT that simplifies the system by replacing all indirect taxes requires a uniform 10% rate on all goods and local services except food, drugs and medical equipment/ services. This has to be complemented with a handful of sales taxes on final consumer goods (e.g. entertainment, petrol, cars) as argued in Planning Commission Working Paper No 4/2002-pc.
One of the predictions that I made at the start of PM Manmohan Singh’s Government is that given his depth of understanding and commitment he would be a Prime Minister who would pay greater attention to long term and difficult issues like governance reform. This process has indeed been initiated and a few things like the ‘Right to information Act’ already passed. But there is still a long way to go and I expect that in the remaining four years further action will in fact be taken.
Most new governments take at least a year to find their feet and get going on policy reforms. As this was the first year of the Government and given the novel political arrangements in which the leader of the major government party is not the Prime Minister, it was perhaps inevitable that the Government would take a little time to settle down. It is hoped and expected that the pace of reforms will gradually accelerate over the next couple of years.
Taking stock of the entire one-year period, the pace of reform has been in line with the average pace seen since 1992-93. Once the crisis driven spurt in 1991-92 was over, the pace of reform has been modest under every government. This slow and steady pace has continued under the UPA government. For instance, the SSI reservation list has been gradually reduced with the removal of remaining labor intensive textiles and other exportables. Similarly peak non-agricultural tariff reductions have continued with a reduction to 15% in the last budget.
There have also been sporadic policy reform initiatives from other ministries. Thus the FDI limit in domestic airlines was raised to 49% and in Telecom to 74%. In Telecom indirect channels of foreign investment were simultaneously closed thus increasing transparency. The permission given to private Indian airlines to fly on foreign routes and the open skies agreement with the USA could transform foreign air travel over the next few years. One hopes that private investment in upgrading major airports will finally get underway after 5 years of policy circumlocution. The SEZ law could similarly have resulted in a revolution in labor intensive exports, but the dropping of the labor clause has made this a little uncertain.
The performance on tax reform has been mixed. In CENVAT the reduction in rates on polyester etc. has been offset by a move away from genuine CENVAT in textiles. Income tax reform has been a mixture of simplification (saving exemptions) and new complexity (securities transaction tax, fringe benefit tax). The latter will have to be reformed 5 years later. The harmonization of States’ sales tax rates that passes under the name of VAT has finally got under way, a great political achievement. From the economics perspective however, a genuine equitable State VAT that simplifies the system by replacing all indirect taxes requires a uniform 10% rate on all goods and local services except food, drugs and medical equipment/ services. This has to be complemented with a handful of sales taxes on final consumer goods (e.g. entertainment, petrol, cars) as argued in Planning Commission Working Paper No 4/2002-pc.
One of the predictions that I made at the start of PM Manmohan Singh’s Government is that given his depth of understanding and commitment he would be a Prime Minister who would pay greater attention to long term and difficult issues like governance reform. This process has indeed been initiated and a few things like the ‘Right to information Act’ already passed. But there is still a long way to go and I expect that in the remaining four years further action will in fact be taken.
Most new governments take at least a year to find their feet and get going on policy reforms. As this was the first year of the Government and given the novel political arrangements in which the leader of the major government party is not the Prime Minister, it was perhaps inevitable that the Government would take a little time to settle down. It is hoped and expected that the pace of reforms will gradually accelerate over the next couple of years.
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