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 Emergent Asia: Strategic Prospects 2015
By Madhukar SJB Rana
The developed, industrial West has the world’s attention by claiming to reducing global poverty by half by 2015; endeavouring to achieve the UN’s MDGs by 2015; and doing everything possible, diplomatically, to protect its inefficient agriculture (at the cost of the poor that they wish to help). Amidst all this, the crowing symbol of an emergent Asia will be Singapore, which will be the world’s richest nation with the highest per capita income by 2015. The other jewel is the fact that China’s GDP will match that of the US at $11 to 12 trillion in 2015 comprising 25 per cent of the global GDP. These are astounding developments taking place in international affairs that will, no doubt, unleash all manner of dynamism, creativity, innovation and self-confidence in the Asian psyche. One may expect Asians to shed their colonial and Cold War baggage and seek to promote universal values deeply imbedded in each of its great civilizations.
In the 16 th century, when Asia was at the pinnacle of its glory, it had around 66 per cent of the global wealth. We may cross that watershed by 2015 as the Japanese and Indian GDPs will be as large as that of the European Union’s which is about $ 9 trillion. This does not include South Korea which is expected to reach $ 2 trillion while Indonesia’s will lie between $ 1.5 to 2 trillion by 2015. Other important countries such as Iran, Kazakhstan, Malaysia, Pakistan, Thailand and Vietnam will certainly add a few more trillions to the Asian wealth thereby effectively pulling the centre of gravity of world economics, politics and culture to Asia.
The impact of all this has already been felt in Australia that henceforth prefers to call itself ‘Australsia’; and considers itself an integral part of the Asia-Pacific region. How does Russia view itself (as much of its landmass is undoubtedly in Asia) is an interesting question. The same could be asked of Turkey and Israel as they begin to readjust themselves to emergent geo-economic, geo-political and geo-psychological realities of the 21st century.
On the geo-economic front, the vision of an emergent Asia will be possible if it can counter the dominant economic leadership from the US by creating regional institutions such as the Asian Monetary Fund that serves to, inter alia, develop local currency bond markets and possibly an Asian WTO to empower the Asian bloc of nations to obtain better deals from the US and Europe. Not to be ignored is the need for an Asian Development Bank that will serve to be the harbinger, intellectually and financially, of a “borderless” Asia by innovating economic, financial and development policies that swear by the doctrine of SAP, E-SAP or the PRSC and conditionalities; but actually move towards a pragmatic approach consistent with a country’s political, economic and cultural under the “one-size-does-not-fit-all” mantra.
Asia also needs to take command of the intellectual leadership in matters of peace, security, globalisation, climate change, sustainable development, democracy, social pluralism and international migration. Its strength lies in its size and the variety of its demography and a landmass that is continental in scope without interruption, except for Japan. China’s Boao initiative is commendable. More such think tanks and institutions for regional dialogue are necessary towards UN ESCAP, SAARC, ASEAN, ECO, BIMST-EC, Gulf Co-operation etc are ideally placed to do both jointly and severally.
How Asia actually emerges and how peaceful will Asia be depends, on the one hand, on whether Japan sees itself as an East Asian or a ‘Far West’ nation. Aditionally, how much cooperation there is going to between China and India . The fundamental question that will be asked by all Asian leaders at various times in national strategy-making will be: Is super-power China or the US a greater threat to each of us in Asia ?
Japan opts to keep its security arrangements with the US intact because they have a common threat perception about China . India this will emerge as the force that can tilt the balance of power in Asia ’s favour — provided India is accepted as the regional power by all of its South Asian counterparts.
If both Japan and India seek strategic partnerships with the US, with the possibility of continued NATO intervention in Asia, then the assertive, non-isolationist US foreign policy will invite counter-actions from China and the Islamic nations where the US foreign policy seeks to promote individual liberty, democracy and human rights, while seeking to maintain its position as the world’s only super-power by containing China. Moreover, it is perceived to be anti-Muslim by the militant Muslims being re-enforced by the double standards over its so-called ‘war on terrorism’ given that Nepal , for example, receives no support to combat its own threats from terrorism despite President Bush’s pronouncements.
One can visualise the US doing all that is possible through military and diplomatic means (as also by spying on nations and being engaged in intelligence interference, not to omit reference to their control of the IMF and World Bank), to prevent the emergence of a multi-polar world to maintain its super-power status. How far the US can arrest this trajectory is questionable with its huge public debt, household debt; and an overstretched military that knows how to win wars but not peace. Critically, too, one may surmise that US domination of global affairs is dependent on how far it can keep the NATO alive with the support of the Europeans consisting of ‘old’ and ‘new’ Europe. That will depend on how the Europeans perceive threats to them from Russia , Turkey or the Arab world.
In short, one foresees a multi-polar world as a definite trajectory in international politics. An additional ‘multi-polarity with multiple poles of power’, lying within the Asia-Pacific, factored by the dominance of the US in Asian affairs, at least until 2040, will add to the complexities of regional strategic relations. The final shape of the emerging balance of power globally will be determined by the emerging energy and water security.
Notwithstanding the above scenario, and in the spirit of globalisation, SAARC must look beyond its own borders to collectively extend its reach to other regions and continents.
One way that all SAARC nations can reorient themselves in the context of an emergent Asia-Pacific is to visualise the sub-continent as having four economies in one: one in the eastern seaboard extending over the Bay of Bengal from Nepal into the Indo-China peninsula; another in the southern seaboard that extends from Southern India into Sri Lanka and Indonesia and Australia over the Indian Ocean; one in the western seaboard extending from Western India and Pakistan into the Arabian Sea reaching the far corners of West Asia, and the other extending from the landmasses of North India and North Pakistan into Central Asia through Afghanistan. In such a visualisation, we may see even more dynamic co-operation between SAARC and East Asia as well as Russia as SAARC associate members by 2015-20.
To be able to so, and for India to exert its rightful leadership in regional affairs and lift South Asia by 2015 along with it, it needs to re-introduce the Gujral doctrine in favour of all SAARC countries. This will help build confidence for the ultimate resolution of the intractable Kashmir question. Just as much as the new thaw in Sino-India relations since 2003 (even without the settlement of the Arunachal boundary dispute) will do; together with the rapid expansion of bilateral trade and investment and the agreed opening of the Sikkim’s Nathula.
Between now and 2015, China will be a major South Asian player with close contact with its neighbours. Its participation in SAARC, as observer with Japan and South Korea and Iran (and sooner than later Russia ) bodes well for South Asia as most of its smaller countries can benefit immensely by serving as transit economies for inter-South Asia-China-Central trade. One does not expect that the Sino-India entente cordiale will be hunky dory with the newly found heights in bilateral economic diplomacy so long as nuclear build up and military rivalry over the strategic oceans, continuation of the Sino-Pakistan strategic partnership, and the ticklish question of Tibetan autonomy continue; as they will prolong the suspicions, fears and threats to each other’s national interest, not to mention the potential threats arising for its energy and water security as China begins to harness the Bhramhaputra river resources in earnest.
An emergent Asia driven by the forces of globalisation and founded on the formation of Asian economic blocs will, undoubtedly, raise the strategic profile of Nepal in international affairs with its abundance of sweet water and energy resources provided it can act as a united, independent buffer state totally free from the clutches of foreign control under diverse spheres of influence. Should this be the case, we in Nepal will still be struggling with poverty alleviation, MDGs, conflict management and consequential a least developed country status, well into 2030, when most of Asia would have graduated into the status of industrial nations.
(Rana is a former Minister of Finance. This is an updated version of an article prepared in 2004.)
Dollar vs Crude OiL Industry
By Pramod Pandeya
Recently, we have witnessed structural changes in the global crude oil market. Analysts have their own version either in form of “Middle-east crisis” or “ China factor” to describe the nitty-gritty of the market. They are largely right. But beyond these factors, there is another equally (or even more) important one that has significant impact on the global oil market — the continuous devaluation of the US dollar.
Till now, the dollar is the currency used in the crude oil trade. Going by the current market scenario and future expectation about the dollar, we have every reason to believe that oil prices will stay on the higher side in the days ahead. Additionally, the dollar-oil equation will be further weakened due to the recently developed “Iranian Oil Bourse” in which crude is traded in euros instead of dollars.
History Speaks:
Crude oil’s intimidating relation with the dollar started back in 70s when the world was struck by the oil crisis. This led to a manifold increase in crude price and put extreme pressure on the dollar. Many countries during that period tried to swap their dollar reserves with gold but the US government then failed to honour the obligation, which ultimately led to its near bankruptcy.
Desperate to maintain its credibility and save the dollar, the US government decided to use its ultimate weapon: Military Might. With its military might and diplomatic lobbying, the US finally succeeded in convincing (forcing!) Saudi royals and many OPEC countries to sell crude in dollars which not only saved the US economy from virtual collapse but also gave birth to new word “Petrodollar” and for the last three decades, it has played a significant role in nurturing the hegemonic status of the dollar.
Devalued Dollar: Impact on Crude Oil Trade
According to reports, the estimated revenue of OPEC countries have gone up from approximately $260 bn in 2002 to about $650 bn in 2006. There are huge incentives to OPEC and other oil exporting countries to increase crude oil price to preserve the purchasing power of the depreciated dollar.
Further, devaluation of the dollar is mainly due to the structural weakness of the US economy and it might take many years to bounce back to the level it was in during its hey days. This has forced oil-exporting countries to find an alternative currency to quote oil price. So, in the next decade or so, euro (if it remains as strong as it is today) may replace the dollar completely as crude oil currency, which might lead to a “Petroeuro” era. But there are some technical weaknesses in the euro, which ultimately can stop it from gaining supremacy over the dollar. The most significant reason being the euro-based crude trading system still lacks euro-denominated pricing. Both Norway Bent Crude (NBC) and Dubai Crude Exchange are denominated in dollars. But, the recently opened Iranian Exchange is certainly going to make euros’ journey much easier as prices are quoted in euros in this bourse.
My Loss, Your Gain:
In the past, the hegemonic dollar was always backed by the wealthy and scarce commodities of the globe whenever dollar faced critical times. This support held the US economy upright. During World War II, it was yellow metal, which backed the dollar, and in the 70’s oil crisis, it was “Petrodollar” which rescued the US economy from virtual collapse. But the inception of the euro in the late 90s and its strong performance against the dollar ever since have posed a strong threat to the dollar. Further, in recent times, critics are expressing doubts over dollar’s relevancy as crude oil currency. They are even asking the shredding of the doomed dollar and embracing the euro as the next generation crude currency. So, a loss for the dollar is sure to be a gain for the young, dynamic and strong euro.
Where Are We Heading?
The recently-opened Iranian bourse (supported by Russia , OPEC and China ) would certainly weaken the supremacy of the International Petroleum Exchange (IPE) and the Chicago Mercantile Exchange (CME) that trade in dollar. Furthermore, the dollar’s supremacy as the global currency is constantly weakened by the fundamental weakness in the US economy and the huge current account deficit of Uncle Sam. Thus, we have every reason to believe a structural shift will take place in the global crude oil market.
I don’t think the Nepal Oil Corporation (NOC) honchos wish to increase the fuel price in every quarter or so to manage the losses which they are incurring due the increased crude oil price (critics equally blame mismanagement within the NOC). So, I would advise them to be proactive and give serious thought on the hedging instruments available in the international market like Crude Oil Bond or even act professionally in managing its treasury and enhancing internal control. Additionally, NOC can explore alternative sources for procurement.
(Pandeya is associated with the Nepal Merchant Banking & Finance Ltd.)
The Neglected Issue of Inflation
By Sadaya Hamal
Inflation is not a welcome guest to any economy. Generally, inflation makes an appearance when extensive excess demand and supply constraints exist in the market for many individual goods. According to Friedman (1973), the inflationary phenomenon is found in all kinds of societies, at every stage of development, under every kind of government and within all kinds of political, economic and social ideologies.
An inflationary situation is much abhorred because it generates negative effects on the economy. Such a situation decreases the real value of savings, imposes hardship on fixed earning groups, negatively affects economic growth, and debases the value of currency etc. There is, however, disagreement about the effect of inflation on the economy. Some argue that a mild inflation is beneficial to economic growth because it helps to keep resources fully employed, generates savings, encourages manufacturers to increase production on account of increase in effective demand, and increases investment. It is generally argued in favour of mild inflation in developing countries to spur and achieve economic growth; however, there is a great danger that mild inflation may turn into hyperinflation. Additionally, many empirical evidences show that increases in the inflation rates will earn an average lower rate of economic growth and per-capita real income over the long-run. Thus, the authorities concerned should always implement effective measures to check inflation from occurring and rising.
Graph I: Declining Trend of Ratio of Agricilture Income to GDP |
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Persistent money creation is one of the prime causes of inflation and the other is supply shortage. Price rise also occurs on account of supply shocks, such as an oil shock or crop failure, as well as increases in indirect tax. However, continuous inflation occurs when there is a continuous excess money supply growth in the economy. Thus, monetary expansion and inflation are closely linked; a continuous high inflation cannot perpetuate for a long period without monetary nourishment.
Fiscal and monetary policies may possess inflation bias because of political compulsion. If a political system has features of inherent and recurring instability, the government may intentionally stall reforms in the tax system and necessary adjustments in administered prices. Moreover, inflation is closely related to electoral competition in a world where politicians seek to be re-elected. Money growth and inflation will go up in the period immediately preceding an election and will come down (possibly jointly with a recession) after the election. The political factor, therefore, is a significant cause to distort monetary and fiscal policies, which generates inflation in many developing countries.
Price stability refers to the state of affairs wherein the movement of prices of different commodities, services, and assets remain either at the original level or very near the original level during each span of time. At present many countries have adopted inflation targeting as their final monetary policy goal. In an inflation-targeting framework, the authorities typically set an inflation target for the medium term, often coupled with an annual intermediate target. If projected inflation over a medium time horizon falls outside the announced range, a change in the monetary policy stance is indicated. The inflation targeting is not a monetary instrument, but a policy objective or goal.
Graph 2: Nepalese Inflamation and Indian Wholesale Price for 1990-2006 |
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Inflation targeting needs a comprehensive and sophisticated model of the economy. First of all, the country has to determine what measures it may use for inflation targeting, such as Consumer Price Index (CPI) or GDP deflator. The countries, which have adopted the inflation-targeting framework, use either headline CPI or underlying (core) inflation measures. New Zealand uses underlying inflation measures. From the inflation index, it has excluded the effects of estimated impact of goods and services tax as well as of impact of interest rates on CPI. Though the headline is easy to adopt, it is not best suited in the medium to long-term as it could be volatile and adversely affect public perception of central bank creditability. The underlying (core) inflation is difficult to estimate. However, from the monetary policy angle, it is desirable that the policy makers endeavour to reduce core-inflation.
The Nepal Rastra Bank Act of 1955 did not have any objective of price stability in its preamble; thus, it was not involved in specifying the annual target of inflation growth rate. The government used to specify the annual target of inflation growth rate in its five-year Economic Plans. As there was no provision of regular mid-term review, there was no mechanism to verify whether the specified target rate was achieved or not. However, the new statute, the Nepal Rastra Bank Act, 2002 has specified objectives - to maintain the stability of price and balance of payments for sustainable development of the economy, and manage it. After this change in the Act, the Bank has begun to announce a permissible limit of price rise each year. In the mid-term review of the monetary policy including limiting of price rises, the NRB has introduced changes in the intermediate target and has announced to suitably use the monetary policy instrument.
Officially, there are two monetary measures published in Nepal - narrow money (M1) and broad money (M2). In the Nepali context, various empirical studies conducted in the past have shown that narrow money, in comparison to broad money, has a stronger relationship with prices in addition to other economic parameters. Because of available empirical evidences, we have considered narrow money as an influential variable of inflation in Nepal . Secondly, the influence of Indian prices on Nepali prices is robust and profound. The Indian wholesale price is considered as a proxy of Nepali import prices because of (1) the open border between Nepal and India that allows free movement of goods and people; (2) India is Nepal's largest international trading partner which means Nepali import prices are captured to a larger extent in Indian wholesale prices; (3) Nepal is a very small economy while compared to the Indian economy, which makes Nepal a price-taker; (4) exchange rate between the two currencies is implicitly fixed and movement of exchange rates with respect to other currencies is in same direction and approximately in same percentage.
The economic parameters shift (or relationship between economic parameters change) suggesting a structural break over a period of time. Such shift in relationship between economic parameters may occur as a result of changes in a political system, changes in a government policy, etc. The Nepali empirical researches suggest 1990 as a year of structural break because (1) political changes took place during that period; and (2) the reforms initiated during the mid-80s were accelerated at the same time. Thus, we are concentrating on the period 1990-2006.
A developing country like Nepal suffers structural weakness in the agricultural sector. The proponents of this viewpoint postulate that prices rise as a result of the rate of agricultural production lag behind the rate of population growth. For this purpose, the ratio of agricultural income to GDP, called as RAG, is used in regression analysis. If RAG increases, it will have negative effect on prices, and vice versa.
Graph 1 reveals the trend of RAG from 1990 to 2006. As evident in the graph, there is an overall declining trend in RAG. There is a prolonged steeper decline from 1990 to 1995. Though there is a declining trend after 1995 also, it does not appear as steep as it was in the early five years (i.e. 1990-95).
The regression analysis for the period of 1990 to 2006 revealed that the Indian wholesale price has the most significant expansionary effect on inflation in Nepal . Narrow money showed mild expansionary effect and RAG has weak contractility effect.
Graph 2 is of Nepali inflation and Indian wholesale price from the period 1990 to 2006. For most of the period, the movement of he two is in the same direction - when Indian wholesale price rises, Nepali inflation also rises. Furthermore, transmission of the effect is almost immediate. However, Graph 2 also reveals that Nepali inflation and Indian wholesale price have moved in opposite directions since 2000 - when Indian wholesale price increased, Nepali inflation declined. This is divergent to our findings. Firstly, the transmission has been almost instantaneous earlier. Secondly, our analysis revealed that Indian wholesale prices exert the most significant expansionary influence on Nepali prices; thus, this movement in opposite directions is contrary to the findings.
In this context, regression analysis conducted for the period between 2000 to 2006 revealed that the influence of Indian wholesale price has actually emerged stronger during this period in comparison to other economic parameters and in comparison to other periods. The expansionary influence of narrow money, however, was reduced significantly during this period.
It is worthwhile to note here that the growth in agricultural production has been negligible over the years. Nepal has a fairly low amount of cultivable land. Moreover, the agricultural sector is dependent on traditional farming mechanism and favourable weather conditions, instead of modern farming techniques and irrigation. Throughout the year irrigation facility is available only to insignificant amount of cultivable land; most of the cultivable land depends on rainfall for irrigation. The existence of these structural bottlenecks cannot have beneficial effect on agricultural production.
The Maoist insurgency engulfed the entire nation with increased intensity especially after 1999/2000. The protracted insurgency had severe impact on the agricultural sector since the Maoists were mostly rural-centric. The insurgency also gave rise to incidences of forced and/or unforced migration to safe areas. In addition, many Nepalis started to seek employment abroad and in India due to the adverse political and economic situation. Such events reduced availability of labour-force to work on the farmlands. The agricultural sector, therefore, could not increase at a faster pace and saw negligible growth.
With the rapidly expanding population showing no sign of receding coupled with the negligible agricultural growth, import of food items from India has increased. Hence, the consumer prices are directly affected. Moreover, the effect of Indian price rise on the Nepali price rise is instantaneous because of immediate consumption, proximity and considerable dependence on Indian products. This is consistent with our finding that the positive effect of Indian wholesale prices on Nepali inflation has emerged stronger. Therefore, when the Indian wholesale price increased in 2001 at 7.16 per cent, Nepal could not have one of the lowest inflation rates at about 2.5 per cent. Moreover, from mid-2002 till 2005, Indian wholesale price rose and it averaged at about 4.8 per cent, Nepali inflation appears to have averaged at about 4 per cent during the same period. This possibility of Nepal experiencing such lower price rise during this period is not simply feasible.
This brings us to a key question - does the Nepali data on inflation present a correct picture? It appears that Nepali inflation has been underestimated since 2000. There may be various reasons for this type of misrepresentation. Firstly, Nepal had witnessed large-scale insurgency during the last 10 years which seriously hampered data collection efforts. Since CPI is based on consumer surveys, the officials concerned may have not been able to conduct surveys to collect data from all parts of Nepal . Because of this reason, the officials appear to have presented inflation figures on an ad-hoc basis. Secondly, preference and habits of consumers may have actually changed. This distorts CPI data as it is calculated on the basis of weights of various items that consumers had preferred previously. Thirdly, data may be misreported due to political pressure, which is a prevalent practice in any developing country.
Whatever may be the cause of distortion in inflation figures, it must be corrected. Firstly, the agency concerned should conduct snapshot surveys, taking representative areas and sample sizes, if data collection from the whole of Nepal is not feasible. It would present a more realistic picture than specifying inflation on an ad-hoc manner. Secondly, this exercise will also allow the agency to determine if preferences and tastes of the consumers have actually changed. Furthermore, the weights of items that constitute CPI can be readjusted according to changed preferences, to establish correct inflation data.
The most important question at present is whether there has been any noticeable effort from the government to control inflation in the recent past. The answer is resoundingly ‘No’. The Nepal Rastra Bank only has few monetary instruments that can control money supply growth; however, empirical evidence suggests that money supply growth has a very weak expansionary influence on inflation in Nepal. As mentioned earlier, the most influential parameter of inflation in Nepal is the Indian wholesale prices on which Nepal has no control. And the only available parameter that possesses a contractility effect on inflation is the agricultural income. Unfortunately, there has not been any worthwhile policy announcement regarding the agricultural sector as of recently. Though the five-year Plan documents placed top-priority on agriculture and irrigation with high budgetary allocation each year, the performance of the agricultural sector has remained dismal. It indicates that something is critically amiss in the government's policymaking mechanism and it requires radical change.
The current coalition government, and the political parties involved therein, seem to be more involved in political bickering than looking at economic issues seriously. It is of concern that the political parties show utter disinterest in economic issues. According to the Population Census 2001, nearly 66 per cent of the population is engaged in the agricultural sector. The negligence of this sector means neglecting the larger portion of the population, who are dependent on agriculture, and denying them an opportunity to uplift their economic condition and well-being. Increasing income of this population would help them better withstand negative effects of inflation. And, if disposable income of this section rises, it may provide impetus to other economic activities. Moreover, improving the agriculture sector may actually check our rising dependence on India for essential food items. This will bring in positive effect by contracting inflation.
Therefore, there is a need to build a consensus among political parties to accord utmost priority to economic issues and to control inflation. Since increasing agricultural income is the only viable option available to us to control inflation, the agricultural sector must be assisted to perform optimally.
(Hamal is currently a lecturer at Management Campus, Purbanchal University .)
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