Despite Loan, Economic Changes Test Pakistani-Saudi Alliance

Presidents Asif Ali Zardari of Pakistan and Mahmoud Ahmadinejad of Iran meet on the sidelines of a Shanghai Cooperation Council summit in Beijing, China, June 7, 2012
Presidents Asif Ali Zardari of Pakistan and Mahmoud Ahmadinejad of Iran meet on the sidelines of a Shanghai Cooperation Council summit in Beijing, China, June 7, 2012 (Presidency of Iran)

Saudi Arabia is willing to loan as much as $5 billion to Pakistan’s new government, led by the conservative prime minister Nawaz Sharif who was elected to a third term earlier this month. Yet the alliance of the two Sunni powers is increasingly tested by their respective relations with India and Iran.

The Saudis seek to avert unrest in Pakistan, where the government last year posted a deficit equivalent to 8.5 percent of economic output, when they see the country as a hedge against their rival Iran. But it is Saudi trade with Pakistan’s own nemesis India that is booming.

India and Saudi Arabia traded goods and services worth $25 billion between them in 2011 when Pakistani-Saudi trade didn’t exceed $5 billion. Saudi Arabia is India’s main provider of oil while it has had to reduce sales from Iran as a result of international sanctions. Some two million Indian workers are employed in Saudi Arabia.

Pakistan, meanwhile, is building a natural gas pipeline into Iran, a project that is opposed by both Saudi Arabia and the United States which have, so far in vain, tried to dissuade it from deepening trade relations with the Shia state.

Saudi Arabia even offered Pakistan an “alternative package,” Dawn newspaper reported last year, that included cheap oil and a cash loan. Pakistan’s foreign minister nevertheless insisted on building the pipeline “at any cost” in May of last year. Iranian gas could help ameliorate regular power outages which now sometimes last up to twenty hours per day, sparking protests and crippling industries in a country that is simultaneously struggling to suppress an Islamist insurgency in its western frontier region.

Help may yet come from another corner. China’s premier Li Keqiang suggested during a visit to Pakistan on Wednesday that the countries should expand cooperation “in connectivity, energy development and power generation.”

China, which sees India as a future competitor for primacy in Asia, also has a stake in propping up the administration in Islamabad. It is deeply invested in the construction of a port at Gwadar in Balochistan that would allow the import of oil from Persian Gulf producers which could then be transported into China overland via the Karakoram Highway, circumventing the Indian navy in the Indian Ocean.

Despite its shifting economic and strategic imperatives, Saudi Arabia is unlikely to sever relations with Pakistan altogether. It has been Pakistan’s staunchest ally in the Muslim world, backing it during its wars with India and opposing the secession of East Pakistan which became Bangladesh in 1971. It also collaborated with Pakistan and the United States in supporting the Afghan mujahideen in their resistance to the Soviet occupation in the 1980s when Saudi Arabia financed Pakistan’s military modernization. The kingdom was also the only country besides the United Arab Emirates to congratulate Pakistan when it first tested a nuclear weapon in 1998.

Retired Saudi officials have warned that if Iran attains a nuclear weapons capacity, which Arab and Western powers suspect is the aim of its uranium enrichment efforts, their government might seek to acquire such a capacity of its own. Since the United States, wary of proliferation in a politically unstable region, are unlikely to provide it, Pakistan would be the natural partner in such an endeavor.

India Poised to Be China’s New Engine for Growth

View of the presidential palace in New Delhi, India, March 26
View of the presidential palace in New Delhi, India, March 26 (Wikimedia Commons)

Quite possibly the most senseless foreign policy position China has taken over the years has been its stance toward Japan. With diplomacy concentrating on World War II issues that most of the world has now moved on from, sovereignty disputes over close to worthless islands and a rise of Chinese nationalism fueled by state propaganda, China has succeeded in alienating what remains one of the world’s largest economic powers as well as a major historic foreign investor in China and a close regional neighbor.

While Japanese investment will remain in China, the fallout from the Chinese government fueled drop off in Japanese sales to China has made the Japanese business community now feel unwelcome in the country. Consequently, future Japanese investment is looking for more sustainable, and friendly, investment relations across the rest of Asia.

A look at the emerging markets across Asia sees Japanese motorbikes and cars on the streets of Hanoi, Ho Chi Minh City, Rangoon, Jakarta, Delhi and Sri Lanka. Successful joint ventures across the region have made Japanese auto companies a dominant force throughout Asia and beyond. Even in the United States and Europe, some of the most popular brands include Toyota, Honda, Nissan, Suzuki and Mazda.

China, meanwhile, is now stuck trying to foist unwanted Volvo sedans on a domestic population that does not want to buy them and is not seeing much overseas demand for its domestic auto brands. No one wants an FAW truck except for a handful of nations in Africa and Latin America. Losing the support of the Japanese investment community was the wrong diplomatic step to take and China will pay in terms of lost opportunities to partner with Japanese manufacturers globally for this misguided approach for years to come.

In short, the lesson is this: you cannot continually beat up on one of your largest trading partners and one of the world’s largest economies without something giving way at some point. It has, and Japan, at least within the business investment community, now regards China as “unfriendly.”

This is relevant to Chinese premier Li Keqiang’s visit to India on Monday, as China three weeks ago invaded parts of Ladakh — Indian held territory in the far west near the border with Pakistan.

A three week standoff over arguments concerning the “Line of Control” ended with the Chinese leaving; a curious incident that suggests all may not be entirely satisfactory in relations between China’s military and its diplomatic and commercial ministries. It has gone unnoticed by many whose traditional view of India is that it remains poverty stricken and poor. In actuality, the country has recently overtaken Germany and Japan in terms of gross domestic product in purchasing power parity terms and sits below only the United States, the European Union and China (according to the CIA World Factbook).

China, for once, cannot afford to upset both Japan and India. Li’s visit, then, takes on some significance for Sino-Indian bilateral relations. It also comes at an interesting time in terms of their population demographics.

China is losing the worker demographic dividend — an advantage it has held over India for the past two decades. Twenty years ago, the average age of a Chinese worker was 23. Now that age is 37 and a 37 year-old worker requires assets and they expect the Chinese government to help them acquire these.

The difference between a 23 year-old worker and a 37 year-old worker is that the latter is likely married, has a child, two sets of parents, a mortgage, a car and probably wants to take his family on overseas vacations. Couple that with the child’s education — possibly with the hope of an overseas university degree — plus planning for retirement and aging inlaws and the implications become clear.

Chinese consumers are becoming more demanding at an accelerating rate as well; China is one of the world’s fastest aging nations with some 250 million — nearly 20 percent of the population — reaching retirement age by 2020. This places domestic stresses on the Chinese government which needs to keep its own population satisfied in the face of growing demand for better consumer products and services. It was feasible for China itself to satisfy that demand twenty years ago but those days are gone. China’s workers are retiring at an increasing rate and the nation is simply running out of the workers it needs to satisfy its own consumer demand.

This is why India has suddenly become such an important strategic partner for China. The average age of an Indian worker today is just 23 — the same as China’s in 1992. India is inheriting the Chinese worker dividend and China needs to put India to work just to satisfy its own domestic consumer needs.

In fact, the institutional infrastructure to put this into place has already begun. China and India are both part of the Regional Comprehensive Economic Partnership Agreement (RCEP) which includes the ASEAN trade bloc of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam in addition to Australia, New Zealand, Japan and South Korea.

The RCEP does away with tariffs on thousands of products right across this region, meaning it will be possible (should your product qualify) to manufacture in India, where wages and land costs are far lower, and export to the China market duty free. Add in the bonus domestic consumer market of India itself plus that of the other RCEP nations and a meeting of minds over China’s huge consumer market — with the middle class expected to reach six hundred million by 2020 — and India’s development of a huge, young and inexpensive labor pool starts to become extremely valuable to the Chinese government.

Li Keqiang’s first goal will be to secure Indian commitments to invest in China but this may not necessarily be in the traditional sense. It may well mean by encouraging more Indian manufacturers to partner with Chinese manufacturers — in India — to then service Chinese consumer demands. I predict a huge growth in Indian-Sino joint ventures over the next few years.

In doing so, China cannot afford to mess around with India any further with border disputes as it has done with Japan in the past. In fact, China may even be prepared to back down from its long-term policy of noncommitment to any border disputes and actually decide it is in its better interests to keep India happy and drop claims on Arunachal Pradesh and other areas. China pushed Japan too far over historical war issues and disputed territories and losing the foreign investment largesse of a major investor in China was a huge mistake.

As India takes on the mantle of “world’s third largest national economy” and China runs out of workforce to supply its own consumer base, dynamic trade and diplomatic relations with Delhi are not an opportunity that Beijing can now afford to mess up or miss out on.

This article by Chris Devonshire-Ellis originally appeared at Asia Briefing, May 17, 2013.

Unpopular Nationwide, India’s Ruling Party Wins State Election

India’s opposition conservatives suffered a crushing defeat in the southwestern state of Karnataka last week, home to India’s technology hub Bangalore, prompting the chief minister and party’s leader there to resign on Wednesday.

The Bharatiya Janata Party lost 72 of its seats in the state assembly compared to the last election when it got nearly 50 percent support. Whereas Congress typically performs well in the countryside nationwide, it also took many urban constituencies in Karnataka, largely owing to middle class discontent with the incumbent government which is marred in corruption scandals.

With some justification, Bharatiya Janata routinely accuses Congress of corruption and crony capitalism in the provinces where it has been able to wrestle control from the left in several local elections in anticipation of next year’s parliamentary election, including in Uttar Pradesh last year, the country’s largest state. Read more “Unpopular Nationwide, India’s Ruling Party Wins State Election”

Indo-Iranian Cooperation in Afghanistan Faces Challenges

India reaffirmed on Saturday its willingness to develop Iran’s Port of Chabahar during the seventeenth meeting of the India-Iran Joint Commission in Tehran. With an initial investment pledge of some $100 million, the move further strengthens the emerging partnership between the two countries in Afghanistan.

The Chabahar port is critical to India’s Afghanistan policy. In the absence of direct physical access to the country and a hostile Pakistan denying Indian goods transit, the Iranian harbor is the most viable access point India has to Afghanistan and the rest of Central Asia. Read more “Indo-Iranian Cooperation in Afghanistan Faces Challenges”

India-EU Free Trade “Early Harvest” Deal Looks Possible

View of the presidential palace in New Delhi, India, March 26
View of the presidential palace in New Delhi, India, March 26 (Wikimedia Commons)

Hopes are rising that the proposed India-European Union Free Trade Agreement may finally be signed off next month after five years of talks. With the chief negotiators of both sides due to meet in two weeks’ time in Brussels, both parties have stated that they are keen to get the agreement in place at a joint ministerial meeting planned in June.

Both sides need some fast and good news. The European Union has been mired in economic problems and has several member states facing elections in September and the Indian government needs a political and economic flag to wrap itself in during its own elections due next year. Another window for reaching consensus may not come around again for some time.

The negotiations thus far have floundered on a number of pressing issues: the EU wants India to cut tariffs for the auto sector and insurance while India wants easier EU visa processing for professionals in its service industry and the granting of “data secure” status.

Two of the issues are complex. A change in raising the foreign investment ceiling in India’s insurance sector beyond the current 49 percent limit will require legislation while the EU is unhappy with the strength of India’s data protection laws. The easier granting of visas to Indian nationals is also problematic for the EU as it grapples with high unemployment rates.

Being recognized as “data secure” is crucial for India, as according to the Indian government it will ensure meaningful access in cross border supply. Currently, however, India is not deemed to offer adequate data protection. The EU’s Data Protection Directive permits personal data to be transferred to third party countries outside the EU if they have been determined as “data secure.”

European industry representatives worry that as India expands its share of the European outsourcing market, which already stands at 30 percent of India’s $100 billion IT and business process outsourcing industry, personal data may be compromised.

These issue notwithstanding, EU-India trade in goods has been trending upward.

There remains good chances that an “early harvest” agreement could still be reached, with the trade agreement signed off but leaving room for later adjustment in key sectors.

India had previously undergone strenuous trade negotiations with both Malaysia and Thailand, with parties stuck on certain issues. Under the so-called “early harvest” approach, however, they were able to sign off on the bulk of the trade issues leaving work for the more contentious points later.

A nine page qualitative analysis of the proposed EU-India Free Trade Agreement as written by the University of Sussex and sponsored by the European Commission may be downloaded here (PDF).

This story first appeared at Asia Briefing, May 3, 2013.

Calculated Political Tension at China-India Mountain Border

In the Himalayas, two great powers are blaming each other for stirring tension. India says Chinese troops crossed the Line of Actual Control, the de facto border there. China claims it was merely responding to earlier intrusions carried out by Indian border guards. We don’t know who is speaking the truth. But “calculated” political tension has emerged.

The root of the Sino-Indian border dispute lies in the 1914 Simla Accord, signed by India’s British rulers and demarcating the border with Tibet. This “McMahon Line,” named after India’s foreign secretary at the time, is recognized by India but disputed by China which insists that Tibet was not a sovereign power. China invaded and conquered Tibet in 1950. Read more “Calculated Political Tension at China-India Mountain Border”

India, Vietnam Emerging as China Alternatives

At the turn of the twenty-first century, there were two main schools of commercial thought with regards to China. The most popular was that China represented a massive market to sell to with roughly 1.3 billion potential consumers. The second was that China had a young, available and inexpensive workforce that was relatively skilled and disciplined. While the latter has proven the dominant economic driver for the past two decades, China’s one-child policy (implemented nationwide in 1982) has meant that the nation’s supply of cheap labor has been drying up — and is now doing so at an increasingly rapid rate.

China today is one of the fastest aging populations in the world — a fact that has not gone unnoticed by the central government. Wary of inheriting a huge population of aged but poor citizens, it has been state policy over the past few years to get more money into the pockets of Chinese nationals and to implement what by global standards is a relatively expensive, contribution based state insurance scheme.

These policies have had the effect of increasing minimum wages across the country by an average of 12.6 percent each year from 2008-2012, with this impacting vertically upon more senior level employees. It is hard to justify to senior staff that lower level employees have increases of 12.6 percent when senior employees cannot. The effect, therefore, of raising the minimum wage has been a massive wholesale increase in salaries across businesses based in China at all levels.

When you combine these base salary increases with every employer’s mandatory social insurance and housing fund contributions at roughly 35-45 percent on top of salaries for each employee, these costs begin to add up fast.

Even relocating a factory into the relatively inexpensive inland regions of China is proving a false economy — firstly because increased infrastructure and transportation costs eat into most of the savings and secondly because these areas too are experiencing large increases in wage overheads.

While all of this is good news for businesses wishing to sell to China, it is becoming increasingly difficult for export driven businesses to justify a China presence — unless at least part of that production is destined for the domestic market.

Yet even here, competition is just around the corner.

Competition for this type of export manufacturing business model is appearing right around the corner as China’s free-trade agreement with ASEAN kicks in come 2015. This means that factories based in Southeast Asian countries, such as Vietnam, can soon sell products duty free to the Chinese consumer market. When one then factors in Vietnam’s lower wages and land use costs, the implications are clear.

Vietnam has even gone to the extent of directly targeting China as a key competitor for manufacturing based, export driven foreign direct investment. It has recently passed legislation dropping its corporate income tax level to two points below that of China beginning January 1, 2014 and, like China did twenty years ago, has introduced sweeping investment reforms and numerous new export processing and manufacturing free-trade zones along its eastern coast.

Consultants still selling the China story will suggest Vietnam’s infrastructure is not up to par but that too is rapidly changing with the Vietnamese government introducing massive construction projects and road, rail and port development schemes. A drive from the airports in Hanoi and Ho Chi Minh City into their respective downtown areas will provide a visual snapshot of the large-scale infrastructure development now taking place in the country. It is prudent to recall that not so long ago, China used to look like one big construction site as well.

There are also other drivers at work here. An increasingly wary United States is becoming concerned with placing all of its purchasing needs into a single China basket; a feeling shared by many of China’s neighbors. Alarm bells went off globally when China suddenly cut supplies of rare earth minerals to Japan after a political spat and concerns over China’s tendency to use trade ties to strong arm other countries into bending to its wishes is also having an effect. Hedging the China risk is now influencing the spread of global manufacturing across Asia.

India, meanwhile, also represents an attractive alternative to today’s China as it actually bears a strong resemblance to China twenty years ago — with its massive consumer market and an abundant, young and inexpensive workforce.

Overall, operational costs in India remain far lower than China and like Vietnam, any executive arriving at the new international airports in Delhi or Mumbai, or taking a trip along the highway into either city center, cannot fail to be impressed by the scale of development — construction sites and cranes are everywhere as the country rapidly upgrades its infrastructure.

The east Indian port city of Chennai is a classic example. While the media focuses on Delhi and Mumbai, Chennai is home to the third largest expatriate population in India. It is also a manufacturing home for multinational corporations, including Nokia, BMW, Siemens, Dell, Motorola and Foxconn among many others, while it hosts the Asian headquarters and back office operations for many global financial institutions.

There’s also the matter of India’s own middle class which is currently about the same size as China’s at 250 million — making it a rising star as a combined base for export manufacturing and domestic sales. India is now one of the few countries where both cheap labor and a large, wealthy consumer class go hand in hand.

In short, investors that are able to look beyond India’s perennial issues — such as its inadequate (but rapidly improving) infrastructure and a large, loud democratic government that at times is slow to put forward necessary reforms — should be able to add value to their global operations by investing in India.

The reasons for these developments are clear. As China’s working population ages and becomes more expensive, alternative Asia beckons. Vietnam in particular is leading the new Asian wave of investment for export driven manufacturing while India now offers not just export manufacturing opportunities, but also, like China, the ability to sell to an increasingly wealthy middle-class population.

China’s continuing evolution can perhaps best be explained in a recalibration of the popular opinion at the turn of the century that the 2000s will belong to China, much like the 1800s were dominated by the British Empire and the 1900s saw America’s rise to prominence.

No, the twenty-first century will more aptly be headlined as “Asia’s century,” and although China will very much be a part of that, other countries in the region will be too.

For those businesses that are involved in export driven manufacturing, it is the Asian connection that now counts. This is the chief reason why China’s role within global trade and the development of emerging Asia should now be reassessed in order to better absorb the ongoing financial battle between production costs and the demands of the global end user.

This article by Chris Devonshire-Ellis originally appeared at Asia Briefing, March 26, 2013.

Border Incident Sparks India-Pakistan War of Words

Prime Minister Manmohan Singh of India participates in the East Asia Summit in Phnom Phen, Cambodia, November 20, 2012
Prime Minister Manmohan Singh of India participates in the East Asia Summit in Phnom Phen, Cambodia, November 20, 2012 (MEA)

As usual, after the military tension at Line of Control in Jammu and Kashmir earlier this month, India and Pakistan have reengaged in a verbal spat.

The first causalities of the recent tension were senior citizens from Pakistan who wanted to pay a visit to India. Their visa request was put on “hold,” which in pragmatic terms means denied by the government of India.

The second victims were Pakistani hockey players who were in India for games. They were sent back to their country due to ruckus created by right-wing fringe elements during the opening ceremony of a tournament in Mumbai.

The third mistake was committed by Pakistan’s interior minister Rehman Malik who suggested that India should provide better security for its famous film star Shahrukh Khan who was invited to Pakistan by a known terrorist. “We are capable of looking at the security of our own citizens,” said India’s home secretary, Raj Kumar Singh, in response. “Let him worry about his own.”

Khan wrote in Outlook magazine that he had sometimes “become the inadvertent object of political leaders who choose to make me a symbol of all that they think is wrong and unpatriotic about Muslims in India.” The actor also expressed his concern about the rising sectarian sentiments in India where the majority Hindu and minority Muslim populations seem to be growing further and further apart.

Rehman Malik’s statement revealed that the Pakistani establishment, 65 years after the partition of India, still thinks of itself as custodians of India’s Muslims — an affront to the leaders in New Delhi.

The recent tension began with a border incident in early January when Indian and Pakistani army forces opened fire on each other at the Line of Control. The situation seemed on the brink of escalation when Indian media reported that a solider had been decapitated and abused by Pakistani troops. Nationalist and right-wing commentators and politicians in India demanded that Pakistan be taught a “lesson.”

One person who kept her cool was Pakistan’s foreign minister Hina Rabbani Khar. She proposed bilateral talks almost immediately to prevent the situation from escalating further. She also demanded third party mediation to resolve the Kashmir dispute which many, including herself, seem to believe is the “core” of Indo-Pakistani bellicosity.

However, even if the Kashmir dispute were resolved, decades of antagonism and warmongering on both sides are unlikely to simply go away. India and Pakistan have been rivals since partition. In order to reach a long-term peace, Kashmir is but one issue that has to be solved.

Khar’s offer to talk was rejected by India, specifically because of the demand for third party mediation in the Kashmir dispute. The two countries agreed in Simla in 1972 to resolve the issue bilaterally. But Pakistan is now in a much weaker position. It has lost three wars against India and copes with a tribal insurgency in its western frontier region. It insists on the involvement of a third party in peace talks to provide a necessary balance.

India-Pakistan Engagement Set Back by Border Dispute

In modern international relations, states are expected to act rationally and responsibly. Looking into the behavior of South Asia’s great powers, however, it can hardly be said that the two act rationally and certainly not responsibly.

The region is in turmoil. The United States are preparing to withdraw from Afghanistan in 2014. The Taliban are hoping to return to power there. But instead of trying to meet those challenges, India and Pakistan were at it again in the disputed region of Jammu and Kashmir.

The arguments are familiar. Pakistan wants the United Nations to look into an alleged breach of the ceasefire agreement. India does not. While the present standoff may not lead to another war, it does affect the pace of bilateral engagement between the two countries.

Trying to lay responsibility for the recent fray is like asking which came first, the chicken or the egg? Certainly on both sides of the border there are stakeholders who benefit from perpetuating the enmity between the two nations. As happened in the past, whenever there was a chance of engagement or a peace deal, some untoward incident derailed the frontier. Read more “India-Pakistan Engagement Set Back by Border Dispute”

Gujarat Election Test for Indian Right’s National Ambitions

In a democracy, charisma and leadership are often overstated. Yet no other form of government needs leadership as much as democracy.

In this sense, India can offer a curious case. Despite having so many regional satraps with mass following, very few have been able to project their clout at the national level. Moreover, one regional satrap is not unusually viewed with suspicion by another so that the general consensus is to have somebody with no mass following at all. Incumbent prime minister Manmohan Singh is a perfect example of this.

Gujarat’s chief minister Narendra Modi defies the rule. The conservative politician has a mass following as well as national appeal. As his state votes in assembly elections next week, Modi’s future will be decades. If he leads the Hindu nationalist Bharatiya Janata Party to victory once more, he could emerge as the party’s prime ministerial candidate in the next general election. Read more “Gujarat Election Test for Indian Right’s National Ambitions”