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Author: Tansen Sen, City University of New York

Chinese president Xi Jinping’s forthcoming visit to India will achieve nothing unless the new leaders of India and China can overcome existing inertia and seriously start revamping their bilateral relations. It is true that the two sides have managed to avoid a repeat of the 1962 armed conflict, and that diplomats have to be credited with limiting the border differences to a few ‘incursions’ and a tense standoff at Daulat Beg Oldi near the disputed Aksai Chin region in May 2013. But, as these episodes accumulate and are sensationalised by the media and dramatised in the blogosphere, they perpetuate mutual distrust and harden negative public perceptions.

Clearly the policy pursued during the last two and a half decades of emphasising trade while taking incremental steps towards managing, without resolving, the border issue has not worked.

Xi Jinping and Narendra Modi have to take prudent steps to move from just managing the relationship to making it truly open and trustworthy, something that was envisioned in the Panchsheel Treaty of 1954 but never attained, despite the celebratory events marking the 60th anniversary of the treaty this year.

The problem lies in the bottom-up policymaking that has defined the post-1962 relations between India and China. Mutually suspicious bureaucrats have hesitated to facilitate people-to-people, industry-to-industry or sub-region-to-sub-region exchanges and collaborations. This is clear by the limited educational interactions between the two countries due to the Indian Ministry of Home Affair’s reluctance to issue visas to Chinese students and instructors and the failure of the Bangladesh–China–India–Myanmar sub-regional collaborative initiative.

There are contradictions between the India–China joint declarations about promoting people-to-people exchanges and the implementation of these measures. Intra-ministerial disagreements, mystifying constraints, narrow visions and a reluctance to involve competent people often render these processes ineffective. These initiatives are usually categorised as ‘public diplomacy’ and epitomised by heavy handedness and restrictions imposed by bureaucrats who treat them as no more than symbolic gestures. In fact, free interactions at the grassroots levels — that could potentially advance mutual awareness and knowledge — have never been fully encouraged seemingly for ‘security’ reasons. Consequently, the rhetoric and false narratives of friendship get recycled while the general public remain in the dark and utterly confused about the actual policy goals.

For Xi and Modi to redefine the bilateral relationship, the existing policymaking structures and thinking have to be discarded. These leaders are the ones who should outline the relevant policies and order the bureaucrats to implement them. Their aim should be to dilute the dogmatic thinking of the respective diplomatic corps, military commanders and intelligence chiefs so that they become decisive and committed to the long-term prospects of India–China relations.

A first step could be for the two leaders to be frank about the historical ambiguity of the territorial claims and acknowledge publicly that there is no other option for resolving the border issue other than recognising the Line of Actual Control. In the short term, such a joint declaration might lead to condemnations by a few members of the public and — especially in India — political factions. But after numerous rounds of border talks without any substantial outcome, this might be the only way to come to terms with the legacies of colonialism and imperialism, and heal the scars of the 1962 war.

The persistent lack of mutual trust and the continued suspicion of each other’s wider geopolitical intentions are apparent in China’s failure to unequivocally support India’s aspiration to become a permanent member of the UN Security Council and India’s resolute efforts to keep China out of the South Asian Association for Regional Cooperation. Xi and Modi could unreservedly support these ambitions and wishes of the other side — not as quid pro quo steps but as gestures of genuine confidence-building.

Even at the early stages of their careers as national leaders, Xi and Modi already have firm standing in their respective countries. They may not be able to resolve the border issue immediately, but the two leaders have enough political capital to at least be magnanimous in backing each other in the wider global arena. In order to redefine the bilateral relationship, they have to go beyond the usual auguries of the bureaucrats about possible repercussions for national interests. Trust between India and China needs to be built on confidence and convictions, not on the computations of career bureaucrats.

President Xi Jinping will mostly likely try to entice India to join his so-called ‘Silk Road’ project. Xi must understand that he will be unable to draw India into a cookie-cutter plan given the existing scepticism in India about Chinese soft power schemes. Any utterings of support from the Indian side during Xi’s visit will be superficial and are unlikely to yield any substantial breakthroughs in bilateral relations. Likewise, Modi must refrain from his own pet proclamation of ancient Gujarat-China relations through the visit of the seventh-century Chinese monk Xuanzang, who merely traversed through the present-day Gujarat region. Instead of highlighting this historically irrelevant episode — Xuanzang passed through several other Indian states — Modi could elucidate his success in bringing Chinese investors to Gujarat — about 20 companies as of last year — and make a commitment to allow such investments in the ‘sensitive’ northeast regions of India.

The India–China relationship is already brimming with rhetorical pronouncements. What it lacks is concrete steps towards building better awareness and eradicating undue suspicions and scepticism. It is time for the two leaders to lay a new foundation not only for the improvement of bilateral relations, but also for reshaping intra-Asian connections and exchanges.

Tansen Sen is an Associate Professor of Asian history at Baruch College, City University of New York.

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India and China must think outside the ‘bureaucratic box’

Author: Pallav Purohit, IIASA

India needs economic growth for sustainable development, which in turn requires access to clean, convenient and reliable energy. An estimated 400 million people still lack access to electricity, and blackouts are still common across the country. A combination of rapidly increasing energy demand and fuel imports plus growing concern about economic and environmental consequences is generating growing calls for innovative policies and mechanisms to promote increased use of abundant, sustainable, renewable resources.

Locals on a boat pass by panels at a solar energy farm at Gunthawada in Gujarat state, about 175 kilometres north of Ahmadabad, India. There are growing calls for increased use of renewable energy resources in India. (Photo: AAP).

The Indian government initiated a renewable energy program to diversify national energy sources about three decades ago. The government aimed to add 455 GW of renewable capacity by 2050. Currently, renewable sources contribute about 13 per cent (32 GW) to India’s 249 GW installed capacity base.

The National Action Plan for Climate Change (NAPCC) sets a target for the share of renewables-based power generation from the current 4 per cent to 15 per cent by 2020. As a result, renewable projects currently benefit from several policy initiatives: accelerated depreciation benefits, feed-in tariffs, a ten-year tax holiday and generation-based incentives. As part of the NAPCC, the government launched the Jawaharlal Nehru National Solar Mission (JNNSM) in 2010 which aims to add 20 GW of grid-connected solar capacity by 2022, along with other solar targets for off-grid space.

The government plans to launch a similar program for wind. The National Wind Energy Mission, announced in January, will aim for 100 GW of wind power by 2022, a third of India‘s estimated wind energy potential. While the government has taken certain measures for the promotion of renewables, these need to be scaled up and expedited. The development of the sector suffers from a number of constraints, overlaps and gaps in the current policy and regulatory environment.

The government’s ambitious goals for solar energy, coupled with the country’s rapid progress in developing wind energy, raise many questions regarding the sources and costs of the investment that will be needed to install and operate this infrastructure. Stressing the need for India to start addressing its emissions, a government report released at the end of May 2014 put the costs of investing in low carbon energy systems at US$834 billion up to 2030.

The National Clean Energy Fund (NCEF), announced by the Indian government in its Union Budget 2010-11, is seen as a major step in India’s quest for energy security and reducing the carbon intensity of energy. The objectives of the NCEF are to fund research and innovative projects in clean energy technologies and to harness renewable sources to reduce dependence on fossil fuels.

The former UPA government had decided to levy a tax of $US0.84 per tonne on both domestically produced and imported coal to build up the NCEF, and fund research and innovative projects in clean energy technology. However, the NCEF has been widely criticised for inconsistencies between the stated objectives, operational guidelines and final approval of the projects. The government had collected over US$6.5 billion through the tax. But it has allocated just over 1 per cent of this amount to the Ministry of New and Renewable Energy (MNRE), out of which just US$267,000 has been spent so far on renewable energy projects in the past three years. There was a high degree of policy and regulatory uncertainty for investment in the renewables sector.

The newly elected Modi government announced a suite of initiatives for solar energy across the country and promised a ‘saffron revolution’ that will include ambitious targets for small, large and off-grid solar and a switch away from an assumed reliance on coal as the country seeks to deliver on its momentous task of bringing electricity to the entire country. The new government increased the coal tax to US$1.67 per tonne in July 2014. While this proposal was welcomed by renewable energy experts, there is uncertainty over what the additional revenue will be spent on, based on past experience.

The scope of expenditure from this fund has also been widened to include environmental projects and research and development projects in the clean energy and environment sectors. The new government will fund its ambitious Ganga rejuvenation plan with the tax on coal. It is also planning to spend as much as US$167 million on projects earmarked for this financial year and has earmarked US$84 million for the initial implementation work for four ultra-mega solar power projects each with a capacity between 2 GW and 4 GW — the energy situation could change rapidly.

Another US$67 million would be provided for installation of 100,000 solar-powered irrigation sets and water-pumping stations. Moreover, the canal-top solar power plant will receive US$17 million this year. The new government also plans for a 5 GW solar power project in the Ladakh region. This further emphasises the scale of India’s renewable ambitions. The recently-announced Wind Energy Mission has also pinned its hopes on the NCEF for potential funding.

The increase in the clean energy tax can be still considered an innovative attempt by the Modi government to acquire additional resources to support its environmental plans. It can be seen as a step towards helping India meets its voluntary target to reduce the amount of carbon dioxide released per unit of gross domestic product by 25 per cent from 2005 levels by 2020. The NCEF must be used to provide much-needed impetus for the development of emerging renewable and clean energy technologies, and the financial capital to early-stage and high-potential projects. It is important that the government provides easier access to finance through NCEF for the renewables sector.

Pallav Purohit is Research Scholar at the International Institute for Applied Systems Analysis (IIASA).

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Increase in coal tax will scale up Indian renewables

Author: William H. Overholt

Our institutions for governing world trade and our thinking about world trade date back to a simpler era. Without a radical rethink, we risk the gradual decay of our most valuable international institutions, loss of extraordinary opportunities to improve global living standards and possibly the sidelining of the West in developing modern institutions.

The GATT and the WTO were devised for a simpler era, when it was possible to think about world trade in the way Ricardo taught — namely that a good is produced in one country and consumed also in a single country. If Portugal was adeptat making wine and England at cloth, it would benefit both to reduce barriers and enhance trade. That two-country model worked relatively well until about 1978, when China started opening its economy by establishing special economic zones across the border from Hong Kong.

By the last decade of the twentieth century, production had become a complex global process. The logic of increasing efficiency by reducing trade barriers remained completely valid, but policy adaptation of that logic to a new era has faltered.

A laptop or a smart phone now is typically made in 15 to 20 countries. When old-style trade thinking is applied to this situation, confusion causes bad policy and gratuitous conflicts. A laptop made in 17 countries might be assembled in China for $2 worth of local wages then exported to the United States, but old two-country thinking leads members of Congress to react as if China had exported $1500 of value to the US. This bolsters protectionism, reduces support for multilateral trade liberalisation and contributes to the fragmentation of the global trade regime.

Because it is difficult to continue the process of trade liberalisation, countries feeling a need for deeper integration form their own regional blocs, inducing further fragmentation.

Regional and bilateral trade negotiations today are focused on ‘country of origin’, by definition a single country or preferential grouping, with the result that it is considered normal to have 500 pages of country of origin rules in a single trade agreement. Since each country has many trade agreements, companies may find the rules so complex that they simply pay high tariffs rather than trying to manage the complex paperwork to prove countries of origin. The complexity of the system discriminates against small, open economies like Singapore, and it discriminates against smaller companies without huge accounting departments. Because it cannot adapt to the globalisation of production, the system is beginning to defeat itself.

Moreover, the addition of over one billion new workers to the globalised workforce entailed very low wages in Eastern countries such as China, flat wages in the West and huge trade imbalances between East and West. This discouraged Western countries from vigorously pursuing the kinds of global agreements that would have eliminated those dozens of separate, conflicting 500-page rule books about countries of origin.

Feeling overwhelmed by Chinese manufactured exports, Western countries have also moved to exclude China from the most important efforts to modernise the global trading system. The proposed Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership agreements (TTIP) both seek to exclude the world’s second-largest economy from potential membership, an arrangement that is both economically untenable and a potential geopolitical disaster.

The geopolitical consequences were magnified by the inclusion of Japan in the TPP agreements, even though Japan’s economy is much less open than China’s and historically has been much less willing to reform in the face of domestic interest group pressure than China has. Given Sino-Japanese tensions, this has come across in Asia as part of a strategy to isolate China.

Magnifying Sino-American differences could make a more inclusive, truly multilateral future trade system much harder to negotiate.

While we still flounder over attempts to come to terms with globalised production, we are heading into globalised consumption. Instead of an era with one billion new globalised workers, we are heading into a world that will contain two billion or more new middle class consumers, mainly in Asia and heavily in China. Chinese wages are rising 13 to 20 per cent a year and total compensation is rising even more. This phenomenon should gradually resolve the most serious trade imbalances and begin to allow Western wages to rise.

But Western media, interest groups and politicians remain obsessed with the problems of yesterday. This could lead the West to squander one of the greatest economic opportunities in world history, namely the extraordinary consumer boom in China, India and other emerging markets. It could also disastrously delay responses to the jobs challenge of the new era: a technology-driven transformation of the workplace driven by robots, other automation, the internet of things and 3D printing that will eventually force billions of workers out of old jobs.

We must begin addressing the world as it is and will be, not the world of generations past. Ironically, in the process the WTO remains crucial to a vibrant world economy. Without the WTO’s dispute settlement mechanism, trade wars will ignite everywhere. By allowing the WTO system to decay, and by blaming globalised trade for problems that are unique to the past generation, we risk going back to pre-World War II trade wars. We need a modern, multilateral structure that updates the WTO, not a degeneration of the global trade and investment system based on a failure to recognise the shape of the new world we are entering.

We are now at one of those great historical turning points. Disillusionment, often misplaced, with existing institutions and obsession with obsolescent problems have allowed the process of trade negotiations to decay so far that TPP and TTIP negotiations could fail or, if they succeed, the exclusion of China could make them Pyrrhic victories. Continued Western failure to address the real issues of our emerging world of globalised production and consumption, and the reality of China’s central role, could lead to trade regimes with the most dynamic markets governed by structures like the Regional Comprehensive Economic Partnership promoted by Asian emerging economies.

William H. Overholt is President of Fung Global Institute and Senior Fellow at Harvard’s Asia Center. The views expressed here are personal and not endorsed by his employers.

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It’s time to update our thinking on trade

A Chinese company that once made computer accessories is seeking to rival International Business Machines Corp. as a top provider of big-ticket computer servers in China.

Cumulative appreciation of the renminbi against the US dollar since the end of the dollar peg was more than 20% by late 2008, but the exchange rate has remained virtually pegged since the onset of the global financial crisis.

The government vowed to continue reforming the economy and emphasized the need to increase domestic consumption in order to make China less dependent on foreign exports for GDP growth in the future.

The country’s per capita income was at $6,567 (IMF, 98th) in 2009.

The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978.

The two sectors have differed in many respects.

The technological level and quality standards of its industry as a whole are still fairly low, notwithstanding a marked change since 2000, spurred in part by foreign investment.

Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s.

China now ranks as the fifth largest global investor in outbound direct investment (ODI) with a total volume of $56.5 billion, compared to a ranking of 12th in 2008, the Ministry of Commerce said on Sunday.

In 2009, global ODI volume reached $1.1 trillion, and China contributed about 5.1 percent of the total.

It also aims to sell more than 15 million of the most fuel-efficient vehicles in the world each year by then.

Although China is still a developing country with a relatively low per capita income, it has experienced tremendous economic growth since the late 1970s.

Agriculture is by far the leading occupation, involving over 50% of the population, although extensive rough, high terrain and large arid areas – especially in the west and north – limit cultivation to only about 10% of the land surface.

China is the world’s largest producer of rice and wheat and a major producer of sweet potatoes, sorghum, millet, barley, peanuts, corn, soybeans, and potatoes.

Hogs and poultry are widely raised in China, furnishing important export staples, such as hog bristles and egg products.

Coal is the most abundant mineral (China ranks first in coal production); high-quality, easily mined coal is found throughout the country, but especially in the north and northeast.

There are large deposits of uranium in the northwest, especially in Xinjiang; there are also mines in Jiangxi and Guangdong provs.

Hydroelectric projects exist in provinces served by major rivers where near-surface coal is not abundant.

Although a British crown colony until its return to Chinese control in 1997, Hong Kong has long been a major maritime outlet of S China.
Rivers and canals (notably the Grand Canal, which connects the Huang He and the Chang rivers) remain important transportation arteries.

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Edward Snowden is Good Business For This Chinese IBM Rival

Author: Hagen Koo, University of Hawai‘i at Manoa

Park Geun-hye, the current president of South Korea, pledged to rebuild the middle class and increase its size to 70 per cent of society, as part of her 2012 campaign. South Korean observers agree that this was an effective political strategy which greatly contributed to her election. In South Korea, as in many advanced economies, a major political discourse has emerged over economic polarisation and the declining middle class.


This is a far cry from the situation of two or three decades ago. South Korea is one of the ‘gang of four’ East Asian countries that achieved rapid economic growth while maintaining a relatively equitable income distribution. By the early 1990s, South Korea’s middle class had expanded vigorously, with as much as 70 per cent of the population identifying themselves as belonging to the middle class.

But this began to change in the mid-1990s. The major turning point was the Asian financial crisis that arrived in South Korea in 1997. It had devastating consequences for the economy and for the livelihoods of the working population. A huge number of people suffered from layoffs, early retirements and business failures, and many middle-class people experienced downward mobility. But the consequences of the financial crisis were uneven. While the majority of working people suffered tremendously, those who possessed financial resources took advantage of credit-scarce market conditions and came out of the crisis richer than before.

So, economic inequality increased noticeably during and after the crisis. South Korea’s average Gini coefficient — a measure of inequality — for 1990–1995 was 0.258, but with rising inequality its coefficient increased to 0.298 in 1999, two years after the onset of the financial crisis. It continued to increase, reaching 0.315 in 2010.

The same trend can be seen in income distribution: the share held by the top 10 per cent of income holders divided by that of the bottom 10 per cent has increased from 3.30 in 1990 to 4.90 in 2010. The income share of the top 1 per cent of the income pyramid was 16.6 per cent of national income in 2012.

The major sources of increasing income inequality are closely related to the neoliberal transformation of the South Korean economy. The neoliberal reform of the labour market over the past decade and a half produced a sharp cleavage between regularly employed workers on standard contracts and irregularly employed workers (those who are limited-term, part-time, temporary or dispatched). The latter group increased from 27.4 per cent of the working population in 2002 to 34.2 per cent in 2011. This means that approximately one third of South Korean workers suffer from insecure job conditions, receiving only around 60 per cent of regular workers’ wages with no medical insurance, severance pay or company welfare subsidies. The South Korean working class, which used to be relatively homogeneous in terms of the job market and wage conditions, has become internally divided — and this reflects growing income inequality in South Korea.

Another source of inequality is the changing salary system adopted by large South Korean firms. Since the late 1990s, a general trend among South Korean firms has been to discard the old seniority-based salary system and adopt the American style ability-based salary system. With this change, the wage gap between professional and managerial workers and the rest of the workforce has widened greatly. As the South Korean economy has moved towards being knowledge-based, the value of scarce skills and knowledge has increased and globalised business sectors have begun to offer extremely high salaries to attract talent.

Furthermore, in recent years, the significant income disparities that have long existed between South Korea’s conglomerate firms and medium to small-sized firms have become even greater in recent years. South Korea’s top 1 per cent of income earners are most likely to be employed in the leading South Korean conglomerates, like Samsung, Hyundai and LG, which have grown into truly world-class companies and become very profitable.

Finally, in South Korea, as in most societies, wealth inequality is much larger than earned income inequality. In 2012, the top 10 per cent of the population possessed 46 per cent of the country’s total wealth. The bottom 50 per cent possessed only 9.5 per cent. This wealth inequality initially developed during the earlier period of rapid economic growth (1970s–1980s) and emerged primarily from the booming real estate market. But in recent years, the stock market and other financial investments have replaced the real estate market as the major means of wealth accumulation.

The prospects for declining economic inequality in South Korea in the near future are very dim. Despite her campaign pledge, Park Geun-hye has done little to attack institutional sources of widening inequality like tax policies, the dualistic labor market or welfare policies. The most recent statistics released by a government source indicates that as much as 73 per cent of Seoul residents identified themselves as belonging to the ‘lower middle class’ or ‘lower class’.

Hagen Koo is a Professor of Sociology at the University of Hawai‘i at Manoa.

This article is part of an East Asia Forum miniseries examining inequality in Asia.

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Inequality in South Korea

Author: Peter Drysdale, Editor, East Asia Forum

The G20 summit in Brisbane in November this year will be held, almost to the day, on the sixth anniversary of the first summit in Washington in 2008. The leaders’ level meeting was born in a time of crisis and panic, with the world economy facing the danger of a total collapse of the financial sector in the United States and its inevitable spread to the rest of the world. While there are still deep problems in the industrial economies of Europe — with massive unemployment levels, especially among the young, and most economies barely on the mend — the United States is steadily moving out of recession and global economic confidence is on the mend.

How has the G20 assisted global recovery and what’s its future with the restoration of global economic stability?

There’s no way, of course, of easily estimating the impact of the G20 on global economic outcomes over the past five years. But most observers would agree that the combination of decisive action by the US Federal Reserve and Treasury, the G20 commitment at the Washington meeting not to raise trade barriers, and then the signal at the April 2009 London meeting of broadly concerted fiscal expansion and a green light for tripling the ‘firefighting’ capacity of the IMF, all made a critical contribution to turning around expectations and preventing the crisis from sliding into a recession on a scale of that which afflicted the global economy in the 1930s.

The elevation of the G20 to a leaders’ level summit fundamentally changed the structure of global governance. An annual finance ministers’ and central bankers’ meeting of G20 countries was launched after the Asian financial crisis in the late 1990s. It was clear that if the problems of 2008-9 were going to be dealt with effectively, the major emerging economies would need to be engaged. The pre-existence of the ministerial level meeting short-circuited the debate about who would be at the table. The G20 emerged as representative of not only the world’s major economies but also the spectrum of regions around the globe. It has been sufficiently flexible in accommodating other parties that questioning of the group’s legitimacy has died away.

The Ukraine question and developments in Iraq also confront the G20 with its role as a political instrument of global cooperation. A multilateral meeting of leaders provides opportunity as well as challenge in managing the tensions mounting between the United States and Russia over unfolding events in Ukraine or whatever unfolding crisis or instability such as Syria last year and perhaps Iraq this year. These events could, though they need not, cast a shadow over the G20′s possible achievements.

As Kemal Derviş, of the Brookings Institution, and I argue in this week’s lead from the latest East Asia Forum Quarterly, five years after the first leaders’ level meeting, the question now is whether and how G20 summits can really add continuing value to global economic governance now the crisis has receded. ‘There has been a slow but steady global recovery, allowing for a gradual normalisation of monetary policy in the United States and reducing the near panic relating to the euro-zone that prevailed in the past half-decade. This year may witness instability, however, for non-economic reasons, such as the tensions mounting between the United States and Russia and unfolding events in Ukraine or over Iraq’.

How must the G20 adapt to serve its new role?

The main challenge is to create sustainable world growth based on real investment that stimulates total factor productivity gains and provides new, long-term jobs in the value-added chains of the products and services of the future. Laying the foundations for sustained growth through productivity-enhancing reforms is a priority for advanced and emerging economies alike. So too is enabling investment in infrastructure that is productive, especially in emerging markets. The two are closely linked.

It is also time to make sure that key global economic institutions are robust and able to withstand unexpected shocks if and when they occur. Early attempts at reform of established global institutions, such as the IMF and the World Bank, are incomplete and fail to satisfy the requirement that the emerging economies be adequately represented.

More importantly, leaders need to add value, for example, by asking big questions about whether the global trade regime is headed in the right direction, or how to shape a potential investment regime. The scale and structure of the global economy has changed dramatically since the post war institutions were put in place. The nature of international commerce and international capital movements and the presence of large new players like China, India and Brazil mean that the old rules need upgrading or extending. Nor can the global problem of climate change be neglected: whatever the reluctance to acknowledge it, there is a palpable anxiety in the global community, and growing willingness, led by the United States and China who will not be put aside, to do something about it. These are issues on which leaders and the Australian Chair need to give strategic new direction.

As Kemal and I conclude: ‘By far the biggest challenge for each G20 host is the total engagement that must go into providing leadership of the global economy through and beyond the host year. In 2014 the expectations are high that we will see a turning point from the ‘new normal’ to ‘strategically-directed’ G20 summits and hence a new phase in global governance. The task for Australia in 2014 will be to deliver and sustain an emerging sense of strategic direction’.

The essays on the G20 in this issue of EAFQ are based on the book The G20 Summit at Five: Time for Strategic Leadership, the product of a major ANU–Brookings Institution project in the lead-up to this year’s G20 summit. This issue of EAFQ also launches a new feature: four essays on major trends and developments in the region. This feature, Asian Review, will now be a regular in the EAFQ alongside its coverage of a particular theme of importance about Asia’s place in the world.

Peter Drysdale is Editor of the East Asia Forum.

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Can the G20 deliver new direction?

Author: Sijbren Cnossen, CPB

India is at a crossroads in its fiscal history. It has made do for years with archaic systems of excise duties and sales taxes. Now it has the opportunity to introduce a modern goods and services tax (GST) at the central and state level.

There are more than 150 countries with a GST (or ‘value-added tax’) around the world from which to learn. Some of these countries, such as New Zealand, Australia, Canada, Singapore and South Africa, have efficient GSTs with broad bases and (nearly) uniform rate structures. Other countries, such as the member states of the European Union, have more complex VATs with many exemptions and multiple rates. Still, other countries — Brazil is an example — have even more complicated VATs with a manufacturing-stage VAT at the federal level (similar to India’s central excise duties system, called CENVAT), origin-based VATs (exports taxed, imports not taxed) at the state level, and separate taxation of goods and services.

Choosing an inefficient GST could easily cost India at least 1 to 2 per cent of national income due to unwarranted administrative and compliance costs, and avoidable economic distortions. The success of newly-elected Prime Minister Narendra Modi’s fiscal policy rests on making the right choice.

Modi’s vision for market-led growth will require the formation of a single Indian common market in which businesses can source anywhere, manufacture anywhere and sell anywhere. But India’s current indirect tax system is a serious impediment to achieving this goal. Its complexity is baffling and its incidence highly capricious and indeterminate. Of the many expert analyses of the system’s shortcomings, most call for the introduction of a broad-based dual GST levied concurrently by the Centre (CGST) and each of the states and territories (SGST).

Experience indicates that a modern GST without serious flaws can be introduced only once — the first time. Mistakes made at introduction are hard — indeed, almost impossible — to undo. A modern GST requires that all goods and services should be taxed at a single rate. The GST should not be used to influence the distribution of the tax burden, to protect domestic industry, to favour labour-intensive production processes or for any other ‘worthy’ socioeconomic goal. A modern GST is simply a revenue-raising instrument, though this isn’t to say that the revenue it raises can’t be spent on worthy social or economic goals.

A number of principles should be heeded in introducing a modern GST in India.

Firstly, tax empowerment (assignment) should be separated from tax design issues. Both the Centre and the states should be allowed to tax all goods and services under their GSTs, including imports and excisable goods. This would ensure equal treatment, economic efficiency and administrative feasibility.

Following the resolution of the tax empowerment issue, the Centre should proceed to introduce its own GST (modelled after, say, the New Zealand or South African GST) on as broad a base as possible and apply a single, uniform, low rate of, for example, 5 per cent. It would then be up to the states whether to introduce their own GST, with the federal government collecting the revenue and disbursing it, or to retain their own (modified) VAT. This is exactly the way the constitutional logjam was addressed in Canada.

Unprocessed foodstuffs should also be taxed, but the subsidy on publicly distributed foodstuffs could be increased to compensate the poor for the increase in price. If this is not possible, exemption (perhaps in conjunction with the zero-rating of selected agricultural inputs) would be preferable to a zero rate on foodstuffs. Following the introduction of a broad-based GST, the federal government and the states could impose their own excises on smoking, drinking, gambling, energy consumption, polluting and driving, or agree on who should tax what.

Secondly, uniformity of GSTs levied by the federal and state governments is not necessary or desirable. Although uniformity might minimise conflict, ease interpretation issues and generally make life somewhat easier for registrants, doing so would ignore the fact that states have already introduced their own VATs, which differ from each other.

Perhaps more importantly, best-practice GSTs should differ from one state to another. Some diversity (which is not the same as a free-for-all) would still be consistent with a common market if care is taken that interstate exports are freed of state-levied GSTs. Identical GSTs might lock federal and state governments into a system that would become undesirable over time, but which would be subject to a de facto unanimity requirement like the European Union’s —increasingly anachronistic — common VAT directive.

Thirdly, an integrated GST to tax interstate transactions is not necessary. State GSTs should be levied on a destination basis. States would continue to zero-rate exports. Obtaining a refund for the SGST paid would solely be a matter between the business and the state government. In essence, there would be no break in the GST collection chain — the CGST would still be applied. There would be a break, however, in the state cross-border audit trail, but this would be repaired by the Centre’s nation-wide audit trail, as in Canada. In India, the CGST would serve as a central audit agency, which can monitor interstate transactions.

Finally, the new GST needs an accounting approach to monitor compliance. This approach is quite different from the control system currently in place for the CENVAT, which is mainly about classification and valuation: defining manufactured goods by reference to some nomenclature, imputing a presumptive retail value to them and applying the tax rate.

By contrast, under the GST, the tax would be based on actual, not presumptive, prices and compliance control would be exercised through checks on books of account. In other words, auditors are needed, not excise tax officers. The implications of this profound change in organisation and methods should not be lost on policymakers.

Reforming India’s indirect taxation system will no doubt be complicated, but getting it right should be a priority for the incoming government.

Sijbren Cnossen is Academic Partner of CPB Netherlands Bureau for Economic Policy Analysis and Professor of Economics at the University of Pretoria; he is Emeritus Professor at the University of Maastricht (Economics) and Erasmus University Rotterdam (Tax Law) and has held appointments at the universities of Harvard, New York, and Florida.

Excerpt from:
Modinomics will need a modern GST

Author: Susan Banki, University of Sydney

Bhutan is famously known for the unique approach it has taken to measuring its population’s overall wellbeing. ‘Gross national happiness’ (GNH) is a set of criteria that considers sustainable development, support of cultural values, environmental conservation and good governance to offer a nuanced index through which the country judges its success. In recent years GNH has captured the imagination of other bodies seeking to offer positive developmental goals. In 2011, for example, 68 countries endorsed a move by the UN General Assembly to adopt Bhutan’s holistic approach to development.

Bhutanese schoolboys wear typical Bhutanese dance masks as they perform during a cultural event to celebrate the birth date of Bhutan

But the four measures that comprise GNH, while laudable, fail to capture one important element that affects a nation’s residents, and one that is quite relevant for Bhutan: the equal treatment of minority populations. What is less well known is that the GNH narrative has masked a dark chapter of Bhutan’s recent history, a chapter that continues to bedevil a significant portion of the population today. Bhutan’s ethnic minorities have suffered profound mistreatment. While this article focuses on the Nepali-Bhutanese, or Lhotshampa, other groups, particularly the Sharchops, have been equally, if not more, mistreated.

Differences in religion, language and ethnicity are one aspect of the Nepali-Bhutanese issue. The Ngalong, the minority ruling class in Bhutan, are Buddhist and speak Dzongkha, while the Nepali-Bhutanese, who have traditionally resided in the lowlands of southern Bhutan, are primarily Hindu and speak Nepali.

These ethno-religious differences, extant for decades, were highlighted by the Bhutanese government’s growing fears in the 1970s and 1980s that the separatist movements in nearby regions (such as calls for an independent Ghorkaland in an area that included Sikkim, parts of Bhutan, West Bengal and eastern Nepal) would manifest in Bhutan. As a consequence, policies singling out ‘the other’ within Bhutan became oppressive. For example, a centuries-old code of conduct called Driglam Namzha, originally meant to offer guidance on dress and etiquette, was reinterpreted in ways that restricted the language and customs of Nepali-Bhutanese.

By the late 1980s discrimination against the Nepali-Bhutanese took several forms. First, in addition to continuing cultural and linguistic discrimination, the jobs and land-holdings of many Nepali-Bhutanese were taken away. Second, in 1988, a first-of-its-kind census, applied strictly only in the south where Nepali-Bhutanese primarily lived, divided the population, including units of individual families, into different categories of genuine citizens and non-citizens. Finally, beginning in 1989 and continuing through the early 1990s, tens of thousands of Nepali-Bhutanese had their documentation (land certificates, voting records and the like) taken away and left the country. They crossed through India and into Nepal, where between 80,000 and 100,000 lived for more than two decades in refugee camps.

Bhutan’s position is that the Nepali-Bhutanese left willingly, and Bhutanese officials at the time even required those leaving the country to sign forms indicating the voluntary nature of their departure. Nepali-Bhutanese were additionally asked to ‘show their teeth’ in photographs as a way of showing that they were happy to leave.

Yet the stories of those who lived in refugee camps in Nepal belie this narrative, and they speak to a damning expulsion of up to one-sixth of the country’s population. One example of the yearning of Nepali-Bhutanese to return is that even the most vociferous exiled groups for many years sent happy birthday messages to Bhutan’s king and asked for the chance to return home.

Today, Bhutan estimates that 25 per cent of its population is Nepali-Bhutanese. Many live in southern Bhutan and remain in what has been called a ‘liminal legal space’, fearful of losing their jobs, afraid to promote their rights, suspicious of local leaders, and ever wary of having their status revoked. There is little triangulated information about this remaining population because the media do not cover the issue and international visitors to the region are highly restricted. Most information that does exist comes from those who have left. And those Nepali-Bhutanese who now live abroad say that relatives who remain within Bhutan will not discuss these issues by email or telephone for fear of retribution.

What hope exists for the Nepali-Bhutanese? Will those in the country begin to enjoy political representation, freedom of speech and security of status? Will those out of the country have the chance to return? Two things have changed in recent years that could signal the possibility of reform.

First, Bhutan is an emerging democracy. The Fourth King, Jigme Singye Wangchuck, administered structural changes to Bhutan’s laws that officially removed his absolute power as monarch and paved the way for a democratic constitution and elections, which occurred for the first time at the parliamentary level in 2007–08 and at the local level in 2011.

Second, the exiled Nepali-Bhutanese, after spending more than two decades in refugee camps in eastern Nepal, have since 2009 been permitted to resettle — that is, to move permanently to some countries of the Global North which offer citizenship to selected refugee populations. To date, approximately 80,000 Nepali-Bhutanese have moved to resettlement countries such as the United States and Australia, where over time they may be able to make use of access to international power-holders, education and media resources to leverage rights claims concerning the Nepali-Bhutanese issue.

So far, however, no change in Bhutan has been forthcoming. Neither national nor local elections have produced candidates willing to take up the Nepali-Bhutanese issue (despite the election of some Nepali-Bhutanese), and it is a taboo topic in the public domain. Lily Wangchuk, the president of Bhutan’s Druk Chirwang Tshogpa party and a social activist, has noted that formalised structures for public debate have not yet filtered down to the informal realm. This, of course, is where honest discussions about the Nepali-Bhutanese may begin to take shape at some point, but certainly not yet.

And while the Nepali-Bhutanese diaspora in resettlement countries has increased exponentially in recent years, its members are too young to maintain a sole focus on reforms in Bhutan. Websites intended to reach out to Nepali-Bhutanese worldwide currently emphasise resettlement issues, rather than Bhutanese politics. To date, not one Nepali-Bhutanese has been permitted to return to Bhutan.

Many commentators have noted that Bhutan is at the start of a long path towards democracy. It is too early to predict if that path, even if straight and smooth, will permit a space for reflections on the wrongs done to Nepali-Bhutanese and other ethnic minorities and, even more importantly, ways to remedy them. In the short term, it’s worth noting that in the past year the narrative of GNH has taken a back seat to other pressing domestic issues, such as unemployment and corruption. But the issue of ethnic minority treatment is not even on the horizon.

Dr Susan Banki is a senior lecturer at the Human Rights Program, Department of Sociology and Social Policy, The University of Sydney.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘On the Edge in Asia’.

Read more:
Finding a future for minorities in Bhutan’s emerging democracy