CURRENT INTERNATIONAL AFFAIRS
ARMS RACE
US scraps missile-defence shield plan
President Barack Obama, in a major policy shift, has scrapped a controversial missile-defence shield favoured by his predecessor, removing a thorn in U.S.-Russia relations but earning criticism from some who accuse him of abandoning US allies in Europe. Obama announced that he would be abandoning plans to base US interceptor missiles in Poland and radar in the Czech Republic to protect Europe from Iranian missiles. Instead, Obama has proposed deploying a system aimed at intercepting short- and medium-range missiles. The President justified his decision by citing new intelligence that shows Iran's long-range missile programme to be far less developed than previously thought. Russia, which had vehemently opposed former President George W. Bush's plan to place US military hardware on its border, said Obama's decision would go a long way in resetting the relationship between the two countries.
GERMANY
Tough task at hand for Merkel after sweeping win
Angela Merkel set to work on September 28, 2009 on a new centre-right coalition after clinching a second term, but warned Germans of a hard road ahead to revive the sickly economy and rescue vanishing jobs. The conservative Chancellor secured another four-year mandate with enough votes to dump an awkward “grand coalition” with the Social Democrats (SPD) for an alliance with the pro-business Free Democrats (FDP). Voters rewarded the 55-year-old leader, dubbed most powerful woman on Earth by Forbes magazine for four years running, for shepherding Europe’s biggest economy through its worst post-war downturn. Merkel’s bloc and the FDP have a comfortable 332 seats in the 622-member Parliament.
WORLD ECONOMY
Global recession ending, says OECD
The global recession is coming to an end faster than thought just a few months ago and may already be over, according to forecasts published by the Organisation for Economic Co-operation and Development. The recovery may even prove a little stronger than previously predicted, OECD chief economist Jorgen Elmeskov said.
The OECD forecasts show a third-quarter return to expansion of economic output, as measured by gross domestic product, in the United States and the 16-country Euro zone, led by its two largest economies, Germany and France. The forecasts showed an annualised expansion of 1.6% in the United States in the third quarter, 0.3% in the Euro zone and 1.1% in Japan.
The pickup that started with a “quite dramatic turnaround” in China and other Asian emerging market economies in the second quarter remained heavily dependent on government stimulus and ultra-low interest rates across the world, Elmeskov said.
The OECD’s 30-member countries do not include rising powers such as China, but do include the long-industrialised ones where the trouble began in 2007 as the credit and housing boom in the United States turned to bust, triggering a crisis in banking and financial markets that infected the real economy.
The OECD is still predicting GDP contractions for 2009 as a whole across the G-7 group, primarily because of a particularly bad first half, despite the improvement now in the pipeline. But it sees annualised GDP rises of 1.2 and 1.4% in the third and fourth quarters for the G-7 as a whole, also signalling an exit from recession at that level.
World requires a new currency: UN report
The dollars role in international trade should be reduced by establishing a new currency to protect emerging markets from the confidence game of financial speculation, the United Nations said. UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, UN Conference on Trade and Development said in a report.
China, India, Brazil and Russia, in 2009, called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the US mortgage market led to the worst global recession since World War II. China, the world's largest holder of dollar reserves, said a supranational currency such as IMF's special drawing rights, or SDRs, may add stability.
There's a much better chance of achieving a stable pattern of exchange rates in multilaterally-agreed framework for exchange-rate management, Heiner Flassbeck, co-author of the report said. An initiative equivalent to Bretton Woods or the European Monetary System is needed.
While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn't be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy FM who worked in 1997-1998 with then US Deputy Treasury Secretary Lawrence Summers to contain Asian crisis.
Switzerland out of ‘grey’ list of tax havens
The Organisation for Economic Cooperation and Development (OECD) has taken Switzerland off from the list of non-cooperative tax havens, following the country signing 12 taxation agreements with different nations, and most of them are significant economic partners like the US and the UK. In April 2009, OECD, a grouping of rich nations, had named many countries, including Switzerland, in a grey list of those which are not fully-compliant with global tax standards. As per OECD norms, a country would be removed from the grey list after it has signed at least a dozen double taxation agreements.
Known for its banking secrecy practices, Switzerland has come under international pressure in the wake of the global crackdown on tax havens. Switzerland has signed treaties with Qatar, Denmark, Luxembourg, France, Norway, Austria, the UK, Mexico, Finland, the Faroe Islands, USA and Spain.
ENVIRONMENT
EU summit targets India, China on G-20 climate financing
The European Union (EU) has challenged rising powers India and China to brake their soaring greenhouse gas emissions in return for Western financial support. “We need to make a credible financial commitment to the developing world. The equation is straightforward: no money, no deal, but if there are no actions, no money,” European Commission President Jose Manuel Barroso said.
According to estimates from the Commission, the EU’s executive, it will cost around 100 billion euros ($147 billion) per year by 2020 to fight climate change in developing countries. But in a clear challenge to rising powers such as Brazil, China, India, Mexico and South Africa, EU leaders stated that “this estimate pre-supposes appropriate mitigating actions by developing countries, especially those that are economically more advanced”.
The high-level EU and G-20 meetings came in the countdown to a critical United Nations summit in Copenhagen, which is intended to seal a new global deal on fighting climate change. EU leaders were at pains to point out the urgency of finding a deal in December. “The climate is changing much faster than expected. ... This underlines the urgent need to reach a global, ambitious and comprehensive agreement in Copenhagen,” the joint statement said.
UN backs India’s stand on emissions
For the first time, a UN agency has endorsed India and developing countries on the climate change front. In its World Economic and Social Survey Report 2009, the UN said rich countries had consumed more than fair share of their carbon space and needed to take deep emission cuts if the new climate agreement was to be equitable. The survey said investments in energy infrastructure would have to be doubled from the existing $500 billion per year to $1 trillion and there was a need to spend approximately $20 trillion by 2030 to move the world to a low carbon growth path.
The report has warned that industrialized countries had already emitted 209 giga-tonnes of carbon. If the rise in global temperatures was to be kept below 2 degree centigrade, industrialised countries would have to reduce their emissions by more than 100% below 1990 levels by 2050. At present, industrialized countries have not agreed to reduce their emissions by even 40% below 1990 levels by 2030 and 80% by 2050.
The UN survey pointed out that in a fair deal, industrialized countries should only occupy 21% of the global carbon budget. But it recorded that even under the most ambitious proposal from the rich nations, they would end up consuming 48% of the budget, at the cost of the poorer nations.
From the present emission stock of 209 giga-tonnes of carbon from the rich nations, they would need to alter the lifestyles of their citizens to come down to 137 giga-tonnes by 2050 and leave the rest of the space for poorer nations to develop economically.
The authors of the report have recommended a global clean energy fund and a global feed in tariff regime, besides a better carbon trading mechanism and forest-related financing mechanism to ensure that needed funds are transferred from the rich to the developing countries as part of the new deal.
NUCLEAR PROLIFERATION
A.Q. Khan nails Pak’s N-lies
An angry, humiliated, and wounded A.Q. Khan has finally made public what has long been suspected: his nuclear proliferation activities, that included exchanging and passing blueprints and equipment to China, Iran, North Korea, and Libya, were done at the behest of the Pakistani government and military, and he was forced to take the rap for it. “The bastards first used us and are now playing dirty games with us,” Khan writes about the Pakistani leadership in a December 2003 letter to his wife Henny that has been made public by an interlocutor. “Darling, if the government plays any mischief with me, take a tough stand... They might try to get rid of me to cover up all the things they got done by me.” Khan had also sent copies of the letter to his daughter Dina in London, and to his niece Kausar Khan in Amsterdam through his brother, a Pakistan Airlines executive. Pakistani intelligence agencies got wind of it and threatened his family’s well-being, forcing him to recant and publicly take the blame for the proliferation activities.
Pak ups number and capability of nukes
Pakistan’s rapidly ramped up nuclear arsenal is now 70-90 strong with increasingly sophisticated bomb designs and smart delivery systems aimed primarily at India, two US researchers have said, even as Islamabad is running from pillar to post seeking international aid.
In a paper written for the Bulletin for Atomic Scientists, Robert Norris of the Natural Resources Defence Council and Hans Kristensen of the Federation of American Scientists say Pakistan is ‘‘busily enhancing its capabilities across the board,’’ with new nuclear-capable ballistic missiles being readied for deployment, and two nuclear capable cruise missiles under development. Two new plutonium production reactors and a second chemical separation facility are also under construction, they said.
Al-Qaida seeking nuclear secrets from Pakistan
Al-Qaida is trying desperately to get its hands on nuclear secrets from Pakistan, according to US Special Representative for Pakistan and Afghanistan, Richard Holbrooke. He told a congressional reception, “Al-Qaida is still there in the region, ever dangerous and publicly asking people to attack the US and publicly asking nuclear engineers to give them nuclear secrets from Pakistan.” This alarming accusation is being taken seriously in light of Pakistan’s history of leaking nuclear secrets and comes on the heels of similar claims made in a report to US lawmakers.
According to the Congressional Research Service (CRS) report—“Pakistan’s Nuclear Weapons: Proliferation and Security Issues”—Al-Qaida has also sought assistance from the Khan network. Former Director of Central Intelligence George Tenet said the United States “received fragmentary information from an intelligence service” that in 1998 Osama bin Laden had “sent emissaries to establish contact” with the network. Other Pakistani sources could also provide nuclear material to terrorist organisations.
According to a 2005 report by the commission on the Intelligence Capabilities of the United States regarding weapons of mass destruction, Al-Qaida “had established contact with Pakistani scientists who discussed development of nuclear devices that would require hard-to-obtain materials like uranium to create a nuclear explosion.” Tenet explains that these scientists were affiliated with a different organisation than the Khan network. Congressional Research Service, a bipartisan independent research wing of the US Congress, prepares reports for lawmakers.
UN united on nuke-free world
In the years and decades to come, he may well be celebrated as Barack “No Bomb” Obama. In a historic moment in time, the UN Security Council unanimously approved a US-drafted, Obama-authored resolution in New York on September 24, 2009, committing to work towards a world without nuclear weapons.
The new measure, formally titled UNSC Resolution 1887, expresses the Council’s grave concern about the threat of nuclear proliferation and the need for international action to prevent it. It reaffirms that the proliferation of weapons of mass destruction and their means of delivery are threats to international peace and security and agrees on a broad range of actions to address nuclear proliferation and disarmament and the threat of nuclear terrorism.
Broadly, the resolution supports:
- A revitalized commitment to work toward a world without nuclear weapons, and calls for further progress on nuclear arms reductions, urging all States to work towards the establishment of effective measures of nuclear arms reduction and disarmament.
- A strengthened Nuclear Non-proliferation Treaty (NPT) and a Review Conference in 2010 that achieves realistic and achievable goals in all three pillars: nuclear disarmament, non-proliferation and peaceful uses of nuclear energy.
- “Universality” of the NPT, calling on all Sstates to adhere to its terms—an oblique reference to hold-outs such as India and Pakistan—and makes clear the Council’s intent to immediately address any notice of intent to withdraw from the Treaty.
The Obama resolution was backed by Russia and China among other countries in what is only the fifth meeting of the Security Council involving heads of government of its member States, and the first time the US President has chaired such as meeting.
But, aside from presenting a time-table of agenda-packed conferences, the US President did not present any specific numbers, metrics, or dates on the road to eliminating nuclear weapons. He said the US will move forward with the ratification of the Comprehensive Test Ban Treaty, and open the door to deeper cuts in its own arsenal.
The pressure on India to sign the Nuclear Non Proliferation Treaty (NPT) is all set to increase sharply with US President Barack Obama rsday leading the UN Security Council to insist that all countries must sign the treaty that New Delhi has called discriminatory. India made its resolve not to fall in line plain. The position was conveyed by H.S. Puri, India’s permanent representative to the UN, to his US counterpart as well as the Security Council. The US is the current UNSC head.
Stressing that India cannot accept obligations arising out of a treaty which it hasn’t signed, the letter said nuclear weapons were vital for the country’s security. ‘‘This position is consistent with the fundamental principles of international law and the Law of Treaties. India cannot accept calls for universalisation of the NPT. As India’s Prime Minister stated in Parliament on July 29, 2009, there is no question of India joining the NPT as a non-nuclear weapon State. Nuclear weapons are an integral part of India’s national security and will remain so, pending non-discriminatory and global nuclear disarmament,’’ stated the letter.
INTERNATIONAL RELATIONS
US aid to Pak comes with ‘accountability’ rider
A new US Legislation triples US aid to Pakistan authorises military assistance to help the country in its fight against Al-Qaida and other terrorists, but it also includes new and painstakingly negotiated accountability measures to ensure that this aid is not misused. India had expressed concern that Pakistan would divert US military aid toward bolstering its defences against a perceived threat from India.
The so-called Friends of Democratic Pakistan got something to applaud when the US Senate passed the compromise legislation in a voice vote. A statement from the sponsor of an identical Bill in the House of Representatives said the legislation required that military assistance be focused “principally on helping Pakistan with its critical counter-insurgency and counter-terrorism efforts”. The bill addresses India's concerns, which Congressional sources and South Asia analysts in Washington say are valid.
Congressional aides laboured hard to reach a compromise between the earlier Senate and House versions of the Bill. The sticking points at the time had been language governing oversight of funds to Pakistan's military. The House Bill had linked the release of these funds to the President’s certification that the Pakistani government “demonstrated a sustained commitment to and made progress towards combating terrorist groups.”
The new version states that the President has to certify that Pakistan is “making significant efforts towards combating terrorist groups ... including taking into account the extent to which the government of Pakistan has made progress on matters” related to counter-terrorism. The new version also doesn’t specify a dollar amount for military aid, only saying “such sums as are necessary.”
Senator John Kerry, who along with Senator Richard Lugar co-sponsored the Bill in the Senate, said: “The clear, tough-minded accountability standards and metrics contained in the original Bill are carried through in this version.”
SUMMITS
G-20 Summit
The G-20 Summit was held at Pittsburgh, USA in September-end 2009. The G-20 leaders’ statement from Pittsburgh has a tough message for the finance community. They have to raise far more capital, say bye-bye to bonuses that soar even if medium term profits of the institutions they worked for do not, and face tough regulation, starting with full compliance with the enhanced Basel II Capital Framework by 2011, including a limit on borrowing. The leaders’ statement is unequivocal and tough: “Where reckless behaviour and a lack of responsibility led to crisis, we will not allow a return to banking as normal.”
With this bare-knuckled preface, the communiqué goes on to identify changes needed in regulation, coordination among regulators across nations, increasing capital adequacy, reforming compensation to remove incentives for risky short-term behaviour, bringing compensation under the purview of regulators, fixing a ceiling on remunerations as a proportion of net revenues, raising the capital requirement of banks that fail to implement sound compensation policies and practices improving over the counter (OTC) derivatives markets, tightening accounting norms and harmonising them globally. The G-20 also wants commodity exchanges to become more transparent, collect data on large trader positions on oil futures and derivatives markets and to comply with the recommendations of the International Organisation of Securities Commissions (IOSCO). There are timelines for achieving each one of these changes.
On reform of compensation the Summit statement said: “Excessive compensation in the financial sector has both reflected and encouraged excessive risk taking. Reforming compensation policies and practices is an essential part of our effort to increase financial stability. We fully endorse the implementation standards of the FSB aimed at aligning compensation with long-term value creation, not excessive risk-taking, including by (i) avoiding multi-year guaranteed bonuses; (ii) requiring a significant portion of variable compensation to be deferred, tied to performance and subject to appropriate claw back and to be vested in the form of stock or stock-like instruments, as long as these create incentives aligned with long-term value creation and the time horizon of risk; (iii) ensuring that compensation for senior executives and other employees having a material impact on the firm’s risk exposure align with performance and risk; (iv) making firms’ compensation policies and structures transparent through disclosure requirements; (v) limiting variable compensation as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base; and (vi) ensuring that compensation committees overseeing compensation policies are able to act independently.”
The G-20 has large ambitions on energy security and climate change and its Pittsburgh communiqué binds members to phase out subsidies on fossil fuels over the medium term. It also recognises that the poor might need subsidies to consume at least a minimal amount of energy and calls for cash transfers to target beneficiaries, while abandoning the policy of subsidising fuels in general. This would bring pressure on India to abandon its present policy of subsidising kerosene and cooking gas and even diesel and petrol when their prices rise above what the government thinks is above the level of political tolerance.
Studies have shown that 40% of subsidised kerosene gets diverted for adulteration of diesel. This not only foils the goal of offering subsidy on the fuel but also reduces engine life across our transport fleets and adds to pollution and diesel consumption through reduced fuel efficiency.
The Group of 20 (G-20), which includes developing nations like India, Brazil, and South Africa, will replace the Group of 7 (G-7), the mostly-western club of rich industrial nations, as a global forum for economic policy, it was announced during the Summit. “Dramatic changes in the world economy have not always been reflected in the global architecture for economic cooperation. This all started to change today,” the White House said of the makeover, “The G-20 leaders reached a historic agreement to put the G-20 at the centre of their efforts to work together to build a durable recovery while avoiding the financial fragilities that led to the crisis.”
For India, this means a regular, perhaps annual or twice-yearly pow-wows beyond the bi-laterals and clubby tri-laterals (IBSA—India, Brazil, South Africa) and quadri-laterals (BRIC—Brazil, Russia, India, China) that it was fostering.
Collectively, the G-20 economies account for 85% of global gross national product, 80% of world trade, and two-thirds of world population.
The new G20 will not have a permanent secretariat, and its chairmanship will be rotated annually, with South Korea running the body next year and France in 2011 A final agreement on a revamped representation structure will be completed in negotiations at the International Monetary Fund (IMF), set to conclude by January 2011. Under the proposal, the G-20 leaders will annually outline objectives for growth and then ask the IMF to carry out a form of assessment or peer review to ensure member states are following the plan’s objectives
Prime Minister Manmohan Singh returned from the G-20 Summit at Pittsburgh with some major gains at hand that are making the rich nations now look at the developing world in a new light. It was evident from the final communiqué issued by the G-20 leaders at the end of the summit that it reflected a lot of what Manmohan Singh had been pointing out prior to the summit.
In some of the other aspects of global financial structure, too, India’s stand was reflected in equal measure—notably greater voting rights for developing countries in the International Monetary Fund (IMF). In fact, the developing countries, mainly India, China and Brazil, also managed to secure what was rather unthinkable even a decade ago—a peer review of the economic policy framework of rich countries.
WORLD TRADE
Doha round impasse resolved
The informal meeting of the trade and commerce ministers of key World Trade Organisation (WTO) member countries in Bew Delhi, in the month of September 2009, agreed to resume negotiations in Geneva. A visibly pleased Commerce and Industry Minister Anand Sharma at the conclusion of the two-day meet said, “The Delhi meeting has managed to break the impasse of the Doha round.”
The global trade talks had been stalled since July 2008. This was an important step for Anand Sharma, who as a new minister has been able to restart the stalled trade-talks process. India has always been seen as a spoiler in the talks. However, this meeting re-established India’s leadership role in the multilateral talks.
In July 2008, the talks had collapsed after India and other developing countries opposed the agriculture subsidies offered by developed nations to their farmers. The developing countries argued that the new subsidy would distort trade by making the produce of their countries costly. India had insisted that developing countries should have the right to impose steep tariffs to protect their farmers if there was an increase in import of farm products under a new trading deal.
At the end of the two-day talks, it is very clear that there has been no change in the position of these countries on the matter. The important issue that still remains is about the position of the developed world—the US and EU—towards the developing world like Africa, India, Brazil etc.
Lauding India’s initiative to revive the stalled WTO negotiations, US Trade Representative Ron Kirk said: “The US Administration is committed to the completion of the Doha Talks by 2010.” However, Brazil said the developing countries had already made enough concessions and new demands should not be made on them.
The talks could produce a deal that boosts the global economy by $300-700 billion a year, according to one recent study, although other estimates of the benefits have been lower.
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