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BRICS Bank Could Change the Game

Kester Kenn Klomegah

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In full-fledged preparation for the official launch of BRICS New Development Bank (NDB) as an extraordinary highlight event during the July Summit under his chairmanship, Russian President Vladimir Putin has ratified an agreement on the establishment of a $100 billion BRICS pool of currency reserves, according to a document published early May on Kremlin’s official website.

Putin signed the federal law “On ratification of the Treaty establishing the pool contingent of foreign exchange reserves of the BRICS countries.” The federal law was first passed by the State Duma (Lower House) on April 24 after series of parliamentary deliberations and was finally approved by the Federation Council (Upper House) on April 29, 2015.

The agreement provides for the establishment BRICS pool contingent of foreign exchange reserves in order to provide financial support in the event of the partners of the BRICS problems with dollar liquidity in their domestic financial systems. This means that the $100 billion pool will maintain financial stability of the BRICS countries and allow for defenses against market volatility. The fund is meant to shield the BRICS against “short-term liquidity pressures” and promote greater cooperation between the five member countries.

On July 15 last year, in the city of Fortaleza (Brazil), BRICS members (Russia, China, Brazil, India and South Africa) signed an agreement to establish the $100 billion development bank, as well as a $100 billion reserve currency pool. China is set to provide the largest share of $41 billion to the pool, while Russia, Brazil and India will provide $18 billion each. South Africa is set to chip in the remaining $5 billion.

The headquarter is expected to be based in China’s Shanghai. The group agreed that India will preside as president on its first year. Russia, meantime, will be the chairman of the representatives.

Professor Georgy Toloraya, an Executive Secretary at the National Committee on BRICS Studies, in an interview with Buziness Africa notes the significance of BRICS bank as a catalyst to other international financial institutions, and explains further that “the Asian Infrastructure Investment Bank (АIIB) is a regional bank while the New Development Bank (NDB) is supposed to have a global outreach.”

“The AIIB is technically China-dominated and will center on projects, interesting to China. The New Development Bank (NDB) will have equal representation. Thus, it’s influence in changing the global financial architecture can be bigger. But competition is a good thing for these two banks as well,” the Executive Director wrote in an email comment to Buziness Africa.

He also recalls Russia’s suggestion to reform the international financial and economic architecture (including the International Monetary Fund) in the context of new developments in the world economy taking into account the legitimate interests of all the countries in order to create a more representative, stable and predictable system, reduce risks of destabilization of monetary and stock markets related to the massive cross-border movements of capital.

Toloraya points out assertively that an effort should be to create the road map of investment cooperation in the BRICS framework, conclude a multilateral agreement on the encouragement and protection of investments, and to single out areas for intra-BRICS cooperation and to develop cooperation in new technologies.

Contributing to this discussion, Professor David Shinn, who is an Adjunct Professor of International Affairs at The George Washington University’s Elliott School of International Affairs, argues in an email interview that “the BRICS New Development Bank is not yet functioning and it is not clear how the five original partners will share power. Other countries have been invited to join the bank, which could further alter the decision making process.”  

The idea is that the five countries contribute a total of $100 billion for an initial capitalization pool for the bank. Should some countries contribute more than others, it is safe to assume those countries will have more leverage than those who put in lesser amounts, the former U.S. Ambassador and now Professor argues, adding that “the devil is always in the detail.”

It is also important to remember that the bank is the first tangible result of the BRICS, five countries that have only one thing in common: at the time they joined BRICS they were the largest economies in their geographical regions. The Nigerian economy has now surpassed South Africa’s economy, so even this commonality is in question, he says.

“I don’t really see the BRICS New Development Bank as operating in competition with the Asian Infrastructure Investment Bank. There is much to be done in the developing world generally and Africa specifically that will accommodate both banks in addition to the contributions of the World Bank and African Development Bank. So long as the BRICS bank is run competently and follows international standards, I expect it will make a positive contribution. But first it has to open its doors and start making loans,” concluded Professor Shinn

According to the biographical history, David Shinn is an American diplomat and professor. He is currently an Adjunct Professor of International Affairs at The George Washington University’s Elliott School of International Affairs. He offers consultancy to the U.S. Government on the Horn of Africa and Sino-African relations. He served previously as an Ambassador to Ethiopia and Burkina Faso.

Undoubtedly, South Africa is a minority contributor to the total currency reserve pool (contingent reserve arrangement – CRA) but an equal contributor to the New Development Bank (NDB or BRICS Bank). With the CRA, the funds committed remain in possession of South Africa.

“The rhetoric is that South Africa’s voice in BRICS financial matters is not going to be compromised, despite being a minority contributor to the CRA, yet South Africa has been shut down in BRICS negotiation processes before and there is a strong tendency for this arrangement as well as the NDB, which will be headquartered in Shanghai, to be driven by China,” says Hannah Edinger, a Director at Frontier Advisory (a research, strategy and investment advisory firm that assists clients to improve their competitiveness in emerging market economies) headquartered in South Africa.

Similarly, Edinger further explains, the AIIB is China’s brainchild and one more initiative to give China a greater leadership voice in the region, given that reform of existing institutions such as the World Bank and broadly speaking global governance has been slow and not that reflective of China’s economic rise.

While focus of both the NDB and the AIIB will be on infrastructure project financing, I don’t think these two banks will necessarily go head to head in terms of competition. Even with the existing Asian Development Bank (ADB) in the region, there is room for co-financing of projects, given that in Asia the infrastructure funding gap is multiple trillions of dollars.

Underlining the high relevance of these two banks, Edinger told me that “in fact, India’s infrastructure deficit alone is already in the multiple trillions of dollars…. Current lending institutions in the regions are unlikely to fill this gap, and even when the NDB and the AIIB are at full lending capacity they might still not plug the deficit. Also, the NDB’s mandate will not only focus on Asia, but also on Latin America and sub-Saharan Africa. I think the challenge for both banks will be to find good projects.”

Alex Vines, a Director for the Africa Programme at Chatham House in London, explains to Buziness Africa that South Africa’s inclusion in the BRICS has been a way for the ANC government to leverage its foreign policy, and position itself within the emerging narrative on South-South cooperation and trade. Their support for the creation of a New Development Bank is a continuation of this, and although only Russia has ratified it so far, the South African’s are in the final stages of ratifications.

The Agreement on the New Development Bank that formerly established the bank at the VI BRICS summit in Brazil last year stated that each of the founding members will initially subscribe to an equal number of shares, indicating equal voting rights on those shares. The bank will invest primarily in infrastructure projects in both BRICS and non-BRICS countries, and the establishment of the first regional office in Johannesburg will give access to the African continent where infrastructure development needs are highest.

The establishment of the first regional office in Johannesburg will give a boost to South Africa’s attempts to market itself as the ‘gateway to Africa’, a position it has had difficulty maintaining against emerging regional hubs such as Lagos and Nairobi. The bank will also deepen the political relationship between China and South Africa.

“The NDB is the first tangible outcome from the BRICS organization, but the political relationship between China and South Africa extends outside the organization. China has become South Africa’s main trade partner, and South Africa is China’s largest partner on the African continent,” he wrote in an email to Buziness Africa.

Plans for the Asian infrastructure Investment Bank are still in their infancy, the MOU was only signed last October, but it looks like these institutions will complement, rather than compete with, each other.

Vines also said: “the establishment of the NDB was in part a reaction to under-representation in the existing international financial institutions, but it is unlikely that they will become direct competitors. It is estimated that the infrastructure investment requirement developing countries tops $1trillion per year, so there is plenty of room for new players in the marketplace, including the World Bank’s proposed Global Infrastructure Facility.”

In the case of the BRICS bank, Christopher Wood, a Researcher on Economic Diplomacy at the South African Institute of International Affairs (SAIIA), also explains in an email discussion recently…“China does not actually contribute more. All five countries are contributing $10 billion of callable capital to start with, giving them equal say in the decisions of the banks. Where China does contribute more is in the case of the Contingent Reserve Arrangement, which is a separate agreement that is a pool money that the five BRICS can draw on in times of financial crisis. The best way to think about the relationship between the two is that the BRICS New Development Bank is like the World Bank (providing funding for development projects), while the CRA is like the IMF (providing emergency funding in times of crisis).”

In the case of the CRA, South Africa does have a very small voice, but it’s not so important in this type of organization. The only decisions that will be made will be over whether to release funds to a country that requests help, and this would usually be an easy decision to make, based on hard economic evidence, according to Wood.

There are challenges to overcome. Researcher Wood thinks that “the bank’s short term challenges will be logistical, completing basic things like hiring staff, building internal operational procedures, and so on. Once this is completed, two larger challenges will present themselves. First, making a decision on what projects to fund, which will involve answering difficult questions on what type of projects the bank prioritizes, where it most wants to operate, and what role political priorities might play. Second, would be in building relationships with existing funders, like the World Bank and AIIB, to assure the BRICS bank doesn’t have to bear all the risk of the projects it gets involved in.”

On the other hand, Wood does not think China’s position in both the AIIA and BRICS bank indicates it wants to dominate the global space of these institutions, but certainly indicates it wants to play a bigger role. Traditional institutions are still dominated by developed countries and reforms that would give a bigger voice to countries like China have been very slow. In the Asian Development Bank, for example, the US and Japan each have more than twice as much voting power as China. The new institutions represent China’s frustration with the lack of reform and the persistence of a voting structure that doesn’t reflect its growth into a global superpower.

Chris Weafer, a Senior Partner with Macro Advisory, a consultancy advising macro hedge funds and foreign companies looking at investment opportunities in Russia, said in comments published recently that “within this new group, Russia certainly has a role because the country is the world’s biggest energy exporter and, on aggregate, the world’s biggest minerals exporter. Neither China nor India could sustain their current high pace of growth without either direct materials imports from Russia or, indirectly, from the global marketplace.”

He says “that alone justifies a seat at the BRICS table. Beyond that, Russia is already one of the largest consumer markets in the world and is, on a per capita and per household basis, the largest in the emerging market world.”

The idea to set up BRICS bank was first proposed by India and that topped the agenda at the summit of the group in New Delhi in March 2012. India believes a joint bank would be in line with the growing economic power of the five-nation group. The bank could firm up the position of BRICS as a powerful player in global decision-making. India believes that a BRICS bank could, among others, issue convertible debt, which would arguably be top-rated and can be bought by central banks of all BRICS countries. BRICS countries would thus have a vessel for investment risk-sharing.

The BRICS countries collectively represent about 26% of the world’s geographic area and are home to 42% of the world’s population. The BRICS consumer market is the largest in the world and is growing by $500 billion a year. Since the start of April, Russia has assumed the presidency of the BRICS group, taking over the position from Brazil. The next BRICS summit will take place in Ufa, the capital of Russia’s Volga republic Bashkiria, on July 8-10, 2015.

Kester Kenn Klomegah is an independent researcher and writer on African affairs in the EurAsian region and former Soviet republics. He wrote previously for African Press Agency, African Executive and Inter Press Service. Earlier, he had worked for The Moscow Times, a reputable English newspaper. Klomegah taught part-time at the Moscow Institute of Modern Journalism. He studied international journalism and mass communication, and later spent a year at the Moscow State Institute of International Relations. He co-authored a book “AIDS/HIV and Men: Taking Risk or Taking Responsibility” published by the London-based Panos Institute. In 2004 and again in 2009, he won the Golden Word Prize for a series of analytical articles on Russia's economic cooperation with African countries.

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Restructuring Libya’s finance and economy

Giancarlo Elia Valori

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Last August the Libyan Investment Authority (LIA) moved its Tripoli’s offices to the now famous Tripoli Tower.

The traditional financial institution of Gaddafi’s regime currently manages approximately 67 billion US dollars, most of which are frozen due to the UN sanctions.

Said sanctions shall be gradually removed and replaced with a system of market controls, as the Libyan economy finds its way.

Right now that, after intimidation and serious and often armed threats, LIA has moved to the safer Tripoli Tower.

However, how was LIA established and, above all, what is it today? The Fund, which has some characteristics typical of the oil countries’ sovereign funds, was created in 2006, just as the EU and US economic and trade sanctions against Gaddafi’s regime were slowly being lifted.

The idea underlying the operation was simple and rational, just like the one that had long pushed Norway to create the Government Pension Fund Global, i.e. using the oil profits to avoid the post-energy crisis in Libya and preserve the living standards of the good times.

Hence investing in its post-oil future using the huge surplus generated by the crude oil sales.

From the beginning, LIA had to manage a portfolio of over 65 billion US dollars, but with three policy lines: firstly, 30 billion dollars to be invested in bonds and hedge funds; secondly, business finance and thirdly, the temporary liquidity secured in the Central Bank of Libya and in the Libyan Foreign Bank.

The funds of those two banks soon acquired a value equal to 60% of all LIA assets.

All the companies having relations with foreign markets, from Libya, fell within the scope of the Libyan Investment Fund.

Currently LIA has over 552 subsidiaries.

Nevertheless, there are no documents proving it with certainty. To date there are not even archives that credibly corroborate the LIA budgets and statistics.

Since 2012 it has not even undergone any auditing activity.

There were and there are no strategies for allocating investments nor a plan. The only criterion followed by the Fund managers – now as in the past – is to invest the maximum sums of money in the shortest lapse of time.

The first serious audit was finally carried out by KPMG in June 2011, in the heat of the battle for the survival of Gaddafi’s regime.

At the time, high-risk derivatives transactions were worth as much as 35% of LIA’s total investments – which was incredible for the other global funds.

According to the most secret but reliable sources, however, in 2009 the losses of the Libyan Fund exceeded 2.4 billion US dollars.

What happened, however, in 2011, after the collapse of Gaddafi’s regime? How did LIA and the Libyan African Investment Portfolio (LAIP) act?

In fact, neither company could carry out any operations.

In 2014 alone, LIA’s losses were at least 721 million US dollars.

Moreover, LAIP still holds in its portfolio the Libyan Arab African Investment Company (LAICO), which manages investments –  particularly in the real estate sector – in 19 African countries, with specific related companies in Guinea Bissau, Chad and Liberia.

Furthermore, Oil-Libya still operates as a network manager and extractor in at least 18 African countries.

On top of it, the Libyan Fund still owns Rascom Star, a satellite and telephone network connecting much of rural Africa.

Within LAIP there is also FM Capital Partners LTD, another real estate Fund.

Nevertheless, as early as the collapse of Gaddafi’s regime, the internal policy lines of LIA and of the other companies separated: 50% of managers wanted to continue the activity according to the classic rules of the Company’s Management, while the others thought they should mainly follow the new political equilibria within Libya.

The last audit carried out by Deloitte also demonstrated that the over 550 subsidiaries were the real problem of the Fund.

Deloitte also assessed that at least 40% of those companies were completely uneconomic and had to be sold quickly.

In this bunch of lame ducks there were, for example, the eight refineries – one of which managed by Oil invest in Switzerland – which also paid penalties to the Swiss government for obvious environmental reasons.

Allegedly the refinery in Switzerland stopped its activities in 2017.

The traditional investment line of the Libyan Arab Foreign Investment Company (LAFICO) has always been linked to LIA, which currently has over 160 billion US dollars avaialble, including oil, personal income and old foreign investment of Colonel Gaddafi, once again only partially reported to international authorities.

Moreover, according to the LIA managers of the time, the various companies within the Fund did not communicate one another and hence their strategies overlapped.

And the same held true for the interests of their different political offspring.

Moreover, in 2011 an old independent audit showed that the losses before the sanctions that preceded the uprisings amounted to approximately 3.1 billion US dollars.

Gaddafi’s regime started to collapse – a regime which, according to the international narrative, had allegedly accumulated all the money taken by LIA and its subsidiaries.

Obviously this is not true – exactly as it is not true that the “deficit” in Italy’s public finances before the “Bribesville” scandal was caused only by the greed and voracity of the ruling class.

In the countries where there is a destructive psywar and an offensive economic war, these are now the usual models.

It is not by chance that on December 16, 2011 the UN Security Council lifted the specific sanctions against the  Central Bank of Libya and the Libyan Foreign Bank (which is not LAFICO) because they had supported the uprisings against Colonel Gaddafi.

In 2014 LIA initiated legal proceedings against Goldman Sachs, which cost it 1.2 billion US dollars, with a bonus for the intermediary bank of 350 million dollars.

The proceedings ended in 2016 and the British judges decided in favour of Goldman Sachs that was entitled to a compensation amounting to one million US dollars.

There was also another legal action brought against Société Générale, which had started in 2014 and later ended with LIA’s partial defeat.

As to the 2018 national budget, for example, the Central Bank of Libya has envisaged the amount of 42,511 billion dinars, broken down as follows: 24.5 for salaries and wages; 6.5 billion dollars for petrol subsidies and 6.7 billion dollars for “other expenses”.

On average the dinar exchange rate is 1.3 as against the dollar, but it is much lower on the black market.

And public spending is all for subsidies and salaries. Very little is spent for welfare – that was Colonel Gaddafi’s asset for gaining consensus. Social wellbeing can be achieved with good stability of oil prices and revenues, which is certainly not the case now.

Moreover, General Haftar militarily conquered the oil sites of the Libyan “oil crescent” on June 14, 2018, after having held back the attacks of the Petroleum Defence Guards of Ibrahim Jadhran, the commander of the force protecting the oil wells and facilities.

According to General Haftar, the condition for reopening wells, as well as storage and transport sites, was the replacement of the Governor of the Central Bank of Libya, Siddiq al-Kabir, with his candidate, namely Mohammad al-Shukri.

Siddiq al-Kabir stated that the Central Bank of Libya has lost 48 billion dinars over the last 4 years and rejected the appointment – formally made by the Tobruk-based Parliament – of his successor, al-Shukri.

Moreover, Siddiq al-Kabirhas also been accused of having pocketed a series of Libyan public funds abroad.

Later General Haftar attacked the Central Bank of Libya in Benghazi to collect funds for the salaries of his soldiers.

Hence the current Libyan financial tension lies in the link between banks and oil revenues – two highly problematic situations, both in al-Serraj’s and in the Benghazi governments, as well as in General Khalifa Haftar’s ranks.

It is certainly no coincidence that the Presidential Council decided to impose a 183% tax on currency transactions with banks.

In addition, taxation was introduced on the goods imported by companies before the current tax reform, which is linked to the reform of the allocation of basic commodities to the Libyan population.

The idea is to stabilize prices and hence make the exchange rate between the dinar and the dollar acceptable, which is another root cause of the economic crisis.

The Libyan citizens often demonstrate in front of bank branches, which are constantly undergoing a liquidity crisis. Prices are out of control and the instability of exchange rates harms also oil transactions, as can be easily imagined.

Nevertheless, even the area controlled by the Tobruk-based Parliament and General Haftar’s Forces is not in a better situation.

In fact, Eastern Libya’s banking authorities have already put their banknotes and coins into circulation, which are already partly used and were printed and minted in Russia.

Pursuant to al-Serraj’s decision of May 2016, said banknotes are accepted in the Tripoli area.

Four billion dinars, with the face of Colonel Gaddafi portrayed on them, and of the same dark colour as copper.

According to the most reliable sources, the reserves of the Central Bank of Libya in Bayda – the city hosting the Central Bank of Eastern Libya – are still substantial: 800 million dinars, 60 million euros and 80 million dollars.

Not bad for an area destroyed by war.

Obviously the simple division into two of the Central Bank – of which only the Tripoli branch is internationally recognized – is the root cause of the terrible Weimar-style devaluation of the Libyan dinar, which, as always happens, they try to patch up with the artificial scarcity of the money in circulation.

As Schumpeter taught us, this does not solve the problem, but shifts it to real goods and services, thus increasing their artificial scarcity and hence their cost.

Meanwhile, the economic situation shows some signs of improvement, considering that the 2017 data and statistics point to total revenues (again only for Tripoli’s government) equal to  22.23 billion dinars, of which 19.2 billion dinars of oil exports; 845 million dinars of taxes; 164 million dinars of customs duties, above all on oil, and 2.1 billion dinars of remaining revenue.

At geopolitical level, however, the tendency to Libya’s partition – which would be a disaster also for oil consumers and, above all, for the Libyan economy, considering that the oil crescent is halfway between the two opposing States – is de facto the prevailing one.

Egypt openly supports General Khalifa Haftar and the tribes helping him.

The Gharyan tribe and many other major ones, totalling 140, now support the Benghazi Government, since at the beginning of clashes, they had often been affiliated to Tripoli and its Government of National Accord.

Tunisia has always tried to reach a very difficult neutral position.

Algeria strongly fears the intrusion of the Emirates’ and Qatar’s Turkish intelligence services into the Libyan economic, oil and political context, but it endeavours above all to limit the Egyptian pressure to the East.

The European powers support General Haftar- with France that, as early as the first inter-Libyan fights, sent him the  Brigade Action of its intelligence services. Conversely, Italy is rebuilding its special relationship with al-Serraj’s government – like the one it had with Gaddafi – but with recent openings to General Haftar.

If we want to reach absolute equivalence between the parties, we must avoid doing foreign policy.

Great Britain and the United States tend to quickly withdraw from the Libyan region, thus avoiding to make choices and not tackling the economic and social crisis that could trigger again a war, with the jihad still playing the lion’s share and precisely in the oil crescent.

The United States should not believe that its great oil autonomy, which also pushes it to sell its natural gas abroad, can exempt it from developing a policy putting an end to the unfortunate phase of the “Arab Springs” it had started – of which Gaddafi’s fall is an essential part.

Currently the Libyan production share is around 1% of the total OPEC production.

Everyone is preparing for the significant increase of the oil barrel price, which is expected to reach almost 100 US dollars in the coming months.

If this happened – and it will certainly happen – the Libyan economy could be even safe, but certainly corruption and the overlapping of two financial administrations and two central banks, as well as political insecurity, could still stop Libya’s economic growth.

Hence, for the next international conference scheduled in Palermo for November 12-13, we would need a common economic and financial policy line of all non-Libyan participants to be submitted to both local governments.

Probably General Haftar will not participate – as stated by a member of the Tobruk-based Parliament – but certainly Putin will not participate.

The presence of Mike Pompeo is taken for granted, but probably also the Russian Foreign Minister, Sergey Lavrov, will participate.

Certainly the Italian diplomacy focused only on “Europe” has lost much of the sheen that has characterized it in Africa and the Middle East.

Meanwhile, we could start with a working proposal on the Libyan economy.

For example, a) a European audit for all Libyan state-run companies of both sides.

Later b) the definition of a New Dinar, of which the margin of fluctuation with the dollar, the Euro and the other major international currencies should be established.

Some observers should also be involved, such as China.

Furthermore, an independent authority should be created, which should be accountable to the Libyan governments, but also to the EU, on the public finances of the two Libyan governments.

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Khashoggi crisis highlights why investment in Asia is more productive than in the Middle East

Dr. James M. Dorsey

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Growing Western political and corporate reluctance to be associated with Saudi Arabia in the wake of the suspected killing of journalist Jamal Khashoggi spotlights fundamentally different investment strategies and environments in the bulk of Asia and the oil-rich Gulf states, the continent’s most western flank.

The Khashoggi crisis highlighted the fact that much of investment in the Gulf, irrespective of whether it is domestic, Western or Chinese, comes from financial, technology and other service industries, the arms industry or Gulf governments. It is focused on services, infrastructure or enhancing the state’s capacities rather than on manufacturing, industrial development, and the nurturing of an independent private sector.

The crisis has put on display the risks Gulf governments run by adopting policies that significantly tarnish their international reputations. Technology, media, financial and other services industries as well as various European ministers and the US Treasury Secretary have cancelled, in the wake of Mr. Khashoggi’s disappearance and likely killing while visiting the Saudi consulate in Istanbul, their participation in Davos in the Desert, a high-profile investors’ conference in Riyadh later this month.

By contrast, the military industry, with US President Donald J. Trump’s encouragement, has proven so far less worried about reputational damage.

Sponsored by Saudi Crown Prince Mohammed bin Salman, who is suspected of being responsible for Mr. Khashoggi’s likely murder, the conference was intended to attract investment in his Vision 2030 plan to reform and diversify the Saudi economy.

In highlighting differences in investment strategies in the Middle East and the rest of Asia, the fallout of Mr. Khashoggi’s disappearance goes beyond the parameters of a single incident. It suggests that foreign investment must be embedded in broader social and economic policies as well as an environment that promises stability to ensure that it is productive, contributes to sustainable growth, and benefits broad segments of the population.

In contrast to the Gulf where, with the exception of state-run airlines and DP World, Dubai’s global port operator, the bulk of investment is portfolios managed by sovereign wealth funds, trophies or investment designed to enhance a country’s international prestige and soft power, major Asian nations like China and India have used investment to lift hundreds of millions of people out of poverty, foster a substantial middle class, and create an industrial base.

To be sure, with small populations, Gulf states are more likely to ensure sustainability in services and oil and gas derivatives rather than in manufacturing and industry. Nonetheless, that too requires enabling policies and an education system that encourages critical thinking and the freedom to question, allow one’s mind to roam without fear of repercussion, and grants free, unfettered access to information – categories that are becoming increasingly rare in a part of the world in which freedoms are severely curtailed.

China’s US$1 trillion, infrastructure-driven Belt and Road initiative may be the Asian exception that would come closest to some of the Gulf’s soft power investments. Yet, even so, the Belt and Road initiative, designed to alleviate domestic over capacity by state-owned companies that are not beholden to shareholders’ short term demands and/or geo-political gain, contributes to productive economic growth in the People’s Republic itself.

Asian nations, moreover, have been able to manage investors’ expectations in an environment of relative political stability. By contrast, Saudi Arabia damaged confidence in its ability to reform and diversify its oil-based economy when after repeated delays it suspended indefinitely plans to list five percent of its national oil company, Saudi Arabian Oil Company or Aramco, in what would have been the world’s largest ever initial public offering.

The Khashoggi crisis and the Aramco delay followed a series of political initiatives for which there was little equivalent in the rest of Asia. These included the Saudi-United Arab Emirates military campaign in Yemen causing the world’s worst post-World War Two humanitarian crisis; the 16-month-old diplomatic and economic embargo of Qatar by Saudi Arabia, the UAE, Bahrain and Egypt; the detention and failed effort to force Lebanese Prime Minister Saad Hariri to resign; and the diplomatic Saudi spat with Canada in response to a tweet criticizing the kingdom’s human rights record. As a result, foreign direct investment in Saudi Arabia last year plunged to a 14-year low.

All of this is not to say that the rest of Asia does not have its own questionable policies such as Chinese claims in the South China Sea or the Pakistani-Indian feud, and questionable business practices such as China’s alleged industrial espionage. However, with the exception of China’s massive repression of Turkic Muslims in its north-western province of Xinjiang, none of these are likely to fundamentally undermine investor confidence, derail existing social and economic polices that have produced results or produce situations in which avoidance of reputational damage becomes a priority.

At the bottom line, China is no less autocratic than the Gulf states, while Hindu nationalism in India fits a global trend towards populism and illiberal democracy. Nevertheless, what differentiates much of Asia from the Gulf and accounts for its economic success are policies that ensure a relatively stable environment and are focused on social and economic enhancement rather than primarily on regime survival. That may be the lesson for Gulf rulers.

A version of this story was first published by Syndication Bureau

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Regional Comprehensive Economic Partnership (RCEP) and India

Prof. Pankaj Jha

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Regional or bilateral free trade agreements between India and other countries/institutions have always faced local resistance because of intrinsic anxiety that low cost imported goods would stifle the growth of domestic industry. Commentators have justified this apprehension advocating that domestic industry in India is still unprepared for international competition, and there are no state subsidies that the government provides to the industry for reducing costs and facilitating unfair cost advantage with regard to exports. Within India, sector specific associations are powerful and a result of which many items such as tea, palm oil, coffee and pepper were enlisted as highly sensitive list items (very less reduction in tariffs) when India-ASEAN Free Trade Agreement was signed in 2009. India is witnessing a very high percentage of growth in services sector (contributes nearly two-thirds of India’s GDP)and therefore has always sought to offset the negative balance of merchandise trade with promotion of services sector and investment as an integral component of bilateral or multilateral trade talks.

RCEP is proposed to be one free trade area which will include 3.4 billion people across the East Asian and Oceania region, with a GDP of more than US $22 trillion and the intra RCEP trade would account for more than 30 percent of global trade, as it would integrate the three largest economies of Asia-China, Japan and India. For India, accession to this economic trading bloc would mean opening its large market of 1.25 billion people for the products from 15 countries including 10 ASEAN members and the five dialogue partner countries -China, Australia, New Zealand, Japan, and Korea. During the last few meetings of RCEP negotiations, India has made it very clear that it would not compromise on issues related to trade in services and also addressing concerns related to the small and medium enterprises in the negotiations.

As discussed, RCEP is expected to bring the ASEAN countries and its six dialogue partners under one large geographic and economic landmass which would be one of the largest economic blocs in the world. India has Free Trade agreements or Comprehensive Economic Cooperation/ Partnership Agreements (CECA/CEPA) with Thailand, Singapore, Malaysia, and Korea while it is negotiating terms of bilateral free trade along with services agreement with Australia, and New Zealand. India has proposed to include services sector into the larger negotiation process while many countries do not want to open their market for highly talented and qualified professionals from India. The bone of contention in this regard is Mode IV which ‘deals with movement of natural persons who are service providers or independent professionals’ to another WTO member country. India has pressed for the Mode IV negotiations while negotiating with Malaysia and Singapore. However, both the countries have only opened Mode IV for select individuals such as consultants, accountants, nurses and financial experts. The limited access to the emerging markets have annoyed Indian negotiators to such an extent that at one time India decided not to enter into any free trade negotiations without including services and investment in the negotiation blueprint.

India started economic liberalization process in early 1992, it is yet to integrate with the global economy given the intrinsic problems with regard to tariff structures, customs procedures and the inherent red tape which was a legacy of the license regime. However, putting onus on India for failed attempts with regard to free trade and better terms of trade with other countries across Asia would be unfair. India has not gained the promised advantage while trading with the price competitive economies of the Asian region. On the contrary, the low cost production centres, particularly China, which thrives on state subsidized production has easy access to the India market while it has not bestowed the same privileges to Indian exports. The tariff and non-tariff barriers in China are still not conducive to Indian exports leading to skewed balance of trade. Taking cue from China’s re-routing of its products through ASEAN nations, India has stressed on the stringently following the Rules of Origin (ROO) template with 35 percent of local value addition as a necessary prerequisite.

This year, in the post Wuhan summit bonhomie, Chinese government has opened its pharmaceutical market to select Indian drugs such as anti-cancer, and other lifesaving drugs which are relatively cheaper than Western imports. Overall China has removed import duties on 28 medicines imported from India. The trade frictions between India and China still exists as India has registered a number of anti-dumping and unfair trade practices case in WTO against China. Indian industry particularly Small and Medium Enterprises(SMEs) however accept the fact that cheap Chinese input material in sectors such as steel, pharma and other related industries have brought down the costs, and have also indirectly helped in real estate, automobile spares, and textile sectors. Nonetheless, larger industrial houses are not in favour of such opening up of market as they feel their future endeavors would be jeopardized if Chinese cheap products both in terms of raw materials and semi-finished products would curtail their market expansion plans through new products. These large industrial houses do control the Indian politics through their corporate funds given to various political parties to fight elections and have a sizeable influence among the country’s parliamentarians and legislators. SME sector in India is relatively unorganized, both in terms of associations and political clout.

In order to increase its trade with countries in East Asia and Oceania, India has been trying to adopt international production methods, and be a part of the Regional Value Chain(RVC). However, India’s incremental approach for market liberalization and other market facilitation efforts have not met with active engagement from the regional community. India has not yet been inducted into the Asia-Pacific Economic Cooperation (APEC) which could have prepared the country for business standardization and harmonization of tariffs as per the APEC provisions. This would have created the base for effective implementation of the RCEP trade provisions with necessary structural support. Indian economists have made it very clear that only market access to merchandise trade without any quid pro quo would not be acceptable to the Indian entrepreneurs. It might also create social problems given the fact that Chinese cheap products have already decimated electronics, mobile, toys and silk industry in India. The cascading effect has left very large number of both skilled and unskilled labour jobless. Given the fact that select sectors in India are still labour intensive, retrenchment of workers has a political cost. There are apprehensions projected by industry associations that cheap imports would adversely impact the steel, chemicals, textiles, copper, aluminum, and pharma industry. India is has a sizeable share of global trade in automotive parts, pharma and textile industry, and so negotiations would be a long drawn affair.  Further, strategic experts feel that India must not become an ancillary industry to Chinese production network as it would jeopardize India’s rise in future as a production and skill center in Asia. Also, it will put China as the benefactor of India’s industrial change which might not be palatable to the political class.

Indian negotiators still believe that until and unless the demands with regard to trade in services, investment and also concerns related to SMEs is addressed, the RCEP would be facing an invisible deadlock. Opening up services sector would help the Indian economy and partly offset the effect that would be felt from the cheap products from relatively cheaper production and export centres. Indian economy still faces stiff competition from China and as a result of this the negotiations with China, would be long drawn affairs. However, there is still a silver lining that RCEP would be concluded in 2019 but the deadline from the Indian side would be after the general elections in 2019 when the current Prime Minister Narendra Modi would be looking for a second term to bring about comprehensive set of economic and financial reforms. In case a coalition government comes into power, it would seriously jeopardize the RCEP negotiations because then the different associations and lobbies would be playing the political game to protect their economic interests.

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