May 16, 2020

What does COVID19 tell us about democracy vs authoritarianism?

The following article was originally published by the Observer Research Foundation on May 16, 2020.

 Few trends have been as evident or exasperating over the past weeks as the use of the ongoing novel Coronavirus (COVID-19) pandemic to advance preexisting political arguments. To those who see the pandemic and its management as a vindication of authoritarianism, or evidence of the necessity of public healthcare, or confirmation of flailing democracies, it is easy to cherry-pick examples to support these arguments. No less than Ben Rhodes, the former U.S. Deputy National Security Adviser, tweeted “It is no coincidence that countries run by right-wing nationalists are handling COVID-19 the worst (see: US, Russia, UK, Brazil),” ignoring numerous glaring examples to the contrary, such as Italy, Sweden, Hungary, or Ecuador.

So what do countries’ handling of the coronavirus pandemic actually say about the relative competence of various regime types? To make an informed assessment, it is possible to map proxy measures for governments and their success in tackling the pandemic. Freedom House’s annual Freedom in the World is ultimately subjective (and its methodology debatable), but uses a standard set of criteria to assess democracies and authoritarian governments on a scale from 0 to 100. While there are many ways to assess countries’ success in managing the pandemic, the best proxy is the number of resulting deaths per million people. This captures success in limiting the number of infections and the quality of treatment to those who are infected.

Any such analysis of these two metrics should also be accompanied by a number of important caveats. An obvious one is that the pandemic is not over. Certain countries that appeared to perform well in its early stages now appear to be worse off, while others have recovered admirably from early setbacks. Using the number of deaths per million people does not capture the secondary consequences of the pandemic, such as the resulting economic hardship that counter-measures may have caused. Ideally, the most effective governments will have minimized coronavirus casualties while ensuring a minimal impact to economies and lifestyles.

Equally, there are limitations to simple political metrics. In addition to some of its methodological shortcomings, the single Freedom House score does not capture the complexity of countries’ political characteristics, let alone their administrative or resource capabilities. Moreover, certain specially-administered territories are excluded from the political analysis. Therefore, this exercise should be seen as little more than an illustration, based on what we know so far.

There is another important point to consider, as a forthcoming working paper by Mudit Kapoor, Shamika Ravi, Anup Malani, and Arnav Agarwal makes clear. They found that 92% of reported coronavirus-related deaths were in democracies (which are home to 48% of the world’s population), while only 8% were in hybrid or authoritarian regimes (home to the remaining 52%). As they dug deeper into this disparity, they noticed that there was far more deviation around the moving average of coronavirus reporting in democracies than in authoritarian regimes. The available data from more closed systems of governance is suspiciously tidy. This suggests that authoritarian governments may be significantly underreporting coronavirus cases, including deaths linked to the pandemic.

With those important caveats in mind, what can be derived from the available data for the 182 countries and territories for which such data is available? As Figure 1 (below) shows, the trend line based on the coronavirus deaths updated on May 13, 2020 is ultimately inconclusive. While a large number of countries towards the upper end of the freedom index have high rates of coronavirus-related fatalities, a significant number of those countries fare relatively well. African countries with varying degrees of political freedom – from Ghana and Botswana to Angola and Ethiopia – appear to be equally unaffected by the virus.

As Figure 2 (below) shows, Taiwan and Iran stand as outliers on opposite ends of the spectrum, as do San Marino and Burundi.

Nor is the picture any clearer among large countries and economies. Despite a recent upsurge of coronavirus cases, India remains on the lower end among democracies in the developing world, while Vietnam – a single-party state – has had a negligible number of COVID-19 deaths. China, despite enjoying a closed political system, remains in the middle of the pack, even accounting for questions about the accuracy of its pandemic data. Neither Russia (with 14.5 deaths per million) nor Brazil (with over 50) appear to have acquitted themselves well, despite very different levels of political and social liberties.

It’s natural for political analysts and commentators to want to impose their own worldviews or thinking upon a problem, particularly one as all-encompassing as COVID-19. But there is little yet to suggest there is a strong correlation between the nature of governments and the impact of the pandemic. Other factors – per capita incomes, openness to globalisation, the nature of healthcare systems, and geographic and demographic factors – are probably more significant. Politics matters, and questions surrounding the effectiveness of democracy will be salient in the coming months and years, as the immediate threat of COVID-19 recedes. But sometimes, a pandemic is just a pandemic.

May 11, 2020

What does the US-China rift mean for the world?

The following article originally appeared in The Hindustan Times on May 11, 2020. 

The rhetoric between the world’s two largest political powers — the United States (US) and China — has heated up. The trend began several years ago, during Barack Obama’s presidency. But it grew under Donald Trump’s tenure, and intensified following in the wake of the coronavirus pandemic. Chinese diplomats have adopted a more strident tone, described as “wolf warrior” diplomacy after a popular Chinese action film. US officials like Secretary of State Mike Pompeo and Deputy National Security Adviser Matt Pottinger have shot back. The blame game caters to the domestic constituencies of both countries, but also complements the intensifying geopolitical competition between Washington and Beijing.

The hardening language and policies by the US and China have worried observers elsewhere, including in Southeast Asia, Europe, and indeed in India. For more than two decades, many had grown accustomed to a comfortable arrangement that involved bolstering economic relations with China, preserving a stable defence partnership with the US, and enjoying cordial political and diplomatic relations with both. For some countries, defence cooperation with Washington facilitated a beneficial economic partnership with Beijing by mitigating the perceived risks and justifying lower defence expenditures. Now, many are openly worried about the prospect of having to make starker choices.

The appeals to Washington and Beijing to not force others to choose are unlikely to be received sympathetically. Beyond a point, the US and China will do what they want, and other countries’ concerns will be but an afterthought. It is also a self-serving narrative, perpetuating the notion that it is possible to benefit economically from China and security-wise from the US — to have one’s cake and eat it too. Consider Malaysia’s lukewarm response recently when the US navy opted to defend Malaysia’s use of it exclusive economic zone from Chinese intimidation.

Furthermore, it creates a false equivalence between the US and China. China has compelled countries to overlook its island building and militarisation in the South China Sea, and asked them to sign on to a unilateral Chinese political project in the Belt and Road Initiative. Beijing also promoted trade groupings such as the Regional Comprehensive Economic Partnership and multilateral lending agencies such as the Asian Infrastructure Investment Bank (AIIB) that deliberately excluded the US.

By contrast, the US has argued that it has promoted a more open international order, one that is less exclusionary. After all, it was Washington that advocated for China’s entry into the UN Security Council, World Bank, and World Trade Organization between 1971 and 2001. More recently, even projects like the Trans-Pacific Partnership (TPP) — from which the US eventually withdrew — opted to compete with China by raising standards, leaving open the possibility of expanded membership. But while the US did not generally compel others into adopting exclusionary practices directed at China, there have been some notable exceptions.

For example, in 2004 and 2005, the European Union (EU) — led by certain member-states and lobbied by defence companies — considered lifting its arms embargo on China. This resulted in a sharp disagreement with the US, which shared both technology and defence supply chains with Europe, at a time when transatlantic ties were already under strain following the 2003 Iraq invasion. Under considerable pressure, and internally divided, the EU eventually opted not to lift its embargo. In hindsight, it is interesting to imagine the counterfactual scenario in which Brussels had stayed the course.

A less successful attempt by Washington to get countries to pick sides occurred in 2015, when public pressure was mounted on European allies — and especially the United Kingdom — to not join the China-led AIIB. The decision by the White House to turn the AIIB into a Rubicon was confounding, given that it was an instance of China largely abiding by international standards and that its creation was compelled by US intransigence over institutional reform. This attempt proved an embarrassment for Washington. Many US allies ignored American warnings and joined AIIB anyway.

A third, and ongoing, attempt by the US to draw a red line in its competition with China involves allowing Chinese companies to compete for 5G telecommunications contracts. The US is somewhat hamstrung by not being able to provide 5G infrastructure itself, with the beneficiaries of a Chinese boycott likely to be South Korean or European firms. So far, US allies such as Japan and Australia have been at the vanguard of disqualifying Chinese companies, while the UK has openly considered breaking with Washington on the issue.

Unlike the previous episodes, which appeared to be aberrations in an otherwise more cooperative international environment, the tussle over 5G may signal the beginning of a new trend. While China drew lines in the sand — both literally, as in the South China Sea, and metaphorically at international institutions — the US has felt compelled to selectively but increasingly do so as well. The world may never revert to the kinds of blocs that characterised the Cold War. But in a more interdependent era, some tough choices are on the horizon.

April 18, 2020

Economic vulnerabilities and power shifts in a post-Covid19 world

The following commentary was published online by the Observer Research Foundation on April 18, 2020. 

It is by now clear that the global Covid19 pandemic will have a wide-ranging impact on the world. While it is impossible to predict with any certainty the scale and spread of the coronavirus, let alone its impact on international economics, politics, and society, it is possible to systematically identify areas of potential vulnerability for the world’s major economies. The unpredictability of the effects of the virus on international politics is in part due to the multiple stages required in any reasonable analysis, each subject to many variables.

The first level of analysis is the virus itself, its effects on global public health, and immediate countermeasures taken by various national and subnational governments to stem its spread and lethality. The second is the economic effects, particularly for major economies such as the US, China and the EU, but also for major developing economies (such as India) and vulnerable smaller economies. The third is what effects the coronavirus will have on domestic politics, including the consolidation or weakening of political leaderships, possible leadership transitions and social cohesion. The fourth is what results will shape international security dynamics, whether accelerating pre-existing trends or reversing others.

International political power derives, to a large degree, from economic power, and the last three decades have witnessed a considerable shift in this regard, reflected in Table 1 below. As the power differential has narrowed between India on the one hand, and the US, Europe and Japan on the other, it has widened relative to China. With Russia, it has swung back and forth, as a consequence of Russia’s susceptibility to energy price swings.

Varied impacts
The coronavirus pandemic will affect future trends in several ways, although the effects will vary widely from country to country. First, transnational exchanges (globalisation) will be disrupted, including trade, travel and foreign investment. Second, financial markets will take a hit as investor confidence suffers, resulting in the tightening of capital. Third, consumer spending will fall due in large part to countermeasures (such as lockdowns and travel restrictions) imposed by governments. Fourth, manufacturing output will suffer as a consequence of the previous three factors, although there will be significant variation from sector to sector. Fifth, energy consumption will decline, initially temporarily and possibly on a longer-term basis.

Governments will have many tools to try to resuscitate their economies from these effects. These will include (1) fiscal stimulus measures, (2) monetary stimuli, and (3) changes to industrial policy. The US and Japan may rely primarily on the first two, but the US government has limited control over industrial policy, while Japan’s attempts at industrial reform under the Shinzo Abe government have been frustrated. The EU only has monetary stimulus as an option, although individual member states (particularly Germany) are capable of fiscal and industrial steps. Weaknesses in Italy and Spain, which have been particularly hard hit by the Covid19 pandemic, could prove limiting. Among the major economies, only China has all three tools at its disposal, although excessive debt by state-owned enterprises will hamper these efforts.

The table below outlines in bold areas of potential vulnerability for each of the major economies; figures in italics indicate areas of relative comfort or resilience. As the table indicates, India is moderately placed on almost every criterion, with neither excessive vulnerabilities relative to others nor major causes for complacency. While Indian government spending appears low (suggesting room for fiscal stimulus measures), India’s low tax base, considerable (albeit manageable) government debt, and low credit rating erode this apparent advantage. Another area of some promise is India’s current account deficit; the pandemic offers an opportunity to redress this, both through the falling cost of commodities (especially energy) and the possibility of a manufacturing boost.

(Notes: All figures based on latest available data from World Bank and IMF.  All figures adjusted to GDP = 1, except net energy imports where total energy consumption = 1. COFER is composition of global foreign exchange reserves; figures for France and Germany adjusted to their weight in eurozone. Reserve holdings in rupee and ruble are negligible. China’s government debt figures (*) are likely understated, as they do not include debts of state-owned-enterprises.)

What next for India
What are the takeaways for India? The most important is the need for an industrial policy for the post-Covid19 world. The immediate aftermath of the pandemic presents a once-in-a-generation opportunity to implement an industrial policy on a national scale, akin to what the US did in the 1940s and 1950s and China did in the 1980s and 1990s. This will only be possible through a series of far-reaching measures, given the great disparity between India’s states and limited room for fiscal manoeuvre. Identifying key manufacturing outputs as national security priorities; providing tax incentives, land acquisition potential, and single window clearances to those planning to manufacture in these areas; improving the secondary debt market to enhance investment; boosting government spending on R&D in critical areas (for instance, health research); and incentivising STEM research at higher education institutions will be necessary. Critical physical infrastructure (highways, rail, ports, high-speed data) and the instruments of national security (defence, cyber, space) offer additional priorities for such a national industrial policy.

A second priority will require observing China’s recovery and response, given its economic and strategic weight. China’s economy is particularly susceptible to declines in foreign investment, manufacturing, and export markets. Declines here could challenge the credibility of the Chinese Communist Party, which explains in large part Beijing’s attempts to shift the narrative focus in its political messaging. Should Beijing implement a full range of measures to stimulate economic recovery, as appears likely, this would artificially inflate growth. At the same time, other countries’ attempts to disincentivise investment into China and increase barriers to market access on national security grounds will negatively impact its medium-term growth prospects. In China, perhaps more than other major economies, economic performance is tied closely to political sensitivities and security policy. Consequently, there will be inevitable concerns about diversionary tensions. India experienced this first-hand in 1962 in the wake of the disastrous Great Leap Forward. Managing these multiple challenges will require India to continue its positive engagement with China, as began at Wuhan in 2017, while accelerating cooperation with balancing powers in the wider region to hedge against various possibilities. An acceleration of India’s ‘Act East’ and ‘Indo-Pacific’ policies—within perhaps more limited means—is therefore an inevitable consequence of the coronavirus pandemic.

A third priority will necessitate tracking developments in the US. The US, which could end up with the largest number of Covid19 infections and deaths, will almost certainly witness the end to the longest period of economic growth in its history. Its economic indicators—including unemployment and the stock market—have already faced severe downturns. But as the US has experienced shocks of this nature before, it can be expected to witness an eventual recovery, likely gradual, helped both by a massive stimulus and buttressed by the strength of the dollar. But the dip will present challenges for India, both in seeking investment from the US and possible complications resulting from a potentially restrictive immigration regime. Bilateral commercial consultations that can identify avenues of mutually beneficial post-Covid19 economic cooperation will be urgently needed.

Moreover, Covid19 will have uncertain effects on US politics. President Donald Trump initially received a boost in approval ratings as the crisis hit, followed by a small slump. Joe Biden, who is the presumptive Democratic presidential nominee, leads Trump in national polls. However, the margin is in fact a lot closer than national surveys imply: polling in key swing states and the demographics of likely voters suggest that Trump may enjoy an edge in the Electoral College. The pandemic will also disrupt important Congressional races. While India is unlikely to be adversely affected by the either the presidential or Congressional elections, it will be important to engage with key stakeholders across the political spectrum, including campaign advisors and legislative leaders, on the panoply of issues that are vital for Indian interests.

Finally, although there will be several other effects for India—major and minor, global and regional—that are harder to anticipate, a potential silver lining could involve a medium-term suppression of energy prices. This would have a positive effect for India’s current account deficit, which in turn would result in opportunities to streamline subsidies and thereby free up fiscal space for other vital investments. Such investments could include capital expenditure in defence, which faced constraints in 2020-2021, as well as foreign assistance, which will be in high demand worldwide and if targeted strategically could confer long-term benefits for India. Additionally, depressed fossil fuel prices could be used as an opportunity to accelerate India’s energy transition to liquified natural gas, which ought to feature in bilateral discussions with major suppliers such as Qatar, the US, Russia, and Australia. At the same time, prioritising solar energy components—an area of supply chain vulnerability for India—will be necessary for the future of the National Solar Mission, as part of long-term energy security plans.

There is no question that the scale and spread of Covid-19 will mean economic setbacks across the board. But, as during the 2007-09 global financial crisis, some actors will emerge relatively better off than others. If India seeks to bounce back relatively strongly, while guarding against further adverse implications (including security), it will have to consider the wide range of possibilities along a few key dimensions.

April 8, 2020

A global pandemic and globalisation

The following article originally appeared in The Hindustan Times on April 8, 2020. 

It is now evident that the coronavirus pandemic (Covid-19) is a systemic global event, one that will have significant consequences for people’s well-being and lifestyles, national economies, and political leaderships on every continent. It is natural for people to be considering the secondary implications of the pandemic. Some of the repercussions will be unexpected, and may not be felt immediately.

One natural question is what Covid-19 will mean for globalisation. Globalisation is the accelerated flow of goods, people, capital, information, and energy across borders, often enabled by technological developments. Over the past three decades, globalising trends were assumed to be the new normal. Trade without tariffs, international travel with easy or no visas, capital flows with few impediments, cross-border pipelines and energy grids, and seamless global communication in real-time appeared to be the natural endpoints towards which the world was moving, if at different rates for different places.

But the globalisation of goods and capital had already begun to plateau or stagnate since the 2008 global financial crisis (GFC). Trade as a percentage of global GDP rose from 39% in 1991 to 61% in 2008 but has remained flat over the past decade. The figure stands at 59% in 2018. Similarly, net foreign direct investment inflows, which were never above 1% of global GDP before 1989, occasionally crossed 4% over the past 30 years. But by 2018, it had dropped precipitously to 1.4%, its lowest level since 1996. Similarly, personal remittance flows, previously on the rise, flattened to around 0.75% of global GDP.

There are several causes for the great stagnation in the globalisation of goods and capital. It became increasingly apparent that not all countries, societies, and people were benefitting equally from globalisation, and that soon began to be reflected in national and international politics. The United States’ (US) sub-prime mortgage crisis of 2007-08, and its spillover to the eurozone, exacerbated national sentiment in Europe, which had previously been a model of international integration. The assumption that China’s rise would result in similar development opportunities for others proved unfounded. As one business leader cynically put it to me, “China, after climbing up the ladder, is kicking it out from under everyone else.” In hindsight, the economically nationalist impulses of countries as different as the US (“America First”) and India (“Make in India”) were a natural consequence.

A similar flattening has been underway in the globalisation of energy. Net international energy trade, which stood at 1.5 billion tonnes of oil equivalent in 1990, swelled to 2.5 billion by 2008 but then grew only moderately to 2.8 billion by 2018. But the drivers have been different: Increases in energy efficiency, the rise of renewables, and new sources as a result of fracking.

Other aspects of globalisation have not seen as much of a plateau after 2008. In fact, the globalisation of people accelerated, although in a manner that was partial and subordinate to national interests. The stock of global migrants grew steadily from 190 million in 2005 to 243 million a decade later. The number of international tourist arrivals rose from 900 million in 2009 to 1.4 billion in 2018. Similarly, on the face of it, the globalisation of information did not slow down. The percentage of Internet users around the world more than doubled from 22% in 2008 to 50% in 2017, although the national, cultural, and corporate Balkanisation of information firmly set in.

How could Covid-19 impact these trends? There will almost certainly be calls for the re-nationalisation of manufacturing, particularly for what are considered critical or essential goods. The recent bickering over personal protective equipment (PPE) and pharmaceuticals have brought this to the fore. This will further complicate trade agreements, both those in force and those under negotiation.

The globalisation of people, including short-term tourist or business traffic, may face new kinds of restrictions. National governments will have to weigh the risks of contagious diseases against the benefits of ease of travel or may have to consider stronger safeguards. In turn, the globalisation of finance will be indirectly affected: Less migration and business travel coupled with incentives to invest at home will hinder transnational capital flows.

The globalisation of information may confront a paradox. On the one hand, information will be more available, important, and shareable than ever. On the other hand, we may well see greater monitoring of individual information. The SARS epidemic of 2003 was a watershed for the use of mass surveillance and big data by governments in the interest of public health. Similar sentiments in a post-Covid-19 world may contribute further to the nationalisation of data.

On balance, the coronavirus pandemic may further slow down (or possibly even reverse) certain globalising trends that had already decelerated. The risk of supply chain disruptions will feature to a greater degree in trade calculations. Decisions about lowering barriers to international travel will face greater scrutiny. Information may continue to become more plentiful, but will be more jealously guarded. The ongoing phase of globalisation has recovered from systemic shocks before, such as 9/11, SARS, and the GFC. But the omnipresence of Covid-19 presents a challenge of a different magnitude.

(Correction: The original article had erroneously stated that net global FDI had never been below 1% of global GDP before 1989, when in fact it had never been above that figure.) 

February 26, 2020

The Resilience of India-U.S. Relations

The following article originally appeared in The Hindustan Times on February 26, 2020. 

As Donald Trump left India after his maiden visit as United States (US) president, what are we to make of the two-day spectacle? His trip was only the eighth by a serving US president, but he was also the fourth consecutive president to visit. The increased frequency of presidential travel to India captures the growing importance of the country for the US, and highlights the continued investments in the bilateral relationship by successive leaders: Atal Bihari Vajpayee, Manmohan Singh, and Narendra Modi in India; Bill Clinton, George W Bush, Barack Obama, and Donald Trump in the US.

The Trump visit differed from previous ones in several ways, most notably in featuring a major stadium event in Gujarat on Monday. The fact that Trump stayed on script while speaking to an audience of over one lakh, much as he had at the “Howdy Modi” event in Houston last year, was a further departure from the controversy that often accompanies the US president in his international engagements. He struck many of the right notes with his hosts: “America loves India — America respects India — and Americans will always be true and loyal friends to the Indian people,” he said. Trump drew contrasts with another large Asian country: “There’s all the difference in the world between a country that seeks to claim power through coercion, intimidation, aggression and a country that seeks to grow by setting its people free and unleashing their dreams, and that’s India.” Although he mentioned that his administration was “working with Pakistan to crack down on the terrorist organisations and militants that operate on the Pakistani border,” he also expressed hope for “reduced tensions” and “greater stability” in South Asia.

The symbolism, ceremony, rapport between leaders, and political significance naturally received the most attention. Trump arrived in India in an election year, keen to project images of himself addressing large and supportive crowds overseas. He hoped also to appeal to Indian-Americans, who have traditionally supported the Democratic Party. In India too, the visit assumed a political significance, given that public opinion surveys consistently reflect positive Indian attitudes to the US.

But this was also an opportunity to consolidate what is now a substantively richer relationship. The India-US security partnership witnessed another arms purchase, bringing to seven the number of US military platforms that will feature in India’s arsenal, many with components manufactured or assembled in India. Additionally, the signing of three significant defence cooperation agreements; upgraded bilateral, trilateral, and quadrilateral dialogues; and regularised military exercises involving all three services have solidified the defence relationship over the past few years. Coordination on connectivity infrastructure, maritime security, counterterrorism, and cyber security have all increased. Multilateral cooperation, notably at the United Nations Security Council, has improved, as demonstrated after last year’s terrorist attack at Pulwama.

On the economic side, two-way trade in goods and services has increased; India is now the US’ eighth-largest trade partner and the US is India’s largest. Energy trade, in particular, has taken off. The number of Indian students in the US and the number of US companies active in India have both grown. For most US-based tech giants, India is now one of their top three customer bases. Indian companies are investing heavily in the US, as Indian CEOs highlighted to Trump. Meanwhile, Indians have established the largest number of billion-dollar start-up companies in the US founded by immigrants.

Differences remain, as between any two countries. But attempts have been made over the past year to reach accommodations. Worries over possible US sanctions against India related to the purchase of Russian defence equipment have diminished following complications arising from Turkey’s acquisition of similar equipment. The consequences of heightened US tensions with Iran have been managed, with India given time and space to diversify its energy supplies while receiving a waiver from US sanctions for the port project in Chabahar. Many major trade differences have been bridged, including on agriculture and health care, although new points of friction have arisen related to digital payments, data localisation, and e-commerce. On Afghanistan, India has been supportive of efforts to improve coordination between the Trump administration and the government in Kabul as both negotiate with the Taliban. With respect to Pakistan, which has experienced a decline in US military assistance, developments at the Financial Action Task Force suggest new alignments.

Whether or not Trump pulls off a re-election in November, these combined gains on both the positive and negative sides of the ledger are what India and the US can build upon or consolidate. A priority moving forward will involve finalising a trade agreement that brings an end to the application of further tariffs and open-ended commercial disputes. Breakthroughs in defence research and development and resolving immigration irritants will also remain high on the agenda, as will addressing differences over Russia and improving the regulatory environment for US businesses in India. The India-US relationship has proved resilient amid the immense changes underway in international politics. The greatest significance of Donald Trump’s visit as president is the indication that this broad trajectory is likely to continue, even under circumstances that would once have been considered highly unlikely.