East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Tue, 16 Sep 2014 00:00:54 +0000 en-US hourly 1 Defeating India’s disastrous food price inflation with trade http://www.eastasiaforum.org/2014/09/16/defeating-indias-disastrous-food-price-inflation-with-trade/ http://www.eastasiaforum.org/2014/09/16/defeating-indias-disastrous-food-price-inflation-with-trade/#comments Tue, 16 Sep 2014 00:00:54 +0000 http://www.eastasiaforum.org/?p=43458 Author: Rajiv Kumar, CPR

Indian economic data in July on industrial growth and inflation was disappointing. Industrial sector growth slowed to 3.4 per cent in June 2014 with the manufacturing sector, the largest component, growing at an anaemic 1.8 per cent. But the more worrying set of statistics was the rise in retail inflation to 7.96 per cent in July 2014, which also reversed the declining trend observed since December 2013.

Not only is this raising consumer anger against the government but it also lowers the prospects of an interest rate cut by the Reserve Bank of India that could reignite growth and investment in an environment in which credit uptake remains very poor. And finally, rising inflation always provides the political opposition with a stick to beat the government with, thereby putting it on the defensive.

Retail food inflation continues to persist at near double digits — 9.36 per cent in July. In the case of food inflation, it is the same old story with the prices of proteins (eggs, fish, meat), milk, fruits and vegetables leading the inflationary charge. The principal culprits have once again been fruits and vegetables: inflation in the prices of these commodities in July 2014 came in at 22.5 per cent and 16.8 per cent respectively. This can only worsen as monsoons continue to disrupt supplies and demand becomes stronger with the onset of the Hindu festival season.

Clearly, measures taken by the new government have failed to make any significant dent in inflation. These measures have largely taken the form of ‘administrative’ steps of raids against people hoarding food and the issuing of non-bailable warrants against them. It is surprising that the government continues to expect this ‘district magistrate’ type of approach to yield results in economic management. It should surely realise by now that it does not. Apparently even the removal of fruits and vegetables from the lists of the Agricultural Produce Market Committee in Delhi has not had a dampening effect on prices. Farmers have clearly been unable to find other channels for selling their products.

One way forward could be for the government to incentivise the National Dairy Development Board to scale up their successful Safal venture and enter wholesale markets more aggressively.

The medium-term solution for controlling food inflation can only be raising production of commodities that are in short supply and improving yields and productivity. Unfortunately, it is hard to attract investment into the production of these perishable goods because actual and perceived risks are much higher than in crops enjoying minimum support prices. This necessitates some radical thinking.

The absence of large-scale organised retailers, like supermarkets, has resulted in meagre investment in logistics and backend infrastructure between farm gates and markets. Consequently, wastage remains high. It is indeed surprising that the Ministry of Food and Agriculture has not uttered even a word on the persistently high and worsening food inflation or about any measures to raise production or productivity. Cracking down on hoarding can only bring very temporary respite, if any, and is not a solution. It is critical that the government considers some other measures to boost supply, which would help to rein in food inflation and reverse inflationary expectations.

Two such measures can be considered right away. First, the government should liberalise agriculture imports and lower import duties on fruits and vegetables to a flat 10 per cent. At present fruits attract a wide range of import tariffs ranging from 25 per cent for grapefruits to 50 per cent for apples, 70 per cent for coconut flesh and 105 per cent for dried grapes. The majority of fruit varieties, as also nearly all the vegetables, however, attract an import tariff of 30 per cent. The rationale, if any, for differentiated import duties on fruits is not clear.

Vested interests will raise the bogey of such import duty reduction hurting our poor farmers. This is dishonest and disingenuous. The reduction in import prices will principally affect trade and intermediary margins, because farm gate prices are in any case strictly cost plus due to farmers’ inability to hold on to their output. India’s balance of payments will also not be much affected. In 2013-14, India imported less than US$1 billion of fruits and vegetables.

The second immediate step should be to minimise non-tariff barriers that hold up imports of food into India. Food imports are subject to long procedural delays, arbitrary and frequent changes in regulations and unpredictable payments. Testing laboratories, located far from the borders, take weeks to give their reports and often only once they receive a bribe. It is high time that India removed these non-tariff barriers and opened its markets for fruit and vegetable imports from neighbouring countries.

This will have the twin benefits of winning friends in our neighbourhood and also augmenting food supplies to rein in inflation. Most importantly, it will demonstrate to the traders, hoarders and speculators the government’s determination to fight food inflation, which ultimately hurts the poor most of all. It is time that The government must think a bit less administratively and a bit more imaginatively to defeat inflation.

Rajiv Kumar is a Senior Fellow at the Centre for Policy Research. He is also the former Director of ICRIER. .

A version of this article first appeared here in Mail Today.

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A chance to mend China–Japan relations http://www.eastasiaforum.org/2014/09/15/a-chance-to-mend-china-japan-relations/ http://www.eastasiaforum.org/2014/09/15/a-chance-to-mend-china-japan-relations/#comments Mon, 15 Sep 2014 12:00:36 +0000 http://www.eastasiaforum.org/?p=43453 Authors: Yves Tiberghien, University of British Columbia, and Yong Wang, Peking University

Over the last two years, China–Japan relations have been trapped in a downward spiral. The inescapable reality of an ongoing great power transition makes this situation particularly tense: the size of China’s economy relative to Japan’s jumped from a mere 25 per cent in 2000 to 99 per cent in 2009 and then to 188 per cent in 2013. Yet an alternative policy course is slowly developing.

Should Chinese and Japanese leaders grasp this chance, they could turn the relationship into an economic asset for the demanding reform programs pursued by Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping.

Following former Japanese prime minister Yasuo Fukuda’s secret meeting with Xi Jinping in Beijing in late July, the foreign ministers of the two countries — Wang Yi and Fumio Kishida — recently met in Myanmar on the sidelines of the ASEAN Regional Forum to discuss Sino–Japanese relations. These meetings have raised expectations of a possible bilateral summit meeting in Beijing on the back of the APEC Leaders’ Summit in November.

Japan and China should grasp this new opportunity.

The tough economic reforms launched by the new Xi regime since 2013 to move China beyond a possible ‘middle-income trap’ stand a greater chance of success with Japanese technology, know-how and support in regional governance.

Japan’s Abenomics reforms have hit both fiscal and structural obstacles. The Trans-Pacific Partnership (TPP) could eventually help incentivise further structural reforms, but progress in the trilateral FTA with China and South Korea as well as further integration with China could support growth more directly. Together, Japan, China and South Korea could play an innovative role in East Asian economic governance and, beyond that, in the G20.

What would it take to move in this direction?

In the decade following the Asian Financial Crisis, a common commitment to economic liberalism and the political will to cooperate boosted the whole Asian economy. As a result, all economies in the region, including the US, benefited from the ASEAN-led process of regional cooperation.

In contrast to these pragmatic times, Japan and China have now openly launched rival integration projects. They are members of competing trade agreements (Japan in the TPP and China-centred FTA networks with regions such as ASEAN, New Zealand, and other around the world). To mark its displeasure with the Japan-controlled Asian Development Bank, China is now planning to establish the Asian Infrastructure Investment Bank later this year. China also played a leading role in the recent BRICS decision to create the Shanghai-based New Development Bank, in part to rival the G7-dominated World Bank and IMF.

Mutual accommodation would allow for a more secure and prosperous way for both countries to jointly contribute to furthering development and boosting trade in the region.

Although the China–Japan–South Korea FTA talks are currently stalled, all three economies are highly interdependent. The trilateral FTA is still officially seen as the top priority FTA by China and it is strongly supported by business groups in Japan.

The recent bad shape of Sino–Japanese relations has as much to do with the growing sense of economic competition as it does with the disputes over territory and history.

As the world’s second and third largest economies, China and Japan find themselves increasingly locked in a tense competition for energy and raw materials, secure shipping lanes and overseas markets — particularly in sectors such as high speed trains, power generation, IT and electronics products. Xi’s active diplomacy with Russia, Africa and Latin America, and Abe’s globetrotting reflect the increasing sense of insecurity over these matters.

Misunderstandings about the intentions of the other side, as well as strong posturing for domestic audiences, has also fuelled tensions. But, if the leaders of China, Japan, and South Korea recognise that their respective top priority reform goals will rise or die together, a new domestic discourse could begin to take hold.

The leaders of Japan and China should grasp the current opportunity to compromise and create an amicable environment at the summit meeting in November. While public opinion in both countries about the other side is abysmal, the publics in both countries support a summit (65 per cent in Japan, 53 per cent in China) and more management of the relationship.

As an important step, Abe should avoid visiting the Yasukuni Shrine. Ideally Japan should develop a long-term arrangement where leaders and citizens alike praying for the souls of Japanese soldiers who died for their nation can be separated from tacit support for the 14 Class-A war criminals, enshrined at Yasukuni, and the Yushukan Museum.

A practical arrangement on another key issue, the disputed Diaoyu/Senkaku islands, is also needed. Japan and China could return to the 1972 understanding to peacefully shelve the issue for future generations to resolve. This should be supported urgently by developing communication protocols among coast guards and practical ways of dealing with possible fishing incidents, along the lines of a presumed 2005 secret agreement . Such simple moves would enable both sides to deescalate the risks of naval and aerial confrontation.

These ideas may seem unrealistic in the current domestic environments of both China and Japan, but there is reason to be cautiously optimistic. For the first time in more than 10 years, both China and Japan have strong and secure political leaders at the same time. Should they choose to work together and focus on their common interests, they could usher in a new win-win relationship from which the region, and the world, would immensely benefit. It is high time to step back from the brink and prepare for a path-breaking summit in November.

Yves Tiberghien is Director of the Institute of Asian Research and Associate Professor of Political Science at the University of British Columbia

Yong Wang is Professor and Director of the Center for International Political Economy in the School of International Studies at Peking University

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China and India’s growing strategic weight http://www.eastasiaforum.org/2014/09/15/china-and-indias-growing-strategic-weight/ http://www.eastasiaforum.org/2014/09/15/china-and-indias-growing-strategic-weight/#comments Mon, 15 Sep 2014 02:00:43 +0000 http://www.eastasiaforum.org/?p=43446 Author: Peter Drysdale, Editor, East Asia Forum

The visit of Chinese President Xi Jinping to India this week, so early in the term of India’s new prime minister, Narendra Modi, underlines the growing strategic weight of the relationship between the two countries. Modi’s prime ministership, with its ambition to re-invigorate India’s stalled economic reform and growth, more than any other single factor, promises to accelerate its potential growth radically. Modi has runs on the board with China in bringing Chinese investors to his home state, Gujarat — as of last year about 20 Chinese companies had set up shop — and through his personal engagement.

Their sheer size and growth potential — particularly India’s — mean that China and India will be at the core of the Asian powerhouse over the coming decades. Over the past 20 years, the two countries have already more than tripled their share of the global economy. Adjusted for purchasing power parity (PPP), the Indian economy is now roughly the size of Japan’s. In PPP terms, China’s economy is likely to top that of the United States in the next year or two. One Goldman Sachs estimate suggests that India’s economy will surpass the US economy by 2043. For long the world’s second largest in population, the dynamics of India’s population growth will push it ahead of China’s in less than two decades.

Despite this, India will likely remain a lower-income country well into the century, lagging behind China and its BRICS counterparts unless it can throw off the shackles of outdated development strategies and a culture of bureaucratic inertia — satisfied with benchmarking itself to standards that don’t measure up internationally.

India has the world’s largest concentration of poor people, with more than 840 million living on less than US$2 a day and 400 million on less than US$1.25 a day. By 2050, with the world’s largest population, India will face multiple challenges around urbanisation, infrastructure, jobs, drinking water, and food for its citizens. Ironically, as its size and rising middle-class power lead many to highlight its role in powering the Asian century, unless its poor can be embraced in the process of growth, China-style, India’s escape from the middle-income trap will remain a dream.

Located in the right place and at the right time, how can India thrive, alongside its giant Asian neighbour? What opportunities does China offer India and what opportunities will the rise of India offer China? India is bound to a low per capita growth trajectory unless it can lift its annual growth rate by at least 2 to 3 percentage points. Is China a threat to India’s regaining its growth momentum, or does it offer a way out of continuing economic fragility?

These are the questions that will be at the back of the minds of Prime Minister Modi and his advisers as they welcome President Xi this week.

Although it would be rash to declare that there is any clear national consensus on the answers to these big questions about India’s future and its relationship with China, Modi’s instinct and his temperament will bring a measure of sureness to answering them that may well be the first steps in defining it.

Modi’s vision is of an India that can look out and compete in the world, finding its way with China and all the world’s major economies. It is of an India that will welcome more and more Chinese investment (together with that from Japan, South Korea and other international investors), taking up opportunities in manufacturing and services where China, for example, can longer compete or never could. And that is the India with which China’s engagement is growing deeper day-by-day and with which its leadership is looking to do business. It is not the defensive, protectionist, bureaucratic India that still too often carries the day, as it recently did when it inexplicably scrapped the WTO deal on trade facilitation.

As Sen explains in his piece on the visit this week, for Xi and Modi to redefine the bilateral relationship in this way, ‘the existing policymaking structures and thinking have to be discarded’. This is a big ask but it is one that, one senses, the Indian people were seeking when they swept Modi to power, as they sought new leadership and a transformation in national thinking.

What will drive these changes and India’s deeper integration into Asia with China, of course, is the inexorable force of India’s and China’s demographic dynamics and growing market size. It will do this by leveraging the two countries’ divergent demographics and their trade and geographic and cultural proximity. Failure to understand the force and potential of the growing weight in the India–China partnership continues to wrong-foot analysis in Washington and Canberra (and other places). The pace and scale of bilateral trade and investment growth between China and India is bound to match that of India’s other Asian partnerships.

But what of the baggage of history in the relationship, it might well be asked?

Sourabh Gupta in this week’s lead examines how Modi and Xi might pirouette around resolution of the border issues that have irritated relations for years. With India having signed on in principle to a package deal after four decades of hesitation, Gupta says, ‘the onus is broadly on China to guide the negotiations towards a successful, status quo-based closure. President Xi will likely want to fully size-up the strategic orientation of the new government in Delhi before committing China to a permanent resolution of the dispute. By admitting that the business transacted (by the British) at Simla a century ago was not as sacrosanct as many Indians have been led to believe, Modi can signal that India stands willing — and politically able — to fashion a creative boundary package that is shorn of the baggage of its colonial past’.

There are other important initiatives underway which might later be recognised as the beginning of a new regional cooperation dynamic. President Xi will confirm his invitation to Prime Minister Modi to attend the APEC Summit in Beijing in November (although India is not yet a member of APEC) and for India to participate in the Asian Infrastructure Investment Bank which China is currently in the process of launching.

Peter Drysdale is Editor of the East Asia Forum.

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China–India border dispute: when Xi comes calling, will Modi be ready?    http://www.eastasiaforum.org/2014/09/14/china-india-border-dispute-when-xi-comes-calling-will-modi-be-ready/ http://www.eastasiaforum.org/2014/09/14/china-india-border-dispute-when-xi-comes-calling-will-modi-be-ready/#comments Sun, 14 Sep 2014 12:00:42 +0000 http://www.eastasiaforum.org/?p=43437 Author: Sourabh Gupta, Samuels International

When President Xi Jinping arrives in the Indian capital next week, he will become the first leader of a major power to pay a state visit in the Narendra Modi era. It is rare for a Chinese head of state to visit India this early in his tenure. It took Jiang Zemin seven years and Hu Jintao four years to pay their solitary visits to New Delhi.

President Xi’s early arrival attests to the forward progress in Sino–Indian relations since late 2009. There has been no territorial nibbling by People’s Liberation Army (PLA) personnel in the disputed belt along their Himalayan frontier in the past five years — though numerous cases of ‘transgression’ have been reported. Territory is no longer utilised as an expedient pressure point by Beijing to signal disaffection; for the most part it is seen rather as a land bridge to restore the spirit of good neighbourliness in ties with India.

The extent to which China and India have of late couched their diplomatic engagements in the vocabulary and practices of an earlier age of Asian connectivity and cosmopolitanism is revealing too. In 2010, an Indian-style Buddhist temple was dedicated by the Indian president to the city of Luoyang, a key terminus on the tea, horse and Buddhist items trading circuit that had bound China, Tibet, India and the nomadic Inner Asian empires together.

In October 2013, President Xi unveiled his signature ‘new silk road’ corridors initiative at a rare Party work forum on periphery diplomacy. India was integral to these belts of contact and commerce and the formalisation of sub-regional economic corridors is expected to be a key takeaway from Xi’s New Delhi visit.

This June, China and India along with Myanmar commemorated the 60th anniversary of the Five Principles of Peaceful Coexistence (Panchsheel) which derive from their overlapping traditions of political morality and ethical universalism. A geo-political order that is keyed to regional tradition and historical circumstance might yet furnish a doctrine of legitimacy that complements the balance of power in the Asian Century.

China and India must first conclusively resolve their long-festering Himalayan boundary dispute if they are to translate their respective trans-Himalayan principles of harmony and unity into a workable model of conflict resolution for others in Asia and the world.

Six years after the Five Principles was codified in treaty form, Myanmar resolved its boundary dispute with China, which had been ‘left over from history’. Eight years after the Five Principles’ codification, India by contrast spurned a similar package offer of settlement and fought a losing border war with China.

India must de-anchor its strategic vision as well as its inflexible negotiating stance on the eastern sector boundary from the painful legacy of the 1962 war.

New Delhi insists to this day that the Anglo-Tibetan understanding on the alignment of the boundary — the McMahon Line — that emerged from a convention in Simla in 1914 is immutable (though the line can be fine-tuned on the ground). The boundary was known at the time to the Chinese side and not expressly objected to, and in any case the Tibetan authorities had the right to sign boundary treaties ‘during the 300 years prior to 1950 … whatever [sovereignty-related] status [it] had enjoyed’. So China is duty-bound to honour that commitment.

But both arguments are flawed. The international boundary question was never put forward to a tripartite discussion at the convention’s plenary session; hence the Chinese envoy had no means to formally record an objection. Tibet, or any other local authority, was not empowered to conduct boundary negotiations and the notes appended to the 1914 convention affirmed that Tibet was a part of China. Both London and Beijing had repudiated the Simla understandings before the ink was dry.

Successive Indian prime ministers across party lines have incrementally retracted New Delhi’s maximalist Sino–Indian boundary claims — although primarily in the western sector. In 2003, the previous BJP government under Atal Bihari Vajpayee junked two decades of Congress government-led negotiating strategy that had marked time in technical-legalistic preliminaries and vowed to resolve the dispute on the basis of forward-looking political and strategic imperatives. Within two years, principles-based parameters to guide a settlement were agreed upon. When Xi Jinping arrives in New Delhi, Narendra Modi should go one step further and acknowledge that the eastern sector boundary has never been formally demarcated and its alignment is hence in dispute.

Make no mistake — with India having signed on in principle to a package deal after four decades of hesitation, the onus is broadly on China to guide the negotiations towards a successful, status quo-based closure. President Xi will likely want to fully size-up the strategic orientation of the new government in Delhi before committing China to a permanent resolution of the dispute. By admitting that the business transacted at Simla a century ago was not as sacrosanct as many Indians have been led to believe, Modi can signal that India stands willing — and politically able — to fashion a creative boundary package that is shorn of the baggage of its colonial past.

New Delhi may pleasantly find that in making this gutsy call, the watershed principle and the due interests of the settled population in the boundary areas are settled to its advantage during Xi and Modi’s terms of office.

Sourabh Gupta is a Senior Research Associate at Samuels International Associates, Inc.

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India and China must think outside the ‘bureaucratic box’ http://www.eastasiaforum.org/2014/09/13/india-and-china-must-think-outside-the-bureaucratic-box/ http://www.eastasiaforum.org/2014/09/13/india-and-china-must-think-outside-the-bureaucratic-box/#comments Sat, 13 Sep 2014 12:00:51 +0000 http://www.eastasiaforum.org/?p=43421 Author: Tansen Sen, City University of New York

Chinese president Xi Jinping’s forthcoming visit to India will achieve nothing unless the new leaders of India and China can overcome existing inertia and seriously start revamping their bilateral relations. It is true that the two sides have managed to avoid a repeat of the 1962 armed conflict, and that diplomats have to be credited with limiting the border differences to a few ‘incursions’ and a tense standoff at Daulat Beg Oldi near the disputed Aksai Chin region in May 2013. But, as these episodes accumulate and are sensationalised by the media and dramatised in the blogosphere, they perpetuate mutual distrust and harden negative public perceptions.

Clearly the policy pursued during the last two and a half decades of emphasising trade while taking incremental steps towards managing, without resolving, the border issue has not worked.

Xi Jinping and Narendra Modi have to take prudent steps to move from just managing the relationship to making it truly open and trustworthy, something that was envisioned in the Panchsheel Treaty of 1954 but never attained, despite the celebratory events marking the 60th anniversary of the treaty this year.

The problem lies in the bottom-up policymaking that has defined the post-1962 relations between India and China. Mutually suspicious bureaucrats have hesitated to facilitate people-to-people, industry-to-industry or sub-region-to-sub-region exchanges and collaborations. This is clear by the limited educational interactions between the two countries due to the Indian Ministry of Home Affair’s reluctance to issue visas to Chinese students and instructors and the failure of the Bangladesh–China–India–Myanmar sub-regional collaborative initiative.

There are contradictions between the India–China joint declarations about promoting people-to-people exchanges and the implementation of these measures. Intra-ministerial disagreements, mystifying constraints, narrow visions and a reluctance to involve competent people often render these processes ineffective. These initiatives are usually categorised as ‘public diplomacy’ and epitomised by heavy handedness and restrictions imposed by bureaucrats who treat them as no more than symbolic gestures. In fact, free interactions at the grassroots levels — that could potentially advance mutual awareness and knowledge — have never been fully encouraged seemingly for ‘security’ reasons. Consequently, the rhetoric and false narratives of friendship get recycled while the general public remain in the dark and utterly confused about the actual policy goals.

For Xi and Modi to redefine the bilateral relationship, the existing policymaking structures and thinking have to be discarded. These leaders are the ones who should outline the relevant policies and order the bureaucrats to implement them. Their aim should be to dilute the dogmatic thinking of the respective diplomatic corps, military commanders and intelligence chiefs so that they become decisive and committed to the long-term prospects of India–China relations.

A first step could be for the two leaders to be frank about the historical ambiguity of the territorial claims and acknowledge publicly that there is no other option for resolving the border issue other than recognising the Line of Actual Control. In the short term, such a joint declaration might lead to condemnations by a few members of the public and — especially in India — political factions. But after numerous rounds of border talks without any substantial outcome, this might be the only way to come to terms with the legacies of colonialism and imperialism, and heal the scars of the 1962 war.

The persistent lack of mutual trust and the continued suspicion of each other’s wider geopolitical intentions are apparent in China’s failure to unequivocally support India’s aspiration to become a permanent member of the UN Security Council and India’s resolute efforts to keep China out of the South Asian Association for Regional Cooperation. Xi and Modi could unreservedly support these ambitions and wishes of the other side — not as quid pro quo steps but as gestures of genuine confidence-building.

Even at the early stages of their careers as national leaders, Xi and Modi already have firm standing in their respective countries. They may not be able to resolve the border issue immediately, but the two leaders have enough political capital to at least be magnanimous in backing each other in the wider global arena. In order to redefine the bilateral relationship, they have to go beyond the usual auguries of the bureaucrats about possible repercussions for national interests. Trust between India and China needs to be built on confidence and convictions, not on the computations of career bureaucrats.

President Xi Jinping will mostly likely try to entice India to join his so-called ‘Silk Road’ project. Xi must understand that he will be unable to draw India into a cookie-cutter plan given the existing scepticism in India about Chinese soft power schemes. Any utterings of support from the Indian side during Xi’s visit will be superficial and are unlikely to yield any substantial breakthroughs in bilateral relations. Likewise, Modi must refrain from his own pet proclamation of ancient Gujarat-China relations through the visit of the seventh-century Chinese monk Xuanzang, who merely traversed through the present-day Gujarat region. Instead of highlighting this historically irrelevant episode — Xuanzang passed through several other Indian states — Modi could elucidate his success in bringing Chinese investors to Gujarat — about 20 companies as of last year — and make a commitment to allow such investments in the ‘sensitive’ northeast regions of India.

The India–China relationship is already brimming with rhetorical pronouncements. What it lacks is concrete steps towards building better awareness and eradicating undue suspicions and scepticism. It is time for the two leaders to lay a new foundation not only for the improvement of bilateral relations, but also for reshaping intra-Asian connections and exchanges.

Tansen Sen is an Associate Professor of Asian history at Baruch College, City University of New York.

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Refining the role of government in the Australia–Indonesia live cattle trade http://www.eastasiaforum.org/2014/09/13/refining-the-role-of-government-in-the-australia-indonesia-live-cattle-trade/ http://www.eastasiaforum.org/2014/09/13/refining-the-role-of-government-in-the-australia-indonesia-live-cattle-trade/#comments Sat, 13 Sep 2014 00:00:02 +0000 http://www.eastasiaforum.org/?p=43427 Author: Ray Trewin, ANU

The governments of Australia and Indonesia have become heavily involved in the live cattle trade. The 2011 Australian ban on live cattle exports to Indonesia, after some animal cruelty was drawn attention to, may have been the blackest day for Australian agricultural politics. And the issues continue, as governments inappropriately use trade policy to address sensitive domestic non-trade issues (like Australian animal welfare and Indonesian self-sufficiency). But government involvement, rather than disadvantaging trade and livelihoods by raising uncertainty and lowering prices as is the case now, could help solve these issues.

Indonesian workers unload Australian cattle from a ship in Jakarta, Indonesia. (Photo: AAP).

Going back in time, the Export Control Act 1982 was established to protect responsible exporters and consumers following a meat substitution scandal in 1981 involving a rogue exporter. Aspects like exporters paying Australian Quarantine Inspection Services (AQIS) directly, with some of these costs passed on to consumers through higher prices, were appropriate in this case. Further arrangements enforced by the AQIS have emerged over recent years. But these arrangements have appeared rushed and lacking in evidence-based policy analysis or forethought on appropriateness. For example, AQIS pushed for the stunning of cattle in Indonesia when it was not required by the relevant international organisation, the World Organisation for Animal Health, or fully practiced in Australia.

Improvements in animal welfare standards in developing countries can be driven by developed countries through trade. But this is not happening in the Australian live cattle trade which is from a developed to a developing country. The existence of alternative suppliers — including other developing nations without strict demands on animal-welfare standards — means that Australia has very little leverage. It is not necessarily more government involvement in the trade that is needed but more evidence supporting an increased trust and reliance on more cost-effective industry approaches, driven by joint-interest and suitable policies.

The current government approach of trying to address non-trade issues with trade policies is indirect and inappropriate. Other issues of concern relate to the current Australian Position Statement on the Export of Livestock (APS) which is under review.

First, the Australian government has very little power once cattle are unloaded but is shifting animal-welfare responsibilities onto exporters, many with little such power.

Second, some arrangements de-privatise the trade (for example, deaths are measured on ship rather than on a consignment basis), diminishing property rights and traceability.

Third, World Organisation for Animal Health standards are based on general performance criteria rather than the costly APS prescriptive regulations focusing on detailed inputs and processes with few incentives to lower costs. Also, restricting processes could be disputed under WTO-rules.

Finally, there appears to be few clear roles or responsibilities for regulatory actions, and a lack of national consistency with other regulators like the states.

Another problem is that there are minimal benefits as the Australian government, at an economic and overall animal-welfare cost through losing market share, tries to exceed international standards in a misguided attempt to minimise animal-welfare impacts. The Australian trade is one of the most animal friendly in the world and having its market shares replaced by less animal friendly trade due to higher costs will only lower overall animal welfare. Moreover, this approach gives scant attention to Australian society’s trade-off between animal-welfare and production. A further problem with the heavy government involvement is the trade’s vulnerability to non-trade issues like the phone hacking of the Indonesian President’s family, unlike more private sector trades such as the more significant wheat trade.

The Australian cattle industry is rightfully upset about increasing government fees that are justified on delivering reputed animal-welfare benefits to Australian society. But only Australian producers, exporters and others in the supply-chain pay for these more general benefits, many directly and others, like Indonesian consumers, indirectly through market forces.

There are better ways than heavy government involvement. Increased private-sector involvement through-joint ventures could expand control and lower uncertainty, providing opportunities for an efficient beef supply-chain in a growing regional market. Elders, a large vertically-integrated livestock exporter, set acceptable standards (which the government tried to mimic with a costly prescriptive-approach) and was successful. This was because Elders’ interests to be a responsible investor and uphold high standards of animal-welfare aligned. There was also an underlying threat of stronger regulations and public disapproval of poor behaviour. Greater private-sector involvement, driven by self-interest that matches the interests of society rather than a vocal minority, could allow governments and responsible companies to avoid costly bureaucratic control through a ‘social licence’ being given to operate without such controls. Scarce government resources could then be focused on the longer-term objective of helping ‘non-licensed’ firms in Indonesia improve standards based on approaches of companies with a ‘social licence’.

Accepted labelling of sustainable meat production could also improve animal welfare and allow the market to deliver on society’s animal-welfare values. This is the case in egg production with its government classification and RSPCA endorsements of specific production labels. Australian consumers favouring free-range egg production bear the costs of this preference directly through premium prices which provide a signal of society’s preferences. A World Wildlife Fund and an industry push to endorse sustainable meat production, like in forestry, would need government partnerships to be acceptable in international trade where ‘G2G’ (government to government) is important.

Current government involvement appears too large, pushing Australia out of the trade with increasing prescriptive bureaucratic demands that have been ineffective and offer few incentives to lower associated costs — which are being unfairly imposed on exporters and indirectly on Indonesian consumers. Refining the government’s role, allowing greater and more cost-effective private-sector involvement through joint-ventures, government-facilitated ‘social-licence’ and labelling are all necessary measures to address the current costly situation.

Dr Ray Trewin is Visiting Fellow at the Crawford School of Public Policy, The Australian National University.

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Why is Indian FDI shying away from South Asia? http://www.eastasiaforum.org/2014/09/12/why-is-indian-fdi-shying-away-from-south-asia/ http://www.eastasiaforum.org/2014/09/12/why-is-indian-fdi-shying-away-from-south-asia/#comments Fri, 12 Sep 2014 12:00:59 +0000 http://www.eastasiaforum.org/?p=43411 Author: Saman Kelegama, Institute of Policy Studies of Sri Lanka

There have been promises of greater Indian investment in South Asia for a long time. A report produced by the Asian Development Bank (ADB) in 2007 argued that India would play a key role in investing in South Asia and this in turn will stimulate intra-regional trade in the region. The report made special reference to the rapidly growing Indian IT industry and identified it as a potential investor in South Asia. The ADB argued that business process outsourcing, knowledge process outsourcing, call centres and other IT related sub-contracting would shift to regional countries as a response to increased costs of doing business in India.

It predicted that a somewhat similar experience to Japanese foreign direct investment (FDI) inflows to ASEAN countries in the 1980s — the so-called ‘flying geese’ phenomenon, whereby industries are first established in more developed countries then move progressively to less developed ones — would be seen in South Asia with FDI from the Indian IT sector taking the lead. But this hardly happened over the last five years, with Indian IT investors preferring countries like the US, the UK and Singapore for investment rather than other South Asian countries.

The total FDI outflow from India to the rest of the world increased from US$20 million in the early 1990s to US$15 billion by 2011, albeit with some fluctuations. India is the largest investor among South Asian Association for Regional Cooperation (SAARC) countries in South Asia but the regional share of Indian outward FDI has declined continuously from 4.5 per cent in 2003–2004 to a mere 0.1 per cent in 2006–2007. Generally, FDI from large developing countries like China and Brazil is heavily concentrated in other developing countries. But during the past decade the destination of Indian FDI has shifted in favour of developed countries and transitional economies. This has partly contributed to the decline in the South Asian share.

A study of Indian outward investment by United Nations Conference on Trade and Development in 2004 identified four reasons why Indian FDI generally flows to developed countries. First, Indian firms are looking for international brand names, for instance, Ranbaxy Technologies acquiring the French firm RPG Aventis in 2003 and Tata Tea acquiring UK-based Tetley Tea in 2000.

Second, access to technology and knowledge has been a strategic consideration for Indian firms seeking to strengthen their competitiveness and to move up the production value chain; one example of this would be Wipro acquiring the American firm Nerve Wire Inc.

Third, the success of Indian service providers in outsourcing IT Services, BPO and call centres by firms in developed countries has exposed them to knowledge and methods of conducting international business, which in turn has induced outward FDI with demonstration and spillover benefits.

Fourth, securing natural resources has become an important driver for Indian outward FDI. For example, Hindalco acquired two copper mines in Australia, and ONGC has bought a 20 per cent stake in the Sakhalin-I oil and gas field in Russia. All these factors point to Indian firms wanting to develop a portfolio of locational assets as a source of international competitiveness and visibility.

But, leaving aside these factors, the general business climate in the South Asian region is also a factor that discourages Indian FDI. Most South Asian countries rank low in indicators of the ease of doing business although they still possess the comparative advantage of low labour costs. Regional countries also fear Indian domination and therefore are much friendlier to non-Indian sources of FDI. For example, in Bangladesh in the early 2000s, the Indian group Tata’s proposal to invest US$3.6 billion in a urea fertiliser plant and a steel mill and the Mittal Group’s proposal to invest US$2.5 billion in a steel mill, both fell apart due to domestic political developments.

In Sri Lanka, the Indian Amul Company came to the market in 1997 for liquid milk production and functioned till 2000, and then pulled out its investment due to trade union hostilities in the factory incited by the milk powder import lobby in Sri Lanka. In the Maldives, the GMR Group of India, which embarked on an airport modernisation project in 2010, had to exit the project due to unilateral termination by the Maldivian government in 2012. The point to be noted is that in general, there is a non-friendly attitude (not necessarily hostile) towards Indian FDI in the region.

With low intra-regional trade (5 per cent), the trade-investment nexus is weak in the SAARC region. Perhaps it is time to make investment liberalisation a priority item on the SAARC agenda if more Indian outward FDI is to be seen in the region. More broadly, there also needs to be a change in attitude both from India and its neighbours if more investment from India is to flow to the South Asian region.

Saman Kelegama is the Executive Director of the Institute of Policy Studies of Sri Lanka

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China and Taiwan walking the line of rapprochement http://www.eastasiaforum.org/2014/09/12/china-and-taiwan-walking-the-line-of-rapprochement/ http://www.eastasiaforum.org/2014/09/12/china-and-taiwan-walking-the-line-of-rapprochement/#comments Fri, 12 Sep 2014 00:00:56 +0000 http://www.eastasiaforum.org/?p=43416 Author: Justine Doody, Berlin

After more than six decades of conflict over the political status of Taiwan, Beijing and Taipei are taking significant steps toward rapprochement in their relations. Yet how much Chinese influence can Taiwan’s democracy tolerate?

On 25 June 2014, for the first time in over 60 years, China sent a ministerial-level figure on an official visit to Taiwan. Zhang Zhijun, head of China’s Taiwan Affairs Office, spent four days in Taiwan, reciprocating the historic visit of his Taiwanese counterpart, Wang Yu-Chi, to Nanjing in February. The February encounter was the first official meeting between representatives of China and Taiwan’s governments since the end of the Chinese Civil War in 1949.

Zhang Zhijun, head of Taiwan Affairs Office in Beijing, and his Taiwan counterpart Wang Yu-chi pose for media at the start of a meeting in Taoyuan, Taiwan, 25 June 2014. (Photo: AAP)

Official contact between the two governments is the latest sign of the rapprochement that Taiwan’s President Ma Ying-jeou has been trying to foster since coming to power in 2008. But the threat of reabsorption by military force still hangs over Taiwan. Even as economic ties grow closer, Taiwan’s people are still divided on the degree of friendliness their government should offer to their larger neighbour.

Taiwan tops the latest edition of the Bertelsmann Stiftung’s Transformation Index (BTI), which measures developing and transitioning countries’ progress towards democracy and a socially responsible market economy. Taiwan has a strongly developed market economy which suffers from neither barriers to market entry for private enterprise nor structurally embedded social exclusion.

This stands in sharp contrast to its more powerful neighbour: China has the second largest economy in the world, but social exclusion, inequality and poverty are rife. Private business faces huge hurdles in dealing with a weak and arbitrarily applied legal framework.

Even so, Taiwan is increasingly dependent on trade with the mainland. In 2010, two years after Ma was first elected, China and Taiwan established an Economic Co-operation Framework Agreement (ECFA). Since then, trade between the two sides has been liberalised. According to the BTI report, trade with China accounts for around 40 per cent of Taiwan’s exports. Taiwan’s total trade with China amounted to US$165.6 billion in 2013, according to Taiwan’s Bureau of Foreign Trade. And visitors from China are now a key driver of Taiwan’s tourism industry: 2.8 million Chinese came to Taiwan in 2013 and 670 flights go between Taiwan and the mainland every week.

Taiwan’s business leaders support closer economic ties because they stand to profit from them. The ruling party, the Kuomintang (KMT), has always been on the Chinese side of the identity divide in Taiwan. And Beijing has come to believe that the best path to unification, a goal it has not abandoned, is now economic control rather than military incursion.

But the people of Taiwan are not all convinced. Ma’s approval ratings stood at 17.9 per cent in May 2014, which still represented a leap from his dismal 9 per cent rating in November 2013. In March, over 100,000 people marched in Taipei against the ratification of the Cross-Strait Services Trade Agreement (CSSTA), a new trade pact that would further extend Chinese penetration of Taiwan’s market by opening 80 of China’s service sectors to Taiwan and 64 of Taiwan’s service sectors to China. And between 18 March and 10 April 2014, a group of students and activists calling themselves the Sunflower Movement occupied Taiwan’s parliament in protest against the same agreement.

A controversial editorial in the Wall Street Journal in August 2014 said that unless Taiwan enacts the CSSTA, it risks losing out in trade with China to competitors such as South Korea. But other commentators argue that allowing China to invest in sensitive sectors such as telecommunications and print media would enable China to exercise greater influence and to work its will to undermine Taiwan’s political system.

The BTI gives Taiwan a score of 9 out of 10 for freedom of expression and 10 for civil rights, as compared to China’s score of two for both indicators. With China still aspiring to unification, any step towards increased influence could prove detrimental to Taiwan’s well-functioning democracy.

Ma and the KMT aim at rapprochement with China, but not unification. Their argument is that building a good economic relationship with China safeguards Taiwan’s status, since closer economic links would make it costly for China to take over Taiwan by force. As Taiwanese self-identification solidifies more and more, preserving the status quo is the most popular option: almost 55 per cent of the people of Taiwan view themselves as exclusively Taiwanese, rejecting any notion of a Chinese identity.

But Ma is approaching the end of his tenure: elections are set for 2016, and it is likely that his rivals, the Democratic Progressive Party (DPP), will succeed in winning back the presidency. The DPP has always been a strident voice for independence and its relationship with China has therefore been frosty. But Beijing is well aware of the failing fortunes of the president and it is willing to take extraordinary measures to avoid derailing the economic relationship that it has built with Ma.

In his June visit, Zhang Zhijun met with the DPP mayor of Kaohsiung, Chen Chu, in a move that many saw as the first step towards reconciliation with the hitherto anti-China DPP. The DPP has aspirations to be seen as the party of the people in contrast to the KMT, which they would cast as the party of the rich. But the people want stability and prosperity, and if economic links with China offer a path to that progress, the DPP will have to walk the line between resisting unification and encouraging closer ties. It remains to be seen whether and for how long Beijing will facilitate the balancing act.

Justine Doody writes for the Bertelsmann Stiftung’s BTI Blog and SGI News.

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India and Japan boost cooperation, but no nuclear power deal http://www.eastasiaforum.org/2014/09/11/india-and-japan-boost-cooperation-but-no-nuclear-power-deal/ http://www.eastasiaforum.org/2014/09/11/india-and-japan-boost-cooperation-but-no-nuclear-power-deal/#comments Thu, 11 Sep 2014 12:00:21 +0000 http://www.eastasiaforum.org/?p=43406 Authors: Pravakar Sahoo and Abhirup Bhunia, IEG

Modi’s visit to Japan from 31 August to 3 September was dubbed a success. But what has been achieved? And what do these achievements mean for both countries?

Modi’s visit assumed far greater significance than any previous visits by Indian prime ministers. This is because Modi has a powerful mandate and, of course, because of the reported bonhomie between Modi and Abe. When Modi was Gujarat’s chief minister, Japanese firms participating in the Vibrant Gujarat Summit invested between US$2–3 billion in various manufacturing and infrastructure projects in that state, in response to its investor friendly environment. Modi shares this business friendly attitude with Abe.

The existing ties between India and Japan are underpinned by commercial bonds. Trade between India and Japan totalled US$18.61 billion in the 2012-13 financial year and the two sides have set a target of US$25 billion by 2014. This is relatively low given the size of both the economies and compared to both countries’ trade with China. In 2013, trade between India and China totalled US$65 billion, while trade between Japan and China totalled US$310 billion. This is somewhat ironic as India and Japan are said to be forging a regional counterbalance to an increasingly assertive and powerful China at a time when their respective trade volumes with China are considerably higher than bilateral trade between them.

Japan is India’s fourth largest investor, with cumulative foreign direct investment (FDI) of about US$16 billion in the last decade and a half. The Indian automobile sector in particular owes a lot to Japanese investments in terms of development of advanced supply chains, growth in ancillary units and technology transfer. In 2011, India and Japan signed the Comprehensive Economic Partnership Agreement.

Japan has reportedly promised investment and financing inflows of around US$35 billion to shore up India’s infrastructural sector. Japanese official development assistance (ODA) through the Japan International Cooperation Agency (JICA) has been particularly important for India which has been one of the largest recipients since 2003. ODA is heavily directed towards long-term participation in infrastructure development in India. As of mid-2013, Japanese loan assistance to India amounted to US$15.91 billion, spanning 67 projects. The cumulative Japanese ODA loan commitment to India as of 31 May 2013 was US$37.61 billion. In line with the specific requirements of the Indian economy, a third of Japanese ODA is located in the energy sector. The transportation sector also received a sizeable share. During Modi’s visit, Japan and India signed agreements to secure Japanese funding for transport infrastructure and the development of industrial cities.

Important deals were also made in trade and FDI, including Japan’s commitment to technology transfers in defence. India will buy the Japanese built US-2 Amphibian aircraft and Japan will transfer advanced technology to India. This will pave the way for the two countries to work together in building a local aircraft industry in India. Modi’s ‘come, make in India’ campaign has been well received in Japan. Japan has removed restrictions on six Indian entities in the defence sector.

Japan has also responded to Modi’s move to remove India’s FDI cap on railway infrastructure. Japan offered financial, technical and operational help in introducing bullet trains in India. This is likely to be initiated in the Mumbai-Ahmedabad route. Besides presenting Japanese firms with a lucrative business opportunity, this would also help fill India’s infrastructure gap. The Chennai metro project is already being funded by JICA, as are the Delhi-Mumbai and the Chennai-Bangalore Industrial Corridors. Japan is more than happy to help India fortify its high speed railway infrastructure at a time when China is racing ahead with superfast bullet trains.

But, despite officials from both sides being ordered to prioritise the issue, a nuclear deal remains elusive.

Japan’s nuclear energy related sales are a key part of its infrastructure-related exports. Japanese firms produce vital reactor components and are keen to supply them to India. But, because India is a non-signatory to the Non-Proliferation Treaty, Japan is currently having a hard time finalising the agreement. Civil nuclear energy talks were hit badly following the Fukushima disaster in 2011 but Japan agreed to resume negotiations last year. On the positive side, the Japanese public is now more receptive to a nuclear energy deal with India. Modi stated there is now an improved ‘understanding’ between the two countries after some ‘frank’ discussions about civil nuclear energy. Both Abe and Modi are reportedly keen to fast track discussions to enable the deal as soon as possible.

One underreported achievement from Modi’s visit is the revival of the agreement between Japan and India to trade in rare earth minerals, which was beset with conflict over pricing. This is important as China currently has a monopoly on this sector. Rare earth metals are a key input for production in high-tech industries ranging from smartphones and notebook computers to aircraft.

Finally, Modi’s assurance that India will fast track Japanese investment in India and set up a special team in the prime minister’s office to facilitate Japanese FDI is a signal to the world about the special position India accords to Japan. The crucial infrastructural partnership between Japan and India has been further solidified with this visit.

Pravakar Sahoo is Associate Professor at the Institute of Economic Growth.

Abhirup Bhunia is a researcher at the Institute of Economic Growth.

 

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BRICS, banking on development http://www.eastasiaforum.org/2014/09/11/brics-banking-on-development/ http://www.eastasiaforum.org/2014/09/11/brics-banking-on-development/#comments Thu, 11 Sep 2014 00:00:35 +0000 http://www.eastasiaforum.org/?p=43400 Author: Keshav Kelkar, UBC

The creation of the BRICS New Development Bank (NDB) to finance infrastructure and sustainable development projects in emerging economies is a landmark achievement. Developing nations have lost faith in the current system with its strict conditions on development finance and its inability to insulate countries from financial shocks. International observers have however expressed mixed views about the creation of the bank and what it represents for the nascent multilateral BRICS bloc of Brazil, Russia, India, China and South Africa.

Night view of skyscrapers and high-rise buildings in Shanghai, China, 30 July 2014. Shanghai will host the headquarters of the BRICS New Development Bank that will challenge for the first time the US postwar dominance of multilateral lending institutions. (Photo: AAP).

Some observers remarked that the NDB represents a timely response to the failure of the existing Bretton-Woods institutions to adequately represent the needs of emerging economies. Others, however, are sceptical of the NDB’s capacity to address these issues, noting that existing rifts between BRICS nations could undermine the initiative.

Despite these naysayers, the creation of the NDB is a positive step for the BRICS nations and developing countries in general. While it is not yet clear whether the NDB will pose a direct challenge to the global financial status quo, its creation presents a number of opportunities for the developing nations.

First, the creation of the NDB will strengthen the voice of developing economies in shaping the future direction of global development finance. The Bretton-Woods institutions, such as the World Bank and IMF, have long dominated the development agenda. These institutions have crafted development strategies and presented them as the only viable model for generating economic growth. The power of the World Bank lies not so much in its deep pockets as in the enormous research and communication capacities it deploys to set the global development agenda. The 2008 global financial crisis revealed that these institutions are ill-suited to address the political-economic realities of the twenty-first century. However, it is the unwillingness to reform these institutions that has incensed developing countries.

Developing countries feel that their place at the decision-making table is not proportionate to their growing economic influence. For example, although the BRICS comprise over one-fifth of the global economy, together they only wield about 11 per cent of the votes at the IMF. But reforms have been met with reluctance, and even resistance, by Western nations.

Western nations are concerned that giving a greater voice to developing nations would diminish their own influence or, in some cases, require developed countries to make financial commitments that cannot be upheld in a post-2008 setting. As Raj M. Desai and James Raymond Vreeland argue, ‘these developments show the political tightrope on which countries must walk when it comes to global development finance: while low- and middle-income countries have legitimate claims about their exclusion from the governance of the Bretton-Woods institutions, richer countries cannot cede too much influence over these institutions to developing nations and still justify large contributions — in particular, to the World Bank’s International Development Association every three years, and to the IMF as part of quota reforms — to their restless voters, especially during difficult economic times’. The NDB represents an attempt by developing countries to level the playing field in a system that has failed to keep pace with their economic growth.

Second, the NDB can fill the existing gap in infrastructure financing. The 2008 global financial crisis has diminished the lending capabilities of Western institutions. The World Bank’s lending has reduced to half of what it was before the global financial crisis. Private lending for infrastructure has also shrunk to one-third of its pre-crisis level. This comes at a time when many developing countries require financing for infrastructure projects in order to tackle the challenges of population growth, rapid urbanisation and environmental degradation. Infrastructure spending in developing countries will need to increase from its current level of approximately US$0.8-0.9 trillion per year to approximately US$1.8-2.3 trillion per year by 2020.

Investment in infrastructure is necessary to improve economic conditions in developing nations. Building roads or railways immediately boosts output and jobs, and helps to spur future growth — provided the money is spent wisely. Better transport helps farmers move their produce to cities and manufacturers to export their goods overseas. Countries with lower transport costs tend to be more open to foreign trade and so enjoy faster growth. Clean water and sanitation also increase labour productivity. While the NDB will have an initial subscribed capital of $50 billion, it has the potential over time to serve as an alternative source for financing important development projects. It may also act as a catalyst for private sector investment, thereby overcoming many of the deficiencies in the current system.

Lastly, while the NDB does not yet pose a direct challenge to its existing Bretton-Woods counterparts, its creation will generate competition among global financial institutions. The creation of the NDB comes at a time when developing countries no longer have faith in the current system and are seeking to promote and safeguard their economic interests. To that end, establishing regional monetary funds can be more effective than the current system when it comes to representation, coordination and crisis management.

The entry of the NDB into development finance comes at a critical juncture when the financing needs of developing nations are rapidly outgrowing the capacity and willingness of traditional funding agencies.

Keshav Kelkar is a research fellow at the Institute of Asian Research, University of British Columbia.

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