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Xi Jinping in India: Economic focus suits both sides

by Shashank Joshi

Prepare yourself for a glut of feeble anthropomorphic metaphors (elephants, pandas, tigers, and dragons are all anticipated) and bloviating communiqués: India-China diplomacy is underway.

President Xi Jinping today begins the first Chinese visit to India since the election of Prime Minister Narendra Modi. Laying the groundwork for this trip, Indian Vice President Hamid Ansari traveled to Beijing in June, followed by National Security Advisor Ajit Doval last week.

Xi's arrival is rich with symbolism, as the trip begins not in Delhi, as would be typical, but Ahmedabad. This is the commercial capital of Modi's home state, Gujarat, viewed by many (though not all) as a model of development for the rest of India. It is by some measures the most economically free state in India, and is still frequently invoked by Modi.  

All this underscores the commercial dimension of India-China ties, a narrative that suits India, since it glosses over border disputes and regional competition, and reinforces Modi's twin foreign policy priorities of development and regionalism. From inviting the leaders of the South Asian Association for Regional Cooperation (SAARC) countries to his inauguration, to visiting Bhutan and Nepal, to resolving a maritime border dispute with Bangladesh, Modi has given admirably sustained and high-level attention to the India's periphery. This is something the previous government valued in theory but neglected in practice. Modi also decided to visit Tokyo (in September) before Washington (later this month), emphasising that his engagement with Asia would be paramount.

More specifically, the lure of future Chinese investment, a purported US$100 billion over the next five years and 'thrice the investments committed by Japan' during Modi's recent trip to Tokyo, has considerable value and little political downside (notwithstanding Nitin Pai's measured warning that Beijing seeks to use such investments as carrots and sticks). All this is couched in Modi's own cringeworthy neologisms.

The commercial narrative also suits China, which has been selling its proposal for a 'maritime silk road', a high profile but nebulous initiative to recreate a historic Chinese trade route through the Indian Ocean by developing maritime infrastructure and setting up free trade zones. During a visit to India last week, I found that most Indians continued to be baffled by the whole idea and slightly irked at China's reluctance to provide more details. One Indian naval officer has suggested that the scheme is a way for China to 'soften' and re-brand the much-maligned 'string of pearls', and the director of India's National Maritime Foundation has dismissed it as 'essentially a Chinese ploy'.

It was therefore unfortunate timing that the Maldives, which Xi also visited this week, decided to hand to a Chinese a firm a US$500 million infrastructure project which had earlier been in Indian hands. India's imperative for regional connectivity and inward investment clash with its suspicion of China's long-term intentions. This is a structural problem that transcends Modi and Xi, and it will continue to give Sino-Indian commercial ties an awkward, tense edge. This is something that is obviously absent in the official pronouncements but more than visible in any Indian newspaper. Full-throated Indian endorsement of the maritime silk road is therefore unlikely, particularly as India appears to be scrambling to turn an old cultural project for the Indian Ocean, Project Mausam (meaning 'Season'), into a copycat initiative

More broadly, Xi's visit also has to be seen in the context of Modi's engagement with both Australia and Japan, both US allies concerned about the implications of growing Chinese power and assertiveness.

Modi signed a long-awaited and landmark civil nuclear agreement with Australia, dissected by Rory Medcalf and Danielle Rajendram last week. Although he could not finalise a similar deal with Japan, his visit to Tokyo did yield progress on the bilateral defence relationship, including a Japanese sale (and possible co-production) of the US-2 amphibious aircraft. In recent weeks, Modi's government has also been hyperactively leaking that India is in the 'advanced stages' of talks with Vietnam over the sale of the supersonic BrahMos cruise missile, which has been jointly produced with Russia. India and Vietnam, which the (ceremonial) Indian president is currently visiting, also signed a pointed statement on freedom of navigation in the South China Sea only yesterday

India is therefore fostering a web of commercial and military ties across the region, the sort of 'middle power coalitions' that Rory Medcalf and Raja Mohan have described in their recent paper, while prioritising economic interaction, avoiding the language of containment or even balancing, and resisting 'a bloc-based Asian order with alliances and counter-alliances'. These relationships don't just strengthen India's regional influence; they also force China to court India more intensively, as it did in the decade after the US-India rapprochement. The trick is in getting the balance right, diversifying and upgrading India's Asian relationships as much as possible without provoking a Chinese reaction or getting dragged into others' disputes. 

On the whole, this points to continuity. It is notable, for instance, that after years of condemning the Congress-led Government for pusillanimity in the face of Chinese border incursions, this Government has acted identically, resolving the latest reported incursion, last week, at the usual tactical level rather than escalating the problem. Modi is fine-tuning Indian foreign policy, not recasting it.

Photo courtesy of REUTERS/Amit Dave.


Presidential trivia

by Sam Roggeveen

Two anecdotes I have stumbled on recently from reviews of Rick Perlstein's The Invisible Bridge, a new book about the US conservative movement.

First, did you know Richard Nixon invented the term 'Missing in Action'?:

The ’70s also marked the high tide of the American Right. Much of the country was discomfited by protests, drugs, and crime...In The Invisible Bridge, (Perlstein) describes how Nixon invented the category of soldiers “Missing in Action” (who, in previous wars, would have been called “Killed in Action / Body Unrecovered”) to rile up the home front against peaceniks, making it seem as though they were determined to abandon soldiers on the field of combat.

And here's a great anecdote about Reagan and the 1973 Arab-Israeli war:

Kissinger...solicited him for advice on the extraordinarily delicate matter of how to frame an Israeli resupply operation that, if handled incorrectly, could lead to a military confrontation with the Soviet Union. Reagan suggested: "Why don't you say you will replace all the aircraft the Arabs claim they have shot down?"

This was brilliant. Since the Arabs were wildly exaggerating their success, presenting them with a Hobson's choice—saying nothing or facing international humiliation—was perfect. Reagan's interpersonal intelligence was something to behold.


China links: Fourth plenum, dyslexia, anti-trust, Hong Kong, ISIS, PLA and more

by Dirk van der Kley


Are we using a 'fixed' strategy against ISIS?

by Brendan Thomas-Noone

For those of us who can’t find the time to read Lawrence Freedman’s momentous new book Strategy: A History, Paul Kennedy has an excellent review in Foreign Affairs. One passage made me think of events in recent days: 

. . . For example, although the section on Mahan does explain that author’s belief that the nation with the greatest fleet would control the seas, Freedman gives more space to a lesser-known naval strategist, Julian Corbett, because he prefers the latter’s emphasis on geographic position, communications, and trade to the former’s more simplistic study of great fleets and the Trafalgar-like encounters they engaged in. Generally, Freedman approves of theorists with a Corbettian approach, since no single strategist can comprehend all aspects of war and get it right; once a conflict erupts, calm judgment and careful reasoning will prove more useful than fixed mindsets. Appropriately, this section of Strategy ends with al Qaeda, an adversary that has demonstrated the importance of surprise, confusion, luck, and passion -- and the futility of trying to use a fixed strategy against it. 

What aspect of the West's strategy in dealing with ISIS is 'non-fixed'? ISIS, like al Qaeda, has been deft at using elements of confusion and surprise to its advantage, but also in adapting to new circumstances. While the US is conducting airstrikes and partnering with local forces in the fight against ISIS in Iraq and Syria now, in all likelihood the method will need to change soon enough. 


Pacific state-owned enterprises are underperforming and need reform

by Laure Darcy

The Small Island Developing States conference held earlier this month included the launch of the Asian Development Bank's latest state-owned enterprise (SOE) benchmarking study, Finding Balance: Benchmarking the Performance of SOEs in Island Countries. The study compares the performance of SOEs in nine island countries (Fiji, Samoa, Solomon Islands, Marshall Islands, PNG, Tonga, Jamaica, Mauritius and Cape Verde) over a 10-year period, and measures their impact on economic growth. The results are sobering.

Over the 2002-2012 period, none of the SOE portfolios generated a sufficient return to cover their initial capital costs. Why is this important? Because when SOEs perform poorly, the economy as a whole suffers.

SOEs in island economies are often the sole providers of core infrastructure services (power, water, transport), so when these are of poor quality and insufficient reach, private businesses cannot develop and become competitive. By absorbing large amounts of scarce capital on which they provide very low returns, crowding out the private sector, and diverting public funds that could otherwise be invested in such high-yielding social sectors as health and education, SOEs act as a drag on economic growth.

The study shows that low SOE returns are not unique to the Pacific (nor island economies), and are common throughout the developing and developed world. Chronic SOE underperformance highlights a fundamental flaw in the model: it is not an effective long-term ownership structure. While the SOE model attempts to replicate private ownership demands and dynamics, it never truly replaces the market disciplines that private firms face. As long as SOEs remain under majority public ownership, politicians will avoid commercial decisions with potential short-term political costs.

Policy makers around the world are aware of SOEs' persistent deficiencies, fiscal costs and negative impact on growth and poverty alleviation. Consequently, efforts to reform SOEs have been ongoing for decades. However, SOE reform requires strong political commitment and this study demonstrates that this is extremely difficult to sustain over prolonged periods. Involving the private sector through public–private partnerships and privatisation is a much more effective way to sustain improved SOE performance and service delivery. Competition for investment capital means that the private sector will always have stronger performance incentives than the public sector. These incentives should be harnessed to support public service delivery. 

Governments engaging in SOE reform are therefore asking three key questions:

  1. What is the appropriate role of the state in the economy?
  2. Does the government need to own and manage state assets to deliver public services?
  3. Can these services be contracted to private sector providers? 

This is the debate all governments with large SOE sectors should be having, regardless of the size of their economy. Within the Pacific in recent years, progress has been made to reduce the size of SOE portfolios and place them on a more commercial footing. The experience of the Solomon Islands is notable, where the SOE portfolio has gone from generating an average return of -14% on equity between 2002-2009 to 10% from 2010-2012. It is now the best performing portfolio of the benchmarking sample, having liquidated underperforming SOEs, established public-private partnerships and restructured its largest SOEs so that they can operate on fully commercial terms.

The experience of the Solomon Islands demonstrates that SOE reform is possible, but requires sustained political commitment to strengthen the underlying SOE legislation, resist the temptation to directly interfere in the business of the SOEs, and allow greater private sector participation in delivering the goods and services traditionally provided by government owned corporations. These reforms are also underway in a number of Pacific countries, and with increased public awareness of the rationale for and benefits of the reforms, it is hoped that the necessary political support can be garnered to see them implemented. 


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