Sunday, February 13, 2011

The Great Fall of China?

"China today has the characteristics of a truly great bubble. The value of the housing stock is set to exceed 350 per cent of GDP this year, the same level as Japan at the height of its real estate bubble. Construction accounts for around one-quarter of economic activity in China, which by coincidence is the same level that Ireland attained before its dramatic implosion."


With the world being remade around us, once unshakeable facts have to be re-assessed. I found this article's Ponzi finance view of China hard to fault. You do have to have much of a grasp of economics to wonder how long all those gleaming skyscrapers can lay empty for? Not saying it's curtains for the regime but economics makes politics. What happens when the prices of skyscrapers and those ostentatious homes fall back to earth in the Middle Kingdom...


FINANCIAL TIMES
Entranced by China’s bubbling economy
By Edward Chancellor
Published: February 6 2011 10:31 | Last updated: February 6 2011 10:31

George Orwell once accused fellow socialists of playing with fire without knowing fire was hot. The same could be said of investors who are repeatedly drawn towards speculative bubbles without understanding the risks.

Even the experience of several great bubbles over the last quarter of a century – from Japan’s bubble economy of the late 1980s through to the global credit spree of the past decade – hasn’t made them any wiser. Today, investors are entranced with China’s apparently glorious prospects. Yet they are ignoring the dangers posed by China’s overheated property market.

Bubbles can be identified before they burst using simple valuation tools. But numbers alone don’t tell the whole story. Investors also need an intellectual framework to understand the dynamics of bubbles. A new book, Boombustology (Wiley) by Vikram Mansharamani provides an excellent overview of the leading work in this field.

Mr Mansharamani starts out with George Soros’s theory of reflexivity. According to Mr Soros, markets are determined by a “two-way feedback mechanism in which reality helps shape the participants’ thinking process and the participants’ thinking helps shape reality”. Chaos rules as errors of perception feed back into reality.

The financial instability hypothesis of the late Hyman Minsky complements Mr Soros’s reflexivity. Mr Minsky’s famous “Ponzi finance” theory describes a situation in which already inflated asset prices can only be sustained by further price appreciation and ever increasing leverage. When the flow of credit dries up, Ponzi finance structures collapse.

According to Mr Minsky, when Ponzi finance is widespread the economy is likely to develop into a “deviation-amplifying system”. All great bubbles have easy money and growing leverage. Mr Mansharamani turns to Friedrich Hayek and the Austrian economists to show how inappropriately low interest rates fuel credit growth and over-investment.

Behavioural psychology also helps explain why bubbles develop. Humans have a chronic tendency to overconfidence. We underestimate the probability of events that we haven’t recently experienced (what’s known as the “availability heuristic”). For instance, in Japan in the late 1980s and again in the US in the early 2000s, it was generally believed house prices could not fall because they had been on a continuously rising trend in earlier decades.

Mr Mansharamani surveys recent research into swarm behaviour in the insect world. While ants lay and follow trails of pheromone, the speculative crowd follows a trail of recently minted money. Politics provides yet another prism for identifying bubbles. Great speculative booms are often stimulated by governments, sometimes with the intent of lining the pockets of public officials. All bubbles are accompanied by fraud.

China today has the characteristics of a truly great bubble. The value of the housing stock is set to exceed 350 per cent of GDP this year, the same level as Japan at the height of its real estate bubble. Construction accounts for around one-quarter of economic activity in China, which by coincidence is the same level that Ireland attained before its dramatic implosion.

A reflexive process appears to be at work as the anticipation of future Chinese economic growth drives new construction, while new construction drives economic growth.

Ponzi finance proliferates in China. Wasteful infrastructure projects are funded with bank loans and land grants from local governments, which themselves depend on land sales for the bulk of their income. Chinese banks bypass credit restrictions by securitising loans to developers, while state-owned enterprises boost profits by dabbling in real estate. China’s financial system has become in Mr Minsky’s phrase a “deviation-amplifying system”. When land prices stop rising and real estate credit dries up, non-performing loans are likely to surge.

China’s asset price inflation has been driven by artificially low interest rates, which is contributing to a massive misallocation of capital into investment projects with palpably low returns. This bubble is the product of government policy. The construction boom was instigated to cushion the Chinese economy from shock waves of the global financial crisis.

Because Chinese property has risen continuously over the past decade, most people assume prices will rise indefinitely. Yet the newly constructed apartments in many Chinese cities are unaffordable to anyone but the rich elite, speculators have acquired millions of apartments that are currently sitting empty, while a glut of new supply is set to hit the market this year.

Beijing is trying to control the runaway housing boom with restrictions on housing speculation and tighter credit.

Mr Soros said speculative bubbles continue until the misperceptions of investors are so glaring they can no longer be ignored. In China, we may not be far from that point.

Edward Chancellor is a member of the asset allocation team at investment manager GMO

Wednesday, December 8, 2010

Wikileaks revealing insight into Chinese Leadership

This was from yesterday's WSJ but it's an interesting peek into the worlds of Xi Linping and Li Keqiang - China's new generation of leaders.

Loved the bit about Chinese GDP figures being "man-made"...

BEIJING—Leaked U.S. diplomatic cables are shedding rare light on the personalities and opinions of Xi Jinping and Li Keqiang—the men tipped as China's next president and premier, respectively—while also revealing a surprising level of openness in their past dealings with the U.S. Embassy.

Some of the latest batch of cables published by the WikiLeaks website contain rare detailed accounts of separate meetings in 2007 between the two future Chinese leaders and Clark T. Randt Jr., then the U.S. ambassador in Beijing.

Although the cables are three years old, the level of detail in them could still embarrass Messrs. Xi and Li, and discourage other leaders from talking openly with U.S. officials, especially in the run-up to a once-a-decade Communist Party leadership change due in 2012.

Hu Jintao, China's president and party chief, is expected to retire along with seven other members of the party's nine-man Politburo Standing Committee—its top decision-making body—but precious little is known about the personal views of the people expected to replace them.

One cable reveals that Mr. Xi, now vice president, is a fan of Hollywood movies about World War II, including "Saving Private Ryan," but dislikes Chinese historical kung-fu dramas such as "Crouching Tiger, Hidden Dragon," and "Curse of the Golden Flower."

"Americans have a clear outlook on values and clearly demarcate between good and evil," Mr. Xi is quoted as saying. "In American movies, good usually prevails. … Some Chinese movie makers neglect values they should promote."

According to the cable, Mr. Xi also enjoyed "The Departed" and had a DVD copy of "Flags of Our Fathers," which he was hoping to watch soon.

On politics, Mr. Xi admits that people are unhappy with the working style of government and party officials, but says it shouldn't be surprising that among the party's 70 million members, "several thousand may be problem cases," according to the cable.

"For the present, people will not take to the streets to complain about officials' work styles," he is quoted as saying. "While there are many problem makers in the Party, the Party also counts among its members the elite of society."

He expresses strong support for private businessmen, as well as concerns about illegal financial activities among the rich, and the income disparity between the prosperous east and the relatively undeveloped western hinterland.

He also says that on a visit to the U.S. in 2006, he and other Chinese officials were worried about being served with legal papers in relation to cases brought by followers of the Falun Gong movement, which is banned in China.

Mr. Randt wrote the cable after having dinner with Mr. Xi at the ambassador's residence in Beijing when Mr. Xi was Communist Party chief in the eastern province of Zhejiang. Seven months later, Mr. Xi was promoted to the party's Standing Committee.

Mr. Xi's status as heir apparent was confirmed in October when he was appointed vice chairman of the Central Military Commission—a key military post seen as a stepping stone to the top party and government posts.

The night after meeting Mr. Xi, Ambassador Randt also had dinner at the residence with Li Keqiang, who was then Party chief in the northeastern province of Liaoning, but is now a vice premier and a member of the standing committee.

That cable quotes Mr. Li saying gross domestic product figures from China's local governments are "man-made" and therefore unreliable—a stunningly candid admission for the man tipped to take over the reins of the economy from Premier Wen Jiabao.

He expresses strong support for free trade and the rule of law, as well as concern about income disparities within Liaoning, and pride over a project that moved 1.2 million slum dwellers into government-subsidized housing, according to the cable.

"Although Liaoning residents are dissatisfied with education, health care and housing issues, it is corruption that makes them most angry," he is quoted as saying.

Mr. Li also admitted to sometimes relying on friends to gather information that he could not obtain for himself through official channels, and suggested that there is substantial internal debate about Chinese legislation.

"People don't see the behind-the-scenes reviews and feedback session that result in the original drafts of the bills being altered substantially before passage," he is quoted as saying.

The cable describes him as "engaging and well informed" with a "good sense of humor," but "coy about his hobbies and interests," although he admitted that he liked walking and built it into his schedule.

He also said he particularly enjoyed visiting Oklahoma on his last visit to the U.S. in 2001, according to the cable.

The two dinner meetings are certain to have been approved by the Party and both men will have chosen their words carefully, both to reflect the Party line and to be polite to their host.

But the details of their private conversations are still potentially embarrassing, as they reveal a far greater degree of openness than is usually conveyed by China's tightly controlled state media, which is often fiercely critical of the U.S.

Even if the cables don't precisely reflect the two Chinese leaders' personal opinions, they do shed light on how the U.S. government perceives them.

Another cable from Ambassador Randt in April 2008 quotes "embassy contacts" saying President Hu was "firmly in charge" of China's policies in Tibet following unrest there the previous month.

Despite reports of a possible split within the leadership over Tibet policy, no standing committee member had sufficient stature to challenge Mr. Hu, who served as party chief in Tibet in the late 1980s, that cable says.

Yet another cable from the embassy, dated July last year, describes the Standing Committee as being increasingly motivated by a desire to forge consensus and protect vested interests among its members and their families.

It quotes an unnamed contact saying there was "no reform wing" within a leadership that had carved up China's "economic pie," "creating an ossified system in which 'vested interests' drove decision-making and impeded reform."

Some policies, such as those on Taiwan and North Korea, had to be decided by the full 25-member Politburo, the cable said, quoting "embassy contacts with access to leadership circles."

China has declined to comment on specific cables, but said Tuesday it hoped the leaks would not affect ties with the U.S.

Washington has also declined to comment on the leaked cables' contents, while denouncing their release as a crime.

Friday, August 20, 2010

Red Pall over China

Great piece from the FT on China's hidden inequality issue, a day after China's economy overtook Japan's.

China’s grey economy
August 19 2010
It is usually pleasant to find some extra money hidden under the mattress. So the claim that China has at least Rmb10,000bn ($1,472bn) in “grey” or undeclared income might be good news – more wealth for the government to tax and perhaps a bit more potential spending from Chinese consumers. Yet dismay should be the Politburo’s principal response to the findings of a recent study by the National Economic Research Institute, a non-governmental group.

The study, sponsored by Credit Suisse, is based on more than 4,000 anonymous interviews in 64 cities around the country. It provides a cross-check to the official quarterly income reports from the National Bureau of Statistics. When asked by the authorities, households seem routinely to understate their wealth, out of fear that the taxman will get the data. Incomes according to NERI are on average 90 per cent higher than the NBS version. The gap was 78 per cent three years ago.


What’s more, the wealthiest 10 per cent have a NERI average per-capita income of Rmb97,000, 65 times that of the poorest 10 per cent. That ratio was 55 times in the 2005 NERI study. The 2008 NBS calculation came up with 23, high enough to give China a Gini index ranking, a measure of wealth inequality, on a rough par with the US. The unofficial number puts China in South American territory.

Premier Wen Jiabao, for whom fairness and justice are “more glorious than the sun,” wants to help the most downtrodden urban workers. The upcoming 12th five-year economic plan is expected to go big on reforms of income distribution. The NERI study, supported by strong anecdotal evidence, suggests he is fighting a losing battle. Hidden stock gains, property deals and plain old hongbao – red envelopes stuffed with cash – are forcing China’s rich/poor divide wider by the day.

Thursday, March 18, 2010

Mullah, Mosque, Military...

Below is a text from Seminar. There's no link but it's a great outsider's view of Pakistan from one of its former insiders.

x


Pakistan’s existential threat

SHUJA NAWAZ


WHEN searching for the ‘elusive truth’, it is useful to not rely solely on the so-called experts but also seek out the poets and novelists. A brilliant new novel, The Wasted Vigil by Nadeem Aslam, a British author of Pakistani origin, more than the myriad expert accounts may help us better understand the conflict raging in our region.

The book, set in Afghanistan, has one of the main characters, a man named Marcus, talking about the country. He says, ‘The entire world it seemed had fought in this country, had made mistakes in this country, but mistakes have consequences and we don’t know whom to blame for those consequences. Afghanistan itself? Russia? The United States? Britain? Arabia? Pakistan?’ Another telling line from the book is: ‘Only the dead have seen the end of war.’ In the wake of the horrific Taliban killings of innocent civilians and attacks even on mosques, that quote brilliantly captures the mess that we face in Afghanistan and Pakistan today. Until the two countries themselves decide to sort out their affairs, no amount of external assistance will help do the job.

In Pakistan, it would be a disservice to look at this current conflict solely as an Afghanistan issue because Pakistan too faces the same wars within. There is a continuous battle between what the government of Pakistan wants, irrespective of its complexion, and what the people of Pakistan want. Our history clearly indicates that whenever we have experienced long periods of autocratic rule, particularly military rule, the result is a stunting of all democratic systems and institutions of civil society.

It is equally critical that we factor in the economic crisis affecting Pakistan today. In a highly urbanized society where the poorest strata spend up to two-thirds of their income on food, an inflation rate in the double digits constitutes a near insurmountable challenge for the government. In addition, the country is facing power, water, and even sugar shortages, as oligopolist cartels ensconced in government and in parliament maintain their hold on scarce resources at the expense of the common person.



Autocracy stunts democracy in Pakistan: unfortunately, any civilian government that inherits power from an autocratic regime in Pakistan too ends up acquiring all the trappings of autocracy that preceded it and is loath to part with them. That is exactly the situation in Pakistan today. General Pervez Musharraf had hijacked a parliamentary system and made it into a presidential system. The current regime essentially continued that system and only now is slowly being forced to shed those powers. But until that autocratic system is fully reversed, normal political development in Pakistan will remain a dream.

I am reminded of Yogi Berra’s famous aphorism that when you get to a fork in the road, take it! That is the Pakistani situation. We are forever at that fork and we are forever taking it, not knowing where we might end up. It is ironic that it was the Pakistan Army that helped stage a free and relatively fair election in 2008 and has now been elevated to the rank of most respected national institution in a poll done by the International Republican Institute. As the most organized and disciplined agency in the land, the army exerts enormous power in all spheres, especially on the Afghan war, the fight against internal militancy, Kashmir, and nuclear issues. That army is now under direct attack by the militant Tehreek-e-Taliban and its partners.

As for Afghanistan, it is now quite clear that the United States went in without a comprehensive plan for winning the war beyond the military ouster of the Taliban. This was evident in its shift of focus from Afghanistan to Iraq, a completely unnecessary war. There was no concerted effort at ensuring the socioeconomic rehabilitation of the country after decades of war, or even on forming a coalition with all the countries in the region, including India, China and Iran to help stabilize the situation.

Further, the US failed to pro-actively help Pakistan transform its own army and Frontier Corps into a counterinsurgency force by equipping and training it for that purpose. Having been in a kind of reactive mode since 2001, it is only recently that it realized that it did not even know what was happening to all the money it had given to Pakistan.



Another point worth remembering is that the insurgency inside Afghanistan, or the civil war as some call it, is in part fuelled by some internal issues. For instance, Afghanistan has so far not shown any willingness to address the grievances of the Pakhtoons against the excesses of the Northern Alliance in the wake of the US invasion. That is a deep hurt which apparently still affects thinking in the Pashtun belt of Afghanistan and Pakistan, enhancing support for the Taliban on both sides of the Durand Line.

It should by now be evident to all that the United States cannot win the war in Afghanistan without the full and willing participation and support of Pakistan, its army, and its general population, especially with the new civilian administration in place inside Pakistan. But equally, the US must remember that it cannot win by aligning itself to any single party or any single individual, as was evident in the misplaced reliance on General Musharraf after 2001. Simultaneously, we must keep in mind that neither capitulation to nor confrontation with US interests in Afghanistan, and especially in FATA, is the right approach. Rather, engagement and a joint effort to eliminate the causes of militancy inside both Afghanistan and Pakistan are far more likely to work.

Another point – and this comes from my own visit to FATA and NWFP – is that the Pakistan Army is seen as an alien force inside FATA. With the Frontier Corps having lost its efficacy over the years, both the army and the Frontier Corps appear ill-equipped and ill-trained for counterinsurgency warfare. What compounds their difficulty is that they are now operating against their own people.

We also need to admit that the traditional system of governance inside FATA, the Federally Administered Tribal Area that abuts Afghanistan, which involves the government’s political administrators and the largely compliant tribal mullahs, has failed. It has been displaced and supplanted by a different system under which new renegade leaders and religious leaders have assumed greater importance. We must recognize that the old system cannot be restored in its entirety, and if it is at all to be used, can only be as a finite and transitional mechanism.



Finally, no plan for FATA will work unless it involves the local people and they are given a responsible role in the implementation of the plan. Simultaneously, we have to ensure that all efforts are made to stem the leakage of funds or resources by the privileged few, and that there is equitable sharing of opportunities and finances. On my visit to North Waziristan I had the opportunity to speak with 23 tribal maliks in North Waziristan and it was amazing how clear-headed they were on their needs. Their needs are very basic and no different than the needs of people living in the United States or China or India or Pakistan: water, education, and primary health care. All they want is an equal opportunity to be able to order their lives.

On the military side, let me begin by quoting General David Petraeus, a key person engaged in evolving a new strategy for Afghanistan and Pakistan that might allow the United States to exit the area with honour. ‘You cannot shoot your way out of an insurgency. You have to recognize that the military-civil equation is 20 per cent military and 80 per cent civil and political.’ So whatever the focus of the US relationship with Pakistan, it must not allow the military-to-military relationship to overshadow the relationship with the civilian government on the one hand and with the people of Pakistan on the other. If it only concentrates on the government and loses the support of the general population of Pakistan, as it has over the last few years, then whatever the approach taken, it is doomed to failure.



In the absence of a national consensus on what Pakistan wants and what kind of society the people of Pakistan want to have, the only option before the government – once the Tehreek-e-Taliban (the homegrown version of the Taliban in Pakistan) came into being and started attacking the military and civilian administration in FATA as well as in the settled area of Swat, Dir and Chitral – was to send in the army. The policy continued even after the new government took over, even though the military had briefed the civilian government on what had happened in the past and asked them for direction about the future.

But in the absence of an overall civilian direction, the army was sent in almost as a default option, moving in the equivalent of six infantry divisions into FATA and Swat. But the Pakistan Army is a conventional force, whose posture has always been to be prepared for an eventual war with India, in case India – choosing its new strategy of ‘cold start’ – decides to shoot first and ask questions later. In having to move six infantry divisions from the strike force that faces India, the Pakistan Army suddenly felt vulnerable, a fact that must be recognized.



Further, the army did not have all the necessary tools for its operations. The Frontier Corps had over time deteriorated, no longer attracting the best officers from the Pakistan Army. And of course, all the soldiers are locally recruited. Thus, while they may be suitable for minor policing, when used in a war-like situation to fight people from their own tribal system and their own tribes, the result is ambivalence. Although efforts have been made to improve the Frontier Corps, poor training and morale affects performance. And in the face of a well-paid cadre of the Tehreek-e-Taliban Pakistan (TTP), possibly their emoluments too need to be enhanced.

Also, the locals impressed on the Frontier Corp soldiers that they were fighting on behalf of the infidels. Many of the officers in the army that I spoke to saw themselves as an alien force, not surprising given the demographics of the army. Though Pakistan has an army that represents all the provinces, but since the Punjab has the largest population, 60 per cent of the military force in Pakistan is Punjabi. In my travels in North Waziristan, for instance, it struck me that even army officers posted there for over two years still did not speak any Pashto. There was a clear disconnect. Nevertheless, despite these handicaps, the Pakistan Army has rapidly adapted to the emerging situation and learnt on the move.



In the Swat district, which is part of the settled area of Pakistan, the army has been learning by doing. Yet, it is very difficult for a military institution to change. Even the United States Army has taken a long time since the invasion of Iraq to learn many of the lessons of counterinsurgency. One such lesson is to engage insurgents and militants on all fronts, without ceding any intellectual or physical space. A military operation launched in Swat was called Mountain Viper. The name might as well have come out of the Pentagon; it meant nothing to the local population, nor the soldiers. It essentially ceded religious ground to the militants who claim to speak for Islam, wanting to bring shari’a (the Islamic code of ethics and law) into this area. However, nobody countered them by stating that this was not shari’a; that the militants were introducing a convoluted version of Islam; that they were mixing local custom and calling it shari’a. Shari’a is what we know to be Islam and what the majority of Pakistanis want it to be!

Subsequently, the commander of the first division sent into Swat launched a new operation. He used a Farsi and Urdu term, Rah-e-Haq, for that operation, which meant that it was part of the true faith or the truth. He publicized it in order to tell people that the army was acting on behalf of a government that believed in Islam and the true faith and that the insurgents were miscreants who were following a heretical path. The operation was far more successful. The lesson is clear: we have to fight using both brains and guns.

The other interesting development is that local people have now understood that the militancy and the presence of Al Qaeda, foreign fighters, as well as Afghan and local Taliban, is creating economic costs, besides causing death and destruction of their property. This has led to a spontaneous upsurge against the militants, in part primed by money from the government, and the setting up of ‘lashkars’ of local tribes. Historically, such lashkars have been drawn upon by the administration either at times of civil unrest or to quell criminal activity, because traditionally it has been the responsibility of the tribes to resolve such issues. So the political agent would approach the tribal mullahs who would then form a group to resolve the problem.

In Bajaur, we saw an instance of such spontaneous formation, particularly among the major Salarzai tribe. Mullah Zaib Salarzai, the leader of the tribe said, ‘The Taliban fighters and commanders are of humble background and thus not in a position to challenge the lashkar. They will be eliminated in a few days.’ He promised the army that if these people (the Taliban) did not leave their area, they would be killed and their property destroyed. To me this appears a good way to approach the problem – encourage the local population to take care of it.



The Pakistan Army was initially slow and took time to acquire the necessary knowledge about counterinsurgency. A favoured strategy was to isolate the militants and the insurgents from the rest of society. Normally this would involve placing the military with the population and providing security from within, not remaining in fortresses and camps outside. Instead, the army in Bajaur asked the people not involved with militancy to evacuate. Thus anybody who chose to stay behind was by default seen as a militant. The trouble with such an approach, however, was that it created unhappiness among the displaced people, more so since not enough planning had been done by the civilian agencies to accommodate them in the middle of winter, to provide them with shelter, food and clothing or to rehabilitate them when they eventually return to their homes. This is now a key element, a kind of doctrinal shift within the Pakistan Army, from a tactical use of counterinsurgency measures to forging a combined strategy with the civilians.



Earlier this year, when the Taliban’s atrocities in Swat provoked a major military operation, the army was prepared: it coordinated its efforts with the air force, identifying and pounding targets before the land forces moved in. Meanwhile the local population was evacuated. However, here too, a lack of planning was evident and only some 200-300,000 of the two million internally displaced persons were accommodated in official camps. The population at large housed the rest privately. Though a testimony to the strength of civil society, it exposed the weakness of civil administration.

A similar approach was followed later in the year in South Waziristan, the headquarters of the TTP. For one week the Pakistan Air Force attacked some 140 plus identified targets. Then the army moved in and ousted the TTP. It has since followed up with attacks in Orakzai, Kurram and Khyber, reducing the ability of the Tehreek to regroup in other parts of the border region. The TTP in turn has taken suicide attacks to the heart of the country and directly to army headquarters, even attacking mosques where militarymen and their children pray.

We also need to recognize the abiding fear inside Pakistan, as well as in its army, of a powerful India to the East and particularly its potential of becoming a regional hegemon. Until that issue is resolved, there will always be ambivalence about fighting the war within: should we retain our conventional force or should we be concentrating on unconventional approaches and weapons?



The army also strongly feels that the United States has been niggardly in its support, denying them the equipment they require. The night-vision goggles originally provided by the US were of mid-20th century vintage. They only operated ten nights of the month, failing to work in bright moonlight. This has now been rectified. The helicopters needed to move troops rapidly over this vast area, an arc that goes from South Waziristan all the way up to Dir and Chitral, were not forthcoming. Only one squadron was initially equipped by the US for that purpose. Though 27 Cobra helicopters were promised, not all were delivered with alacrity. Another squadron was recently produced for the Waziristan operation but some are already out of service due to lack of spares. Meanwhile, when additional US forces were recently deployed in Afghanistan, hundreds of helicopters suddenly became available and were seen as critical to overcome the problem of rough terrain and mobile warfare. None of this went unnoticed by the Pakistani Army, adding to the distrust between allies.

Over time, there is a need to move away from a purely military solution and strengthening the military alone. There is a need to adopt an approach that will engage the United States with the civilian population of Pakistan and, through them, with the government of Pakistan. This alone will allow economic development in Pakistan to be kick-started. In this regard, President Obama’s new Afghanistan strategy of December offers some hope. As its operational details become clear and if they address Pakistan’s concerns that the US will not simply be pushing the Taliban into Pakistan and then attacking them with increased drone attacks, we may see progress.



The Pakistan Army is already overstretched fighting the domestic Taliban. It cannot open up a new front against the Afghans who flit between Afghanistan and Pakistan’s border region. Pakistan is especially concerned about the drone attacks moving to Balochistan, an action that may inflame public opinion and put the country on another collision course with its American friends as the US demands that Pakistan do more and Pakistanis react that the US wants them to ‘do all’.

Centcom Commander General David Petraeus, in an interview with National Public Radio on 4 December, provided a clear understanding of the situation: ‘There are limits to how fast we can expect or perhaps demand that Pakistan can take certain actions. The fact is that they have shifted a substantial amount of their military capability, for example the Indian border, from other locations, to deal with this extremist threat. And I think you cannot underestimate how important the steps they have taken in the last nine or 10 months are. They have also taken very significant casualties in these fights with the extremists. And their civilians have suffered severe losses as well, as these extremists have fought back.’

Such an understanding may yet help restore balance to the US-Pakistan relationship. Equally important is the need for India to show, in the words of Canadian scholar Peter Jones, ‘strategic altruism’ towards Pakistan. Pakistani fears and concerns about Indian involvement in Afghanistan and even Indian support of some disruptive activity in Balochistan need to be addressed by India directly. The terrorist attack on Mumbai on 26 November 2008 was successful in derailing the Indo-Pakistan attempt to collaborate against terrorism. A year later, seven persons have finally been brought to trial in Pakistan for involvement with the attack. Hopefully, a greater openness between the intelligence agencies of both countries will allow them to remove each other’s paranoia. US scholar Christine Fair’s comments about Indian intelligence activities on the western frontier of Pakistan have added to the paranoia inside Pakistan about its neighbour to the East.



The external and internal situation in Pakistan is interconnected. It is important for Pakistan to address its domestic economic and political situation rapidly so that the civilian system remains robust and transparent and can be rid of corruption. Externally, a normalization of relations with India will allow it to concentrate on the war within. An equal responsibility for this rests on India and the international community. The US and the NATO coalition will need to ensure that it does not abandon Afghanistan in a precipitate manner, as some of the initial reports about the Obama strategy appear to indicate. The entire region is deeply intertwined economically and politically. The solutions will not be simple or short-term, but a start needs to be made by all countries involved.

President Obama in his West Point speech of 1 December 2009 observed:

‘In the past, there have been those in Pakistan who’ve argued that the struggle against extremism is not their fight, and that Pakistan is better-off doing little or seeking accommodation with those who use violence. But in recent years, as innocents have been killed from Karachi to Islamabad, it has become clear that it is the Pakistani people who are the most endangered by extremism. Public opinion has turned. The Pakistani Army has waged an offensive in Swat and South Waziristan. And there is no doubt that the United States and Pakistan share a common enemy.

‘In the past, we too often defined our relationship with Pakistan narrowly. Those days are over. Moving forward, we are committed to a partnership with Pakistan that is built on a foundation of mutual interest, mutual respect, and mutual trust. We will strengthen Pakistan’s capacity to target those groups that threaten our countries, and have made it clear that we cannot tolerate a safe haven for terrorists whose location is known and whose intentions are clear. America is also providing substantial resources to support Pakistan’s democracy and development. We are the largest international supporter for those Pakistanis displaced by the fighting. And going forward, the Pakistan people must know America will remain a strong supporter of Pakistan’s security and prosperity long after the guns have fallen silent, so that the great potential of its people can be unleashed.’



But American support alone will not solve Pakistan’s problems. Only Pakistan holds the key. 2009 was a ‘year of decision’ inside Pakistan, as the people and the army took the battle to the insurgents. 2010 will show how far a cohesive national effort can be formulated to win this war in order to secure Pakistan’s very existence.



* Shuja Nawaz is the author of Crossed Swords: Pakistan, its Army, and the Wars Within, Oxford University Press, 2008.

Saturday, March 6, 2010

a passage to tolerance and power

My piece in the Guardian saying Goodbye India is here.

A longer version is below

It was hard not to be infected by the hubris of India - a nation that feels part of history, an essential actor on the global stage. Yet if my experience was to feel admiration for a nation which had thrived as a democracy despite unbounded poverty, mass illiteracy and entrenched social divides, experiencing India as a reporter was a string of enervating and dispiriting episodes.

Whether one found oneself stepping into the Dantesque hell of a rural police station where half-naked men were hung from the ceiling during an interrogation or talking to the parents of a 12-day-old baby bulldozed to death in a slum clearance, day-to-day India was a shocking news story. Even in the country's most cosmopolitan city, Mumbai, I was aghast to see mobs of locals attack their fellow citizens for being “north Indian migrants”.

The romance of India's idealism was undone by its awful daily reality. The venality, mediocrity and indiscipline of its ruling class would be comical but for the fact it appeared to make politicians appear incapable of doing anything for the 836 million people who lived on less than 25p a day.

The selling of public office for private gain appeared so bad that it seemed the only way to make poverty history in India was to make every person a politician. Last year it was shown that the wealth of local representatives during their last five year term in the northern state of Haryana rose at an astonishing rate of £10,000 a month. Their constituents were lucky if they saw an extra few pounds extra a month.

The burden of democracy in India - to borrow from Yeats, the Irish poet much influenced by mystical Hindu thought - was that “the best lack all conviction, while the worst are full of passionate intensity”.

Yet remarkably the country continues to confound those who write it off. True India’s transformation is no Chinese quick-march into the future. Hundreds of millions of Indians still openly defecate in fields, at roadsides and beside train tracks. Common tropical diseases overwhelm the country's poorly-funded public health system.

In my six years working and living in the country, I saw it redeemed repeatedly by three remarkable quirks of history: a written liberal constitution, religions rendered ethical and a talent for sabotage. Take the last first. India won her independence not through war or revolution but non-cooperation, street protests and the quiet subversion of the economy.

Civil society in India has acquired an unrivalled mastery of such skills and its campaigners have become more savvy than politicians in realizing that democracy will not prevail unless its proponents show success at governing. The result is that it was activists who shamed the government last year into enacting a law making children’s education compulsory.

Coming from Britain, debates about the merits of a written constitution appeared to be a little academic. Yet India’s constitution, the longest in the world, vividly provided a moral compass for justice in a society where violence had been the best measure of one’s power and standing.

When homosexual sex was legalised by Delhi’s high court last summer, the judges justified striking out the previous law criminalizing the gay community saying it was in violation of the Indian constitution. By appealing to the highest sense of being Indian, the bench ended years of homophobia.

To claim religion enabled Indians to come together rather than come apart might seem far fetched. British India was rent asunder by religion at the time of independence and one of my first reporting tasks was to visit Muslim victims of state-sponsored pogroms languishing in refugee camps in Gujarat. Yet such violence in India appeared more political than theological.

During my time in India it was Europe that appeared intolerant, unable to embrace religious diversity. Whereas I awoke each day to the sound of the muzzein and was warmly welcomed by veiled Muslim neighbours for Eid celebrations, the Swiss voted to outlaw the construction of minarets.

In France a law banned headscarves and turbans in schools. Across the Channel, justice secretary Jack Straw wanted Muslims to remove the burkha. Nobody appeared to want the Turks to join the European Union. It seemed Europe’s enlightened liberalism was a cultural straightjacket of unspoken but distinctly Christian values.

By contrast tolerance in India was rooted in its own unique contribution to religious thought. The country’s philosophical genius, established today in law and custom, was that it mattered not what you believed but instead how you behaved. Lead a compassionate, religious life and the state would leave you alone. The result of this thinking is that today Indian streets are shared by people look look, dress and pray different - making them a celebration of the nation’s diversity. In Europe this was a crisis of identity.

It’s an open question whether the society being created by these forces is a fair one. India is perhaps the most unequal country on the planet, with a tiny elite engorged on the best education, biggest landholdings and largest incomes. Those born on the bottom rungs of the social hierarchy are severely handicapped in their life chances for no fault of their own - suffering a cruel legacy of caste bigotry, rural servitude and class discrimination.

To challenge this Indian politics is increasingly becoming a debate about the have and have nots. The rise in Maoist guerilla violence has come about because of the widening gulf between rich and poor in the country. This domestic issue is having a major impact on geopolitics. Delhi’s stance in almost every global talks is reduced, quite rightly, to the impact on poverty reduction in India.

Whether it is climate change, trade talks or nuclear armament India has forced wealthier nations to acknowledge that international relations is not just about power but morals. India’s negotiates with the hand dealt in the future: in a matter of a few decades New Delhi will be the third largest economy in the world. This coming gigantism means India must today be bought off with a level of compensation that is high enough to signify guilt from the west.

Coming back to London has meant coming home to a country that lives in the shadow of its former colony. Britain may see itself as a major power, sending troops to pacify Islamic insurgents and teaching the world about a thing or two about good governance. For all the bragging, these are days of delusion that will see us morbidly disappointed. Unlike Indians we do not live on the cusp of a stirring transformation. Overspent and overstretched, we live instead on the crest of a falling wave.

Thursday, December 31, 2009

More Great Games

Below is the complete text of a NYT piece which asks why is Nato securing the peace for Chinese investment in Afghanistan? It's basically a follow up to Indian diplomat M Bhadrakumar's excellent analysis last week.

This is a telling comment on the voraciousness of China's economy which is subservient to, who else, the United States.

Afghanistan is not the only place where the United States and China find themselves so oddly juxtaposed in the post-9/11 world. China is investing more in extracting Iraqi oil than American companies are. It has reached long-term arrangements to buy gas from Iran, even as the government there comes under the threat of Western sanctions for its nuclear program. China has also become a dominant investor in Pakistan and volatile parts of Africa.

But it is in Afghanistan where China’s willingness to take risks for commercial and diplomatic gain are most striking.


It's in the US interest for Beijing's heavy industrial base to continue as long as China produces low cost goods for the rest of the world. Once that changes, things could change in their unequal partnership.


UNEASY ENGAGEMENT
China Willing to Spend Big on Afghan Commerce


By MICHAEL WINES
Published: December 29, 2009
KABUL, Afghanistan — Behind an electrified fence, blast-resistant sandbags and 53 National Police outposts, the Afghan surge is well under way.

Uneasy Engagement
A Global Hunt for Resources
This is the ninth in a series of articles examining stresses and strains of China’s emergence as a global power.
Related
Uneasy Engagement: China Hunts for Art Treasures in U.S. Museums (December 17, 2009)

Uneasy Engagement: China’s Export of Labor Faces Scorn (December 21, 2009)

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Imaginechina, via Associated Press
The Beijing headquarters of the China Metallurgical Group Corporation, known as M.C.C.

The New York Times
Aynak's deposits were known in the time of Alexander the Great.
But the foot soldiers in a bowl-shaped valley about 20 miles southeast of Kabul are not fighting the Taliban, or even carrying guns. They are preparing to extract copper from one of the richest untapped deposits on earth. And they are Chinese, undertaking by far the largest foreign investment project in war-torn Afghanistan.

Two years ago, the China Metallurgical Group Corporation, a Chinese state-owned conglomerate, bid $3.4 billion — $1 billion more than any of its competitors from Canada, Europe, Russia, the United States and Kazakhstan — for the rights to mine deposits near the village of Aynak. Over the next 25 years, it plans to extract about 11 million tons of copper — an amount equal to one-third of all the known copper reserves in China.

While the United States spends hundreds of billions of dollars fighting the Taliban and Al Qaeda here, China is securing raw material for its voracious economy. The world’s superpower is focused on security. Its fastest rising competitor concentrates on commerce.

S. Frederick Starr, the chairman of the Central Asia-Caucasus Institute, an independent research organization in Washington, said that skeptics might wonder whether Washington and NATO had conducted “an unacknowledged preparatory phase for the Chinese economic penetration of Afghanistan.”

“We do the heavy lifting,” he said. “And they pick the fruit.”

The reality is more complicated than that. The Chinese bid far more for the mining rights to the Aynak project and promised to invest hundreds of millions more in associated infrastructure projects than other bidders. It is a risky venture that has not yet proved to be economical, and it has already been dogged by allegations of bribery.

But the Aynak investment underscores how China’s leaders, flush with money and in control of both the government and major industries, meld strategy, business and statecraft into a seamless whole. In a single move, Beijing strengthened its hold on a vital resource, engineered the single largest investment in Afghan history, promised to create thousands of new Afghan jobs and established itself as the Afghan government’s pre-eminent business partner and single largest source of tax payments.

An Odd Global Pairing

Afghanistan is not the only place where the United States and China find themselves so oddly juxtaposed in the post-9/11 world. China is investing more in extracting Iraqi oil than American companies are. It has reached long-term arrangements to buy gas from Iran, even as the government there comes under the threat of Western sanctions for its nuclear program. China has also become a dominant investor in Pakistan and volatile parts of Africa.

But it is in Afghanistan where China’s willingness to take risks for commercial and diplomatic gain are most striking.

China Metallurgical Group, often called M.C.C., will build a 400-megawatt generating plant to power both the copper mine and blackout-prone Kabul. M.C.C. will dig a new coal mine to feed the plant’s generators. It will build a smelter to refine copper ore, and a railroad to carry coal to the power plant and copper back to China. If the terms of its contract are to be believed, M.C.C. will also build schools, roads, even mosques for the Afghans.

The sweeping agreement has some experts rubbing their eyes in disbelief. “It’s almost as if the Chinese promised too much,” said one international expert who, like some others interviewed, refused to be identified for fear of alienating the Afghans or the Chinese.

But even if elements of the agreement fall through, the Chinese have already positioned themselves as generous, eager partners of the Afghan government and long-term players in the country’s future. All without firing a shot.

Nurzaman Stanikzai was a mujahedeen in the 1980s, using American-supplied arms to help drive the Red Army from his homeland. Today he is a contractor for M.C.C., building the Aynak mine’s electric fence, blast wall, workers’ dormitories and a road to Kabul.

“The Chinese are much wiser. When we went to talk to the local people, they wore civilian clothing, and they were very friendly,” he said recently during a long chat in his Kabul apartment. “The Americans — not as good. When they come there, they have their uniforms, their rifles and such, and they are not as friendly.”

American troops do not, in a narrow sense, protect the Chinese. The United States Army stations about 2,000 troops in Logar Province, where Aynak is located. But an Army spokesman said they generally patrolled well south of the mine area and had not provided direct security for Chinese investors or mine workers.

The Afghan National Police, which does protect the mine, was largely built and trained with American money. The 1,500 guards the police have posted in and around Aynak are special recruits not drawn from the main force, according to Maj. Gen. Sayed Kamal, who heads the National Police.

But the conclusion is inescapable: American troops have helped make Afghanistan safe for Chinese investment. And there is no sense that either government objects to that reality. As diplomats and soldiers alike stress, the war in Afghanistan was never motivated by commercial prospects. Had an American company won Aynak, some Afghans noted wryly, critics inevitably would have accused the United States of waging war to seize the country’s mineral wealth. Moreover, if China succeeds in developing Aynak and generating revenue for the Kabul government, that helps achieve an American goal.

“To the extent that the Chinese bring Afghanistan up to speed and start paying a billion dollars a year in royalties,” a Western government official who has followed the Aynak project said, “that would mean that Afghanistan is on a firmer ground to start paying for its own security.”

China Stays Out of War Effort

The Chinese, meanwhile, have rebuffed requests to join the Afghan war effort, saying that national policy forbids military action abroad except as part of a peacekeeping force. Instead, China’s foreign policy is based on commerce. Its state-owned companies have been snapping up energy and mineral resources worldwide for years now, often by overwhelming competitors with lavish offers.

In 2006, for example, another state-owned goliath known as C.M.E.C. swept bidding for one of the world’s largest known iron ore deposits, in Gabon, by offering to build a 360-mile railroad to the nearly inaccessible mine site, two hydroelectric dams to power the mine and a deepwater ocean port to export the mined ore.

Such splurges are both national strategy — China’s goal is to control long-term access to critical commodities — and a matter of necessity if Beijing is to keep its industrial empire running. With 700 to 1,000 steel mills to feed, China is the world’s largest importer of iron ore. Similarly, China already imports 40 percent of the world’s copper.

If the Aynak venture differs from those in the past, both international and Afghan experts say, it is because it appears to be as much a strategic coup as a commercial one.

Opportunity in Southwest Asia

The United States views Southwest Asia mostly as a security threat. China sees it as an opportunity. Decades of military cooperation with Pakistan, which shares India as a rival, have flowered into an economic alliance. A Chinese-built deepwater port in Gwadar, Pakistan, on the Gulf of Oman, is expected eventually to carry Middle Eastern oil and gas over the western Himalayas into China.

Afghanistan, which borders both Iran and Pakistan, drew scant attention from China until the middle of this decade.

Aynak’s riches had been known since Alexander the Great’s armies forged copper there 2,300 years ago. When the Soviet Union invaded Afghanistan in 1979, its geologists took core samples and mapped the Aynak deposit, but were never able to begin mining.

The Soviets were succeeded by Osama bin Laden, who used Aynak as a training camp while planning the Sept. 11, 2001, attacks on the United States. After the American-led invasion of Afghanistan, Afghan geologists rescued the Soviet surveys of Aynak and hid them until exploration could resume.

That exploration — a detailed overflight of much of the country by American surveyors in middecade — showed Afghanistan to be far richer in oil, natural gas, iron, copper and coal than anyone had imagined. Aynak, in particular, was judged a world-class copper deposit, not just huge but of unusually rich quality, and the government chose it as the first major mineral concession to be auctioned to developers.

To minimize corruption, the Afghan government decided, on the advice of American advisers, to ask the World Bank and a Colorado geological consulting firm to help oversee the bidding. A report last month in The Washington Post quoted an American official as charging that the Chinese swayed the bid with $20 million or more in bribes to the mining minister, Muhammad Ibrahim Adel, who was recently dismissed from the Afghan government in part because of the allegations. Mr. Adel has denied the charge.

Foreign experts say that the possibility of bribery in Afghanistan, one of the world’s most corrupt nations, can hardly be ruled out. But they also say that the Chinese bid was so clearly superior to others that any bribe money may have been incidental to the outcome.

“This was not a backroom deal. This was not Adel, sitting in Beijing, cooking this up,” said one of several international experts interviewed for this article. “This was thoroughly vetted by the governments of the day.”

A. Rahman Ashraf is a veteran geologist and senior adviser on mining to Afghanistan’s president, Hamid Karzai. Mr. Ashraf intervened in 2002 to stop Aynak’s mining rights from being sold under the table to a Korean bidder.

“Our wish was that this process must be very transparent,” he said of Aynak, “because this is the first time. If it is not transparent, then nobody comes to the others.”

China won the bid, he said, for good reason: it offered a package deal, from power plants to railroads to smelters to coal mines, that no other bidder could match. And it promised to staff the entire venture with Afghan laborers and managers — many of whom must be trained from scratch in a country with little mining expertise.

“After five years, it’s only Afghan engineers,” he said. “Only in administration do the Chinese stay.”

Indeed, outside experts here say, the striking aspect of China’s Aynak venture is the degree to which it left competitors in the dust. Increasingly, the world’s richest remaining mineral deposits are in hostile territory — malarial jungles, combat zones, unstable nations that possess mineral riches but no realistic way to get them to market.

With government money and backing behind them, China’s state-run giants take risks in places that even the largest private behemoths will not tolerate, and they can add sweeteners — from railroads to mosques — that ordinary mining firms are ill equipped to provide.

“The Chinese have sort of raised the bar. They’ve taken it beyond the scope of just an extractive operation,” the Western official said. “The Chinese are willing to step up and take a long-term strategic approach. If it takes 5 or 10 years, at least they have a beachhead.”

The wild card, of course, is that no outsiders can know how much of China’s Aynak venture is in fact brilliant strategy, and how much is merely a potentially ruinous business deal by an overzealous corporation. Beijing’s corporate strategy is as opaque as it is overwhelming.

China Metallurgical, a Fortune Global 500 company that has so many subsidiaries that they are mostly identified by numbers, is a signal example. The corporation reports to the top level of the Chinese government. Big foreign investments like the one at Aynak require blessing at an equally high level. M.C.C. has huge and productive investments around the world.

Yet hardly all those ventures are successes. An M.C.C. copper mine in Pakistan is widely said to have serious environmental problems. A Pakistan lead mine has been dogged by conflict, including a suicide bombing that killed 29; residents accuse the company’s Chinese work force of stealing local jobs. In Papua New Guinea, 14 Chinese workers at an M.C.C. nickel mine were injured in May in a pitched battle with local people who rioted over what they called intolerable working conditions.

That bid in 2006 for the iron mine in Gabon? Four years after C.M.E.C. struck its deal, the bargain appears to be unwinding over hints of corruption and global objections to a dam that would destroy Kongou Falls, one of central Africa’s most treasured waterfalls.

Was Too Much Promised?

Not surprisingly, that record leads skeptics to suggest that in Afghanistan, M.C.C. may have overpromised and, later, will underdeliver.

In interviews here, some experts said that M.C.C.’s Aynak bid was so munificent that the company might be forced to renegotiate lavish payments of copper royalties to the Afghan government. Others predicted that the company would be forced to shift parts of the vast project, like the yet-to-be-built railroad, to international donors.

Still others said the company’s initial environmental efforts already badly lagged behind the promise in its winning bid to strictly adhere to the Equator Principles and World Bank benchmarks — the gold standards for environmentally sensitive projects.

China Metallurgical is not talking. Its officials not only refused to be interviewed for this article, but also sought to prohibit a journalist even from photographing the mine site from afar.

But the company clearly is undeterred. The Afghan government is seeking bids for its second great mineral project, a behemoth called Hajigak that is said to contain 60 billion tons of iron ore. There are seven finalists — all companies from India and China. M.C.C. is one of them.


Li Bibo contributed research from Beijing.

Thursday, December 24, 2009

Xmas Eve reading on Great Gaming in Asia

Amazing analysis by Indian diplomat and thinker M K Bhadrakumar on China's chess moves in Central Asia, which Obama officials describe as "at the fulcrum of key US security, economic, and political interests".

Western experts often speak in a dismissive tone that the Central Asians prefer the Chinese because they never raise difficult issues such as democracy and human rights. But this is far too simplistic a reading. Central Asian countries see Western discourse on democracy and human rights as doublespeak from countries that pander to authoritarian regimes without scruples when it suits their business interests.

Central Asian countries draw satisfaction that eventually Washington is no more trampling on the region's sensitivities and ethos. The fashion in which Uzbekistan taught an enduring lesson to the European Union and the US regarding mutual respect and equitable relationship was widely noted in the region's capitals.

But that is only part of the story. The main thing is that China has reset the terms of the West's engagement with Central Asia. Western countries need to negotiate hard with Central Asian interlocutors squarely. Secondly, while they are under compulsion to abandon the cherry-picking approach they once took - touching the region's precious minerals and shying away from any further involvement such as in the manufacturing sector or agriculture


The piece's denouement is another level of Dante's Hell

China (and Russia) have reason to be on guard that Obama's Afghan surge and the new strategy as a whole essentially aim at pursuing longstanding US strategic interests of controlling Central Asia and containing Russia and China through "soft power" - methods different from those of the previous US administrations...

The specter of an open-ended US military presence in the region haunts China. After all, China was the US's accomplice against the Soviet Union in the Afghan jihad in the 1980s and should know that Washington has myriad ways to make use of radical and extremist elements as instruments of geopolitics.