Transpacific Partnership: Should India Join this mega trade deal

Whether or not India should join the TPP is a debatable issue. What one can safely conclude is that India’s interest in participation would bring in dynamism to the TPP and be a great relief for both the United States and Japan.

With the Doha Round of the World Trade Organization (WTO) not quite going anywhere, countries have started moving towards bilateral free trade agreements (FTAs) as well as regional trade agreements (RTA). These are seen as a way forward, with trade experts hoping that these will ultimately pave the way for a multilateral agreement in the WTO.

India is negotiating entry into some RTAs, but opinions about them are mixed. Three mega trade agreements are being negotiated: the Regional Comprehensive Economic Partnership (RCEP), the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). India has started preparing for RCEP with its set of demands and offerings but has not taken any stand on the TPP (the TTIP has no relevance because of the geographical area it relates to).

Starting off in 2005 as the Trans Pacific Economic Partnership Agreement (TSEP or P4) between four countries (Singapore, New Zealand, Chile and Brunei), the TPP now covers 12 countries – the United States, Canada, Australia, Vietnam, Malaysia, Japan, Mexico and Peru getting added along the way – which together account for around 40 per cent of global gross domestic product (GDP) and nearly a fourth of international trade. Taiwan and South Korea are also planning to join.

What is in it for India?

India’s scepticism over FTAs stems from the fact that it has not been able to take full advantage of them as much as its partner countries have. One reason for this could be that India has been silent or slow on economic reforms, as a result of which domestic industries are not efficient enough to compete in the turfs of the partner countries. It is only now that serious efforts have started but they will take some time to show results. However, India can’t wait forever for this process to set in.

India is negotiating an ambitious FTA with the European Union for quite some time now. With India unrelenting on certain areas like government procurement and differences over the automobile sector, these negotiations are not going anywhere. However, the European Union must be desperate for the agreement in view of its domestic economic situation and pressure from its industry which is bereft of any real growth. It all depends on how effectively the policy makers there would be able to convince their varied countries.

As of now, the differences between their economic goals are increasing due to the worsening economic situation in some of the EU member countries. However, instead of embarking on that exercise, that is, convincing its member states about the desperate need to enter into a FTA with India, the European Union is trying to bring down India’s negotiating will by pretending as if it is more interested in the TIPP, which it is now negotiating with the United States and is trying to create barriers such as recent directives on government procurement, so as to send a message to India.

In this backdrop, the best option for India is to simultaneously move on multiple fronts and conclude deals wherever possible, with whatever little gain it can accumulate. This no doubt is a tough call as in any negotiation, we need to give away some to get some. While RCEP and TPP may be competing among themselves, India can’t afford to choose one over the other, leading to a complete neglect of one of the groupings, especially due to the China factor which looms large over RCEP and the fact that, seen from India’s perspective, RCEP may be more about manufacturing sector and TPP about services.

Analyses of TPP

Dr. Badri Narayanan of Purdue University, in a recent paper co-authored with Dr. S.K. Sharma of the Indian Institute of Foreign Trade says that India would lose due to TPP, regardless of whether it joins or not. This is because of ‘strong trade diversion effects arising from global price reduction facilitated by widespread tariff elimination’. However, Narayanan adds that India might gain in areas such as textile products, leather, light and heavy manufacturing, fish, dairy, meat/livestock etc., as India’s output would increase if it decides to join the TPP. These are crucial sectors for India because of their employment generation potential.

Narayanan points out that India might, anyway, lose in agriculture as output would decline in sugar, wheat, vegetables, processed food etc. Apart from this, he points out that his study has not taken into account services and hence this study may ‘underestimate the potential effect of liberalization where services sector is to be included’. Thus, this crucial aspect of impact of TPP on the services sector in India is missing in that study making the conclusions incomplete. And it is services sector which need to be looked into carefully with regard to India’s entry into TPP.

There are other analyses with regard to TPP’s impact on other countries. Standard Chartered predicts benefits to Vietnam’s apparels export due to trade diversion from Sri Lanka and Bangladesh. Dr. Rashmi Banga of UNCTAD predicts further decline in Malaysia’s domestic value added exports due to increase in imports from the United States and Japan. The European Union has already felt that the impact of TPP on it would be negative, forcing it to move faster on its foreign trade agreements with Asian countries.

Hence, we need not shy away from moving towards foreign trade agreements or wait till we put our house in order. This definitely would mean giving away some of our stated positions. That is part of the negotiation. However, the appropriate negotiating strategy is to give away things that would hurt us less or when the offloaded baggage would benefit us in the long run.

India and the contentious areas of TPP

The recent developments in TPP negotiations show that the United States is proposing to make TPP countries its playground. It is trying to expand its ideas of intellectual property rights, trade, entrepreneurship and government procurement to the TPP alliance. Taking lead will have an ‘equal and opposite’ impact on the United States. It would mean that it will have to part with its jobs – mainly in the services sector either voluntarily as a bait or due to the structural compulsions of ‘comparative services advantage’.

It would also mean dilution of its ‘Buy American’ laws, adversely affecting the protection it gives to its domestic manufacturing sector, thereby losing out those jobs to TPP countries. Since much of manufacturing jobs have already moved from the United States, this exodus of remaining jobs in manufacturing and jobs in services sector will greatly affect it. This time, it will not be only the low end ‘white collar coolie’ jobs that will move to other countries, but also lead to an exodus of high end jobs in the services sector as well.

Of all the chapters, the demands on intellectual property rights would be the most contentious. It already is, with economists such as Paul Krugman pointing out that the proposed Intellectual property provisions envisioned by the United States would mainly help the pharmaceutical industry and Hollywood. Krugman has severely criticized the TPP on the ground that, while it may help its corporate giants, the average American worker would lose. Senator Bernie Sanders also argues on similar lines. And this is where India needs to pay attention.

The agreement has 29 chapters and the one on services is of foremost importance to India. The provisions that may cause concerns are the intellectual property rights and agriculture. The agreement aims at comprehensive market access, which means that tariffs and barriers would be eliminated among the member countries for trade in goods and services. It also aims at protecting investments. One problem area for India would be that it will get firmly entrenched in the domain of the United States and the present independence and flexibility it enjoys might be affected if it agrees in toto to the terms and conditions of the TPP, as it exists now.

However, at the same time, America’s agenda in Asia would be ineffective without the participation of the two Asian giants – China and India. With TPP being rumoured to be a tool by the United States to encircle and limit the influence of China’s clout in the region, as part of its ‘pivot to Asia’ policy, and Japan silently playing in the background, India’s interest in participation would bring in dynamism to the TPP and will be a great relief for both the United States and Japan.

India now has an upper hand due to the threat of the other competing mega deal – RCEP which, if made effective, might invalidate any gains that the United States would dream of with the TPP. Hence, it is all the more important that India takes a firm view on this mega deal at this juncture from its present position of strength as it would give it the flexibility to bend the clauses being negotiated. +Swarajya 

GREECE - EUROPE AND THE FUTURE FOR SYRIZA GOVERNMENT

Let us begin with some jottings from history. In our imagination Greece occupies the bedrock of key Western ideas with its first city states and the idea of democracy, but that was ancient Greece. Modern Greece, as we know, has had an important place in Europe after it emerged breaking free from the Ottoman empire in the 1820s with the intervention of France, Britain and Russia. A very poor and essentially rural country then with a limited state under the deep sway of corrupt elites. Located at the confluence of Southern Europe and the Balkans, it was deeply marked by wars with Turkey (also a traumatic transfer of populations agreement with Turkey), a far Right dictatorship in the mid 1930s, the German occupation, its own civil war till 1949. Post civil-war Greece of the 1950s and 1960s remained authoritarian and underdeveloped. The United States called the shots in these Cold War years and then came a spell of dictatorship from 1967 to 1974 to pre-empt the rise of the Left. Greeks have had it very hard and have a great tradition of resistance acknowledged in Europe.

Europe was marked by widespread anti-fascist resistance to overcome the wars that had destroyed and economically drained its people; peace was then seen as crucial for democracy. Communists were at the forefront of the struggle against the colonels’ regime in Greece, in particular the Athens Polytechnic uprising of 1973. Repression of the uprising led to mass mobilisation that resulted in the overthrow of the dictatorship. The 1974 democratic and peaceful transition in Greece was hailed across Europe. It had alternating governments of the Centre-Left PASOK and the New Democracy Conservatives as the two principal political actors.

In 1992 Greece (along with post-Franco Spain and Portugal) signed the Maastricht Treaty and in 2001 it joined the Eurozone—countries with a common currency. Greece has been in the thick of its most severe economic crisis since 2010. The backdrop for this crisis dates to the 2008 financial meltdown that affected the world economy and the Eurozone. Across Europe the economic crisis has fuelled the rise of quick fix, ‘anti-political’ and ‘anti-systemic’ movements and also of the far Right while taking the sheen of the old established mainstream political parties leading to loss of influence. The story of decline of the old Left parties of Europe is independent of this and that started in the 1980s and reached its zenith in the crisis years starting 2007 on.

There has been much excitement among Left circles in Europe and across the world ever since a coalition of the far Left Syriza formed a government in Greece. Syriza is a broad network of political activists from different currents of the far Left, the feminists, ecologists, anti corruptioniks and all of the resistance struggles against austerity of recent years as part of it.

The origins of Syriza go back to the period 2004-2008, the Coalition of the Radical Left, developed through the past years marked by crisis, but expanded its popularity in a somewhat alarming way in 2011. The open secret here is that during the long drawn 2011 Syntagma Square occupations in Athens, Leftwing anti-imperialists and ultra-nationalists rubbed shoulders on the same side in a toxic entente. This has created a short-term spill-over effect where the Right/Left, Left/Right axis appear in a blurred spectrum with a shifting base in crisis-marked Greece.

By the 2012 elections, the Coalition of the Radical Left, Syriza, went from having five per cent to 27 per cent of the votes and making it the second-biggest party in Greece. In the January 2015 elections Syriza won 36.3 per cent votes giving it 149 seats in the 300-seat Greek parliament. It had to tie up with sovereigntyist Right-wing ANEL party [Independent Greeks] to obtain the majority required to form the government; as a result the new government has a rabidly reactionary Defence Minister. Syriza’s own Foreign Minister is a nutty ideologue of the ‘patriotic Left’ (formerly with the still unadulterated Stalinist Communist Party of Greece, the KKE).

Europe’s old Left parties, which were mass parties, have sunk in popularity and ceded ground to the far Right parties that are quite popular with the labouring classes (an uncomfortable reality mostly unacknowledged by the Left). The two though share ‘national sovereignty’ as the common repertoire and a rejection of the Eurozone and espouse economic autarchy vis-a-vis the

European economic union as a solution. We have seen something similar in and around the world where the Left and Right came to share a common language with regard to globalisation.

The past few years has seen a number of governments in Greece collapse while trying to implement a slew of economic austerity measures imposed by the European Commission, the European Central Bank and the International Monetary Fund (the Troika). The scale of the crisis has been enormous leading to the collapse of the basic social infrastructure in Greece, to the denial of access to health care for three million people, quite dramatic for a European country with a population of 11 million.

According to the Organisation for Economic Cooperation and Development (OECD) figures of March 2014, 30 per cent of the Greek population live below the poverty line and 17 per cent of the people are unable to meet their daily food requirements. Umpteen media reports have described the huge increase in disease, suicide and preventable death. A large social crisis emerged, also providing fertile ground for the rise of the far Right and neo-Nazi Golden Dawn party; they went about distributing food to the needy while pushing ultra-nationalism. (Half a million people voted for it.)

The election of a pro-poor Left Government committed to oppose neo-liberal policies and adjustment measures resulting in mass unemploy-ment has the airs of a “Greek spring” with vast support of the population, larger than its real strength. Syriza’s opposition to externally imposed austerity policies is formulated in simple terms of defending national sovereignty against an outsider—the Troika. Syriza’s political campaign has relied a great deal on a patriotic and populist idiom, deploying a ‘saving-the-nation’ device and tapped into the vast reservoir of resentment within Greece. (It is a matter of history now that in 1979-80, the iconic founder and leader of PASOK, Andreas Papandreou, had opposed membership to both the EEC and NATO saying they were part of the same syndicate; but those were different times.)

However, it accepts that political action in and against the European Union is the route to take. In a bold and internationalist stance, the Syriza has broken with the anti-European rhetoric of the old Left and has opposed an exit from the Euro, saying it will be disastrous for the future of Europe. But they are caught in a vortex as they try to negotiate their way with bankers and EU

officialdom. The size of the Greek public debt is gigantic—323 billion Euros— and the hands of the Left Government are tied to prevailing economic agreements across Europe. Syriza is arguing for a bailout package with the EU that would create a new solidarity in Europe based on fair fiscal, and social and labour policies. Millions of people haven’t been paid wages, pensions and unemployment benefits. Discontent has chiselled space for acceptance of violence in daily

politics. Syriza, while it gets down to providing economic relief to citizens, must now to draw the line without fear of breaking its ties with the street, by not closing its eyes to banalisation of xenophobia and anti-outsider/immigrant sentiment. It is an explosive situation. In a time of economic and social unrest the European Union was awarded the 2012 Nobel Prize for keeping the Peace and Tolerance in Europe. Be that as it may, Europe cannot look away from the

serious social crisis in Greece; it has a special responsibility to come up with a social Marshall plan.

Tucked within the Greek turmoil has been another crisis that has been spinning out of control—xenophobic violence against migrants and asylumseekers, on Roma, on Gays and on Leftists, mob violence against migrants from Afghanistan, Bangladesh, Pakistan, North and sub-Saharan Africa; these have been witnessed right through the years 2013 and 2014.

EU officials have agreed to extend the Greek economic bailout for four months at the end of February 2015, allowing the nation a little breathing space not to impose new austerity measures, but also requiring Prime Minister Alexis Tsipras and co. to continue paying back the European Union. The Syriza Government’s economists are framing—with the Troika breathing down their necks—proposals to expand the income generation of the Greek state and reduce its expenditure. At the same time, the new Greek Government is moving to raise pension and the minimum wage levels and ending the previous government’s privatisation programme. A very daunting task. Syriza has come up with its first proposed legislation to partly deal with the humanitarian crisis, but so far it has ducked the class question with regard to structural inequalities in Greece to craft practicable alternatives expected by the movements of the unemployed, poor and disenfranchised that brought Syriza to power. This can be counter-productive in the long run.

In Greece’s economic pyramid, the big untouchables have been the Greek Orthodox Church, always exempt from paying taxes on its vast properties, and The shipping oligarchs who wield immense power and evade taxes and influence political futures. Syriza plans to tax the rich and clamp down on tax evasion, as part of austerity measures; some of these may not pass with the EU. Moreover Greece’s immensely powerful shipping magnates, faced with a property tax dragnet, are likely to fund any forces that undermine and bring down Syriza. The beleaguered far Right Golden Dawn party is likely to see a rise in its funding from dubious sources to destabilise Greece and tie down Syriza.

Syriza’s Left project will certainly have mass popular support to stave off opposition from the wealthy oligarchs inside Greece, but it cannot use its popular support to challenge the unfair demands of the European monetarists in the driving seat at the EU. Syriza has the goodwill and support of a wide number of intellectuals from across Europe. It must therefore internationalise

the campaign across Europe to get support from social movements, trade unions etc. for organising giant protests against austerity in Brussels, Berlin or Paris.

But the prime responsibility for this will have to be shouldered by the European Left. The Spanish, French, Italian and German democrats, labour organisers and social justice campaigners should jointly organise mass actions to hold back the “Troika” from strangling the government in Greece. The common interest of Europe is at stake: today it is Greece, tomorrow it will be other countries. It is difficult to say how long the Syriza Government will survive in Greece and whether it will be successful; but if this is looked at only as a national problem and not taken to be an opportunity by the Left groups across Europe everyone will miss the bus. A failure of the Syriza Government will certainly open the floodgates in terms of rise in the social and electoral prospects of the far Right formations within Greece. Let us not forget that Golden Dawn had had 21 MPs in parliament and got some seven per cent of votes. Elsewhere in Europe too we are already seeing a phenomenal rise of ultra-nationalist extremist forces.

An intense cross-border European solidarity can help shift the question of national sovereignty into a call for democratisation and a Europeanised economic policy. The EU has to stop being a technocratic instrument of economic policing and become socially accountable to the people. A whole new model is needed to deal with the crisis across Europe, the public debt burden and a common poverty and social alleviation programme should be Europeanised without leaving it to national governments. A radical new Euro- Left strategic vision is the key here: A basic requirement would be to shelve the age-old baggage of Left nationalism. It should campaign for a Europe-wide common approach so that the EU doesn’t treat each affected country in a piecemeal manner by placing the burden of crisis separately. It should resist all calls for pre-Schengen closed borders within Europe. It must also actively mobilise to face head-on the growing mutation of nationalist sentiments into fascist hysteria—a grave danger to Europe.

Nurtured and educated by the groundswell of radical grassroots movements against austerity, a new Trans-European Left alliance can (re)emerge as a popular force among the precarious layers of the new labouring poor, not just its traditional forte—the proletariat; with enough bargaining power to refashion a Europe that isn’t just in the service of big elites and capital. Will they rise to the occasion? This isn’t about capture of state power but about capture of people’s imaginations, the Left’s own imagination and energies that connect the local, national struggles with common European (and international) ones. The continued economic crisis is undermining Europe’s

common political and economic future, it is time to take the bull by the horns before it is too late; or else nationalists, populists, and isolationists will have a field day.

The author is a Left-leaning activist who spent several decades in France and

runs the South Asia Citizens Web [http://sacw.net]

‘Rebalancing’ Aggregate Demand- Chinese Economy at Present

China needs to return to the original formula of the “four modernisations” propounded by Zhou Enlai.

It is generally agreed that China’s economic growth is now no longer being fuelled by net exports of goods and services to the extent that it was in the few years prior to the 2008 great financial crisis, but gross capital formation has been an even greater contributor to such growth than before. Perhaps what was eventually inevitable has now struck in the form of immense overcapacity and non-performing loans. Over investment in commercial and high-end residential property, steel, cement and automobile capacities  and in other manufacturing sub-sectors is starkly visible, especially in the new uninhabited “ghost towns.” For economists, the fact that producer prices, especially the prices of manufactured goods in terms of their valuation at the time of despatch from the factories, have fallen month after month over the last three years, drives home the point.

The question one needs to ask is: Where is this very signifi cant overinvestment leading to and what needs to be done?

In terms of the components of aggregate demand, what economic observers have been advocating for quite some time is that China should “rebalance” its over-reliance on net exports and investment in favour of consumption. The fact that the share of net exports in China’s gross domestic product (GDP) has come down quite signifi cantly is, of course, the result of the external demand constraint, especially from the world’s two largest markets, the United States and Western Europe. But,

regarding investment, one needs to recall that China was the most adept of the world’s economies in bringing itself out of the slump that followed the great fi nancial crisis of 2008. The Chinese government launched a massive $585 billion stimulus plan and urged the state-owned banks to be liberal in dishing out new loans, the two leading to a massive increase in investment in the years that followed, making up for the decline in the share of net exports of goods and services in GDP. The share of household consumption expenditure in GDP has fallen dramatically from something like 44% in 2002 to 34% in 2013.

The massive increase in investment spending (as a proportion of GDP) is what has kept China’s real GDP growth rate high, though not as high as the 10.5% average annual fi gure for the first decade of the 21st century. The trend in growth rates now seems downward, that is, if one were to also include what has been forecast—from 7.7% in 2012 and 2013 to 7.4% (estimated) in 2014, the lowest in 24 years, and 7.0% (7.1% forecast earlier) in 2015, a fi gure announced on 5 March by the Chinese Premier Li Keqiang in his opening address to the annual National People’s Congress in Beijing last week. The fi scal defi cit is expected to rise this year but the chairperson of the government’s planning agency, Xu Shaoshi, has stressed that this should not be viewed as a massive stimulus—it involves an investment spending of 1.6 trillion renminbi ($260 billion) on infrastructural development, including railways and water conservancy projects, which, in magnitude, is less than half of the massive stimulus announced in November 2008.

The lowering of the 2015 target GDP growth rate to 7.0% from the 7.1% targeted earlier, and the fact that the earlier official forecasts for 2016 and 2017 expected a further decline reflects a number of developments, national and international. First, the steady fall in producer prices of manufactured goods over the last three years in the face of massive excess capacities in a number of manufacturing sub-sectors evokes the apprehension of deflation.

Second, in the face of the fall in the value of a number of major currencies (e g, the Japanese yen, the euro, the Brazilian real) vis-à-vis the dollar and the Chinese renminbi, the Chinese central bank, the People’s Bank of China, anticipating currency wars, has considered it prudent not to engage in competitive depreciation. Third, the credit elasticity of aggregate demand seems to have gone down quite signifi cantly with creditors using much of the additional loans to roll over existing debt. And lastly, the lower Chinese GDP forecasts seem to also take into account the fact that despite massive quantitative easing by the US Federal Reserve earlier, and now the European Central Bank and the Bank of Japan, the world’s major economies have failed to recover. With the economies of the Triad (North America, Western Europe, and Japan) mired in stagnation, China’s economy has been widely viewed as one of the principal means of lifting the world economy. The suggested way in the form of China’s economy rebalancing the components of aggregate demand, namely, the sum of investment and net exports in favour of household consumption, is fraught with a fundamental contradiction. It requires a dismantling of the low-wage, “global labour arbitrage” model of capital accumulation in global supply chains wherein China is the world’s assembly hub, for it is only with a very significant increase in the real wage rate that the path of economic growth can shift to a mass consumption-led track. 

Nevertheless, one needs to be reminded, that the “four modernisations” as originally propounded by Zhou Enlai in 1963 and adopted by Deng Xiaoping in 1978 were to be implemented by the adoption of policies based on the so-called “three imperatives”— social justice, regional balance and command over external relations. Sure, China does not have the kind of mass poverty, misery and degradation that one encounters in other parts of the Third World, but surely social justice calls for a return to the “clay” and “iron rice” bowls, albeit redesigned, and a redistribution of income in favour of workers and peasants.

(Published in www.epw.in)

The Lightning from Greece Strikes Germany

K. P. Fabian
On January 25, the Greek electorate gave a verdict that has raised questions about the survival of the Euro, and even of the European Union (EU). The Greeks voted for a leftist party (Syriza), led by Alexis Tsipras. An acronym for Coalition of the Radical Left, Syriza contested elections first in 2004 and gained only 3.3 per cent of votes. In contrast, in the recent elections, it gained 36 per cent of the vote, capturing 149 seats in the 300-strong parliament. Tsipras has taken over as Prime Minister with the support of a right wing party, the Independent Greeks, which is virulently opposed to the European Union. Syriza and the Independent Greeks have nothing much in common except for their hostility to EU and its harsh treatment of Greece – imposing austerity as the price for the ‘bail out’ in 2010.

The rise of Tsipras is a clear defeat for German Chancellor Angela Merkel who did not promptly send the customary congratulatory message to him. The Chancellor’s office issued a statement
sternly reminding Greece that it had to abide by the commitments of the previous Samaris government, commitments which led to the latter’s humiliating defeat. In other words, the message from Berlin is that despite the verdict of the people of Greece the new government is bound to follow the policy of the defeated government.

It is necessary to examine the wisdom of the austerity policy advocated by Germany and, because of Germany, by the EU. The basic approach was that Greece has sinned by living beyond its means and by borrowing beyond its capacity to repay; and, therefore, it should be punished. The Greek government should cut expenditure, sack employees, reduce pensions, and reduce allocations to schools and hospitals. The bailout of $ 270 billion was given by a troika of EU, ECB (European Central Bank) and IMF. The troika thought that they were physicians treating a patient who should have no say in the prescription. It had confidently calculated that the patient will respond to the stiff medication and start recovery by 2012, when the budget would be balanced if interest payments are excluded. Instead, the budget got balanced only by 2014. The prognosis was that unemployment will go up from 9.4 per cent in 2010 to 15 per cent in 2012 and then come down. As a matter of fact, unemployment shot up to 28 per cent by 2014.

What the pundits ignored, only because they wanted to ignore, was the plight of the people who lost all hope. Live births declined by 20,000 during the first three years of austerity. Miscarriages doubled. Married women rushed to brothels but were rejected because legal brothels cannot employ married women; as a result, many took to the streets. Some women doctors doubled up as escorts. 20,000 lost their homes and for them and many others the soup kitchens run by the church and others prevented death by hunger. The policy makers in Brussels, Berlin, and Washington knew all this, but they couldn’t care less. What mattered was balancing of books irrespective of the human cost, and there was no need to change the medication.

Tsipras as candidate had said that if he comes to power he would default on debts. Naturally, as Prime Minister, he has to be more responsible. He has categorically denied any intention to default, but has demanded “a just, viable, mutually beneficial solution.” He has promised to his people a series of measures to reverse the austerity policy. 300,000 new jobs would be created, especially for the young among who half are jobless. The minimum monthly wage would be raised from Euro 580 to 700. Those below the poverty line would get free 300 kWh of electricity and food subsidies.

Would Prime Minister Tsipras be able to deliver on these promises? Where will he find the money? What will be the response of the troika? There are signs that the troika’s solidarity is weakening despite tough statements from Germany. While Merkel was tardy in greeting Tsipras, the French President has invited him to Paris. As a matter of fact, not all in the Eurozone shared Germany’s advocacy of austerity. But, since Germany provides a huge share of the money, the others maintained a respectful silence. Italy and Spain are inclined to be less tough with Greece. Germany can count on support from the Netherlands and Finland, at least for a while.

If Germany does not budge, Greece might default and walk out of the Euro. Pundits in Germany and elsewhere have argued that such a walk out is a desirable outcome. With Greece out, the Eurozone can look forward to good health since the former accounts for only two per cent of the EU. But, sadly, the pundits are going to be proved wrong once again. If Greece defaults and walks out, the EU will be in crisis. Speculators will go for Spain and the EU will not be able to find the money to bail out a large economy such as that of Spain. Moreover, the Spanish government might not agree to austerity. And  if it agrees, it will lose the election due in December 2015.

The implications of Germany’s policy failure need careful study. The first ambassador to call on the Greek Prime Minister was the Russian. Tsipras had recently gone to Russia after the annexation of the Crimea. EU solidarity against Russia over Ukraine will be dented. Hungary is not abiding by the sanctions imposed by the EU. Greece will speak out against the policy of sanctions.

Merkel’s worry is that if Tsipras has his way and discards austerity with the concurrence of the troika, in the December 2015 election in Spain, Podemos, a Spanish version of Syriza, will seize power. But the question is whether Germany can persist with a flawed policy? In conclusion, the EU can survive the lightning stroke from Greece if it responds with reason and prudence. But the answer to the question whether it will survive, is not that clear. There is a chance that Germany, with its mind set of punishing those who live beyond their means, might persist with the flawed policy.

Incidentally, there might be a demand from Greece for repayment of a loan that Nazi Germany took from its  client government in Greece way back during the Second World War. That loan works out to $11 billion in current terms. Germany has to act with prudence. One of the banners after the declaration of the Greek election results read: Das ist eine wirkliche gute nacht, Frau Merkel (This is a good night to you, Mme Merkel).

Tsipras will be attending a EU summit in February. He will be the only one without a tie. Greece has asked for an international conference on its debt, recalling that a similar conference held in London in 1953 wrote off half of Germany’s debt. In the duel between Tsipras and Merkel, the younger leader has a better chance to win.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India
(Accessed from http://idsa.in/idsacomments/TheLightningfromGreeceStrikesGermany_kpfabian_300115.html)

Is the Chinese Economy in a Crisis?

Is the Chinese economy in a crisis? The report delivered by prime minister Li Keqiang to the National People’s Congress recently does not mention a crisis. But it uses a new phrase to describe the current state of the Chinese economy: the emergence of a ‘new normal’.
The new normal, according to Chinese authorities, refers to a phase of growth in the Chinese economy where the emphasis is less on the rate of growth and is more on its quality. The objective is to keep economic growth at a level where it is adequate to generate a certain number of jobs and restrict the growth of registered unemployment to a maximum. In terms of targets, this roughly amounts to creating around 10 million new jobs per year and confining the registered jobless growth to around 4.5%.

While these targets would reflect a certain degree of confidence on part of the government in ensuring that economic growth is adequately ‘inclusive’, there is admission of a definite slowdown in the economy. This is evident from the change in the macroeconomic policy stance. The People’s Bank of China has begun cutting interest rates in a calibrated fashion, signalling the easing of monetary policy. The pro-cyclical policy would still aim to achieve a lower growth of 12% in broad money next year compared with 14% in the current year. Fiscal deficit is increasing and is projected at 2.3% of GDP the next year. The export growth target has been pegged downward at 6%. Even this lower target might be difficult to achieve given that the current year has seen exports grow by only 4.9%.

While the government has fixed a GDP growth target of 7% for the next year, most analysts are looking at a shortfall with the consensus being at around 6.8%. This would clearly be a record low for China given its impressive growth record of the last three decades. The Chinese government’s rationalisation of a lower growth target comes from a realisation that an obsessive focus on high growth for years has created perverse incentive structures leading to high pressure on resources. Natural resource depletion has reached an alarming high, as has the damage on environment through high carbon emissions. Moreover, high growth has clearly not been egalitarian by nature with several sections having enjoyed only marginal benefits of China’s economic miracle.

The ‘new normal’ offers premier Li—the key architect of China’s new economic approach—and his advisors the opportunity of introducing new structural reforms. Most of these, keeping in line with President Xi’s unrelenting stress on curbing corruption, are expected to focus on institutional reforms and regulatory changes. There is no denying the necessity of greater structural reforms. It is also true that these changes will take time to implement, and even more time to yield the quality and level of growth that China aspires to. In the meanwhile, however, what is happening to the Chinese economy is not great news for the rest of the world. By conservative estimates, the Chinese economy contributed to around a quarter of the global growth in 2013. Indeed, China’s role as a major importer and consumer of resources and products is often overlooked.

China is not only the world’s largest exporter of goods, it is also the second-largest importer of goods. At the same time, it is also the second-largest importer of commercial services. These services reflect the importance of the Chinese market for several major producers around the world. A slowdown in the Chinese economy is going to reduce its absorptive capacity. This has already begun reflecting in lower prices of energy and commodities. Several countries exporting energy products to China such as coal, crude oil and refined petroleum would feel the impact. These countries include major resource exporters like Australia, Canada, Indonesia, Chile, Peru, Nigeria and a large number of natural- and energy-resource exporting countries from Asia, Africa and Latin America. India might also see its exports of minerals and raw cotton to China taking hits.

China’s slowdown will also affect its consumption of services including transport, financial and business services. This is obviously not good news for major service exporters like the US and EU. The service exporters would also be concerned over the fact that China is trying hard to reduce its reliance on service imports. Indeed, services have overtaken manufacturing to become the largest contributor to the Chinese GDP, now with their share inching close to 50% of the GDP. The bulk of the new jobs expected to be created in China now are in domestic services like tourism, hospitality, education and healthcare.

A slowing China and the advent of the new normal might actually imply more pains for the rest of the world than China. Because the new normal is much different from the normal China that the world has got used to!
By Amitendu Pal
The author is senior research fellow at the Institute of South Asian Studies in the National University of Singapore.

E-mail: isasap@nus.edu.sg.

Greece in the Weak Zone

Averting a Greek tragedy, for now

In a situation that is still fluid, what Greece needs is a fallback option that will allow it to negotiate from a position of strength knowing that it has other schemes worked out for life beyond the euro.

   THE citizens of Greece are not the only ones who have been watching the tense negotiations between the new government in Athens (led by the radical party Syriza) and the European Union (led de facto by the Germans). Not just in Europe, but everywhere in the world, people are watching with bated breath this most recent skirmish, part of a battle in what may turn out to be a protracted war between democracy and finance. For, this struggle is not really about whether Greece should continue with its fiscal austerity programme or about the contradictions of remaining within the eurozone. It puts to test one of the more critical questions of our times: can elected governments actually take measures to fulfil their promises to the people in the face of opposition from global finance and its agents in establishment? Consider the immediate background. Ever since the eurozone crisis broke around five years ago, the economy of Greece has suffered unmitigated decline. National income has declined by around a quarter; unemployment has increased dramatically and the official open unemployment rate is now at 25 per cent, with youth unemployment almost 50 per cent. These high rates of unemployment persist even though the labour force has shrunk, with bright, educated people leaving Greece in ever larger numbers and discouraged workers, with little or no prospects of employment, simply abandoning the search for jobs in the country. Fiscal austerity imposed by the hated “troika” (the E.U., the European Central Bank and the International Monetary Fund) has involved massive cuts in public sector jobs and wages and compression and even elimination of all sorts of public services. This has dramatically worsened the quality of life and has even led to public health crises, as diseases such as malaria and HIV-AIDS that were under control even a decade ago have made massive comebacks. The social effects are also frightening, with rising inequality and incidence of crime, violence against migrants and the emergence of extremely right wing and openly fascistic neo-Nazi groups like Golden Dawn.

    Despite all this, the government’s external debt shows no sign of shrinking, and public debt now stands at 175 per cent of gross domestic product (GDP) compared with just around 110 per cent when the crisis erupted. Some of this reflects the very design of the original bailout and so-called “adjustment” package, under which any rescheduled interest payments were simply added on to the principal. As in so many other cases, the bailouts that were purported to save the country were actually designed to save private finance from the implications of its own irresponsibility. The several attempts to “save” Greece really did no such thing—they essentially saved the European banks (including those from Germany, Austria and the Netherlands) that had lent to public and private borrowers in Greece.

By now, private finance has more or less washed its hands of that country, having passed its holding of Greek assets to the ECB and other E.U. institutions along with the IMF. There is, nonetheless, stubborn resistance on the part of creditor governments to any kind of Greek debt restructuring—which is bizarre since it is clear to everyone involved in this complex financial ritual that there is no way in which this debt can conceivably be repaid in the foreseeable future, even with continued economic pain being inflicted upon the Greek people. Indeed, with the continuation of policies that prevent economic activity from expanding once more, the chances of any recovery of output that would allow the economy to grow

out of the debt are even slimmer.

     It is in this context that Syriza—led by the charismatic Alexis Tsipras, now Prime Minister—came to power in the recent elections, promising an end to this apparently endless and meaningless austerity. Syriza offered hope because it rejected the seemingly endless downward spiral of ever-greater austerity and misery that would involve several lost generations. It promised a programme that would rebuild Greece on four pillars: confronting the humanitarian crisis, restarting the economy and promoting tax justice, regaining employment, and transforming the political system to deepen democracy.

    But none of these is even remotely possible under the terms of the current bailout agreement with the E.U. This is why Syriza originally also promised that it will not extend the bailout. In his very first speech to Parliament as Prime Minister, Alexis Tsipras said, “The Greek people gave a strong and clear mandate to immediately end austerity and change policies....Therefore, the bailout was first cancelled by its very own failure and its destructive results.”

Instead, Syriza’s government asked for the write-off (“restructuring”) of a significant part of the Greek debt on the basis of a debt conference; a temporary moratorium on debt payments until economic conditions improved; repayment of the remaining debt tied to economic growth rather than to the Greek budget; and purchase of Greek sovereign bonds under the ECB’s monthly programme of quantitative easing. In addition, Syriza felt that Germany should repay reparations for a loan that the Nazis forced the Bank of Greece to pay during the occupation of the Second World War, which would amount to around €11 billion today.

    The first set of requests consists of fairly sensible policies that are similar to those routinely available to companies facing liquidity problems, under debt workout laws in many developed countries. But because sovereign debt workouts are still not adequately dealt with, these suggestions have proved to be red rags to the European mainstream’s bull. In particular, Germany’s response has been aggressive and resolutely uncompromising. This could also be related to a fear of a domino effect, as the new party in Spain, Podemos, also fervently anti-austerity, gathers political strength before the upcoming elections there.

   

     The ensuing war of nerves brought negotiations down to the wire, and until the point when a last-minute compromise was hammered out on February 13, it seemed that Greece would have no option but to default, generating a run on its banks and perhaps leading to its exit from the European monetary union. This last-ditch agreement has, in fact, kicked the can down the road for another four months even as the basic issues remain unresolved. On the face of it, it looks like Athens has lost this round and has been forced to do a U-turn. The Greek government has agreed to “the successful completion” of the present bailout “on the basis of the conditions in the current arrangement” — which effectively means that it has to abide by the existing bailout agreement that Syriza had so comprehensively rejected.

   It has also got nothing in terms of any offers of debt renegotiation, and Germany has already declared that it will not even agree to discuss any possible debt restructuring. This is why some left-wingers within Syriza have already condemned the deal. Thus, Manolis Glezos (a 92-year-old Member of the European Parliament from Syriza) said this was just “rechristening fish as meat” and apologised to the Greek people “for participating in this illusion”. It is true that the Greek government is under extreme pressure, as capital flight from Greece is already well advanced and the ECB has put in place restrictions that will, in effect, prevent the economy and government from running after February 28. This judgment may also be too extreme, as Syriza has managed some partial success in two crucial areas. The E.U. expects Greece to run a primary surplus (budget surplus before interest payments) of 3 per cent of economic output this year and 4.5 per cent in 2016 and 2017. Athens has been asking for a surplus of 1.5 per cent, and it is likely to get some concession close to that figure, which would imply at least some relaxation of fiscal austerity measures. Most importantly, it has won the right to decide how this is to be achieved through its own package of proposals. 

  Given previous promises, the new package is likely to reject privatisation of state assets to raise resources and instead include various other measures, including tax reforms that heavily punish evasion, collection of unpaid tax dues, crackdown on tobacco and petrol smuggling and raising of taxes on the wealthy. It will scrap the unpopular property tax and instead tax luxury homes and large second properties. It will avoid implementing pension cuts and value added tax (VAT) rises and instead focus on making the civil administration more effective. These breathing spaces are very important to even try and implement Syriza’s other promises, such as 300,000 new jobs in the private, public and social sectors, and a substantial increase in the minimum monthly wage, or up to 300 units of free electricity and food subsidies for families below the poverty line, free medical care for those without jobs and medical insurance, and so on.

  

  At the time of writing, the outcome is still unclear, since the Greek proposals were yet to be considered (and approved) by the E.U. And much can change over the next four months before the next bailout (or otherwise) is due. Ultimately, unless there is much greater accommodation by the ruling powers in Europe, it will prove near-impossible for the Greek government to fulfil even its more limited progressive agenda and still remain within the eurozone. Yet, Syriza has insisted that it does not want to leave the euro, and the dominant public opinion within the country also still favours this. So things are still fluid: for Greece, for Europe, for democracy versus finance. It is important at this stage to work out a Plan B, a fallback option that will allow the Greek government to negotiate from a position of strength knowing that it has some other schemes worked out for life beyond the euro.

      

China and its AIIB

Seeds Of A Modern Economic Empire: The AIIB is the logical outcome of China’s surging wealth and its limited influence in global financial institutions

On October 24, in a ceremony at the cavernous Great Hall of the People, China’s president Xi Jinping laid the foundation of an institution that historians might one day recall as the birth of modern China’s economic empire. If the Asian Infrastructure Investment Bank (AIIB) takes hold, the planned continent-spanning transportation network funded by the bank would place China at the hub of a gigantic trade and economic web. It would also expand Beijing’s strategic influence throughout Asia, reaching across Central Asia to Europe. The ambitious plan could falter, though, if China refuses to modify its aggressive posture along its borders and in the east and the South China Sea. Although, other than China and India, most of the 21 founding members of AIIB are small regional players, Australia, Indonesia and South Korea are likely to join in the near future. The United States, which has cautioned its allies against participating in a China-dominated institution lacking transparency and sound lending policies, will be under pressure to relent. For years, China has sought to increase its share in the International Monetary Fund commensurate with its economic power. Although the US administration agrees, the proposal has been blocked by the Congress. Meanwhile, Washington has announced a ‘rebalancing’ of Asia and sought to develop the Trans-Pacific Partnership trade group excluding China. In a way, AIIB is the logical outcome of China’s surging wealth and the obstructions it has faced in the exercise of its power in established global financial institutions. Thanks to nearly four decades of double-digit growth, China has not only built world-class infrastructure and industry but also amassed a mountain of foreign exchange reserves. With growth tapering off and funds held in reserve earning a minimal return, China needs to find new investment vehicles and create demand abroad for its industry and services. At the same time, Asia is starved of the capital it requires to build its much-needed infrastructure. The Asian Development Bank (ADB), so far the only regional resource, says Asia needs at least $8 trillion worth of infrastructure in the next decade; India alone needs a trillion dollars. Indonesia needs $300 billion. But ADB lends just $10 billion a year for infrastructure. The AIIB will initially be capitalised with $50 billion, mostly by China, with promise to increase to $100 billion with operations starting before the end of 2015.Not surprisingly, Xi Jinping’s promise to create a Silk Road Economic Belt on land and a Silk Road on the seas has sparked interest in the region. China has talked of laying a pan-Asian high-speed rail from Kunming to Singapore running through Laos, Vietnam and Thailand. Another plan is to build a Central Asian Line starting from Urumqi all the way across to Turkey and Germany. Yet another proposal is to create a road link between Kunming and Kolkata. It is fair to expect that the transportation network will facilitate investment. China’s aging population and rising labour costs make relocation of its manufacturing and the laying of infrastructure in neighbouring states a logical course. Xi’s promise to lend money with “no strings attached” — a not-so subtle dig at the conditionalities attached by the World Bank and the IMF — is also attractive. In fact, the lack of clearly articulated terms and conditions has led the US to warn that AIIB may be engaging in a “race to the bottom” in environmental, governance and other international standards. Asian countries being wooed by AIIB, however, may be less concerned about the absence of such conditionalities. What might still give them pause about taking Chinese loans is the potential impact on China’s military behaviour. As long as China refuses to sign a code of conduct in the South China Sea, and settle its border dispute with India, its Asian neighbours can be forgiven for closely examining the AIIB gift horse in the mouth.(This story was published in BW | Businessworld Issue Dated 01-12-2014)

Eurozone Crisis Again

Hopelessness In The Euro Zone: The euro zone may be sinking into another recession. Sadly, it is self-created and may last quite long

I went to attend meetings at a small town called Mechelen, halfway between Brussels and Antwerp in Belgium, a country that a wicked Italian friend once said one should be mindful of because you can fly over it between two quick sneezes. After spending two days there, I can’t help but think that continental Western Europe seems to be doing everything it possibly can to bring about another recession and perhaps even recreate a Japanese decade of systematic, policy induced stagnation. Basking in the new optimism of Prime Minister Narendra Modi’s acchey din aane waley hain, the minds of most Indians are far removed from how Western Europe is again sinking into another self-created morass. Yet, it is useful for us to know why this is happening — if only to understand how a large number of European policy makers just can’t get the basics right. Let me share with you some basic economic data of the euro area. The sequential, annualised GDP growth for Italy in the second quarter (April-June) of 2014 was -0.7 per cent. That’s expected, some would say, and they would mostly be right. At a pinch, one could have even dealt with France tanking — as the second quarter (Q2) 2014 growth was -0.1 per cent. But with Germany’s GDP growth turning negative at -0.6 per cent for Q2 2014, the euro area now runs a serious risk of getting into its second recessionary period in six years. It hasn’t happened yet, with growth at a pathetic 0.3 per cent for Q2. But everything suggests that it very well could. To put things in perspective compared to other major countries, the sequential, annualised growth of the US was 4.6 per cent in Q2 2014. For Canada, it was 3.1 per cent. Even a relatively tiny nation such as Great Britain posted a growth of 3.7 per cent in Q2 of this calendar year. And China, despite its obvious slowdown, grew 7.8 percent in the third quarter of this year. Why can’t the euro zone grow? The European Central Bank is certainly not the villain of the piece. The interest rate on the10-year euro bonds is at 0.86 per cent. You can’t get much lower than that, unless you are in Japan. The problems lie with the nuts and bolts of the real economy. Consider France. Despite relatively high productivity in selected areas, it has a 35-hour work week, and six weeks of paid holidays plus more if anyone worked more than 35 but only up to 39 hours per week. Add to that a crippling tax regime where the maximum marginal rate of income tax is 45 per cent which, when one adds all other taxes, social security contributions and local levies, rises to over 65 per cent. Yet, thanks to its continuing love for unwarranted public spending, France’s fiscal deficit is at 4.4 per cent of GDP — well above what is permitted by single currency stability pact. Its industrial production shrank by 0.3 per cent in September 2014; and unemployment is at 10.5 per cent. Italy is another disaster. Negative GDP growth; negative growth of industrial output; budget deficit of 3.3 per cent of GDP; and over 12 per cent unemployment. And while Spain shows positive growth over a very low base, it has negative industrial growth, and a fiscal deficit amounting to 5.6 per cent of GDP. Worse still, one out of four employable people in Spain are unemployed. Barring Germany, the Netherlands and Scandinavia, Western Europe is rapidly sinking yet again. As it must with its sclerotic labour laws and employment rules, lack of competitiveness and the pervasive bureaucracy that emanates from Brussels. Instead of leveraging the powers of a large and relatively cheap labour force that came into play with the eastern expansion of the European Union, everything has been done to maintain the unaffordable comfortable lives of citizens. One day the leaders of Western Europe will have to wear their thinking caps. Today they haven’t a clue where these are.(This story was published in BW | Business world Issue Dated 01-12-2014)