Wednesday, 23 December 2009

After Copenhagen, let's focus on governance

I end a series of posts on the Copenhagen climate conference with this one to reiterate why governance has to be at the heart of future climate negotiations. For nearly two decades climate negotiators have been trying to get deals on reducing greenhouse gas emissions but they have largely failed to develop the institutions that would make such deals credible. Any future climate deal will have a combination of emissions reductions or controls, financing, monitoring, and development and transfer of cleaner technologies. While all this is on the agenda for climate meetings, there is a real gap between substantive discussions on emissions and those on other aspects of climate governance. If we have to get beyond the Copenhagen impasse, negotiators, political leaders and ordinary citizens have to recognise the realities of unequal power in world politics. And we have to find win-win strategies for collaboration on technology development, organise more efficient but also more representative coalitions to manage negotiations, and build capacity for better information collection, analysis and exchange.

You can read more in my op-ed for the Financial Express, Climate for a win-win dialogue, here.

Friday, 18 December 2009

Copenhagen offers lessons for climate governance

In an op-ed for the Financial Express today, I argue that the chaos on the streets of Copenhagen and the frustration with the negotiations inside the Bella Center show a mirror to the world of international diplomacy and global governance. For international regimes in general, Copenhagen offers lessons for agenda-setting and participation, negotiations and rule-making, and implementation, monitoring and enforcement of commitments. Read the article here.

Why climate finance negotiations do not move forward

During my week in Copenhagen I was asked to contribute to Opinio Juris, a forum of reputed international law and international relations scholars. I argue that negotiations are stuck because we are unable to break out of the moulds that have defined our positions for nearly two decades. The massive trust deficit that plagues the negotiations can only be broken if we take a more honest approach towards debunking seemingly dichotomous and exclusive positions: a choice of public over private finance; a trap of us versus them stemming out of a fear of competition; and a stalemate over what comes first, commitments or conditionality. Continue reading the article, Red herrings in debates over climate finance, here.

Wednesday, 9 December 2009

Four questions for Copenhagen

The success or failure of Copenhagen will depend not only on the substance of the deal but on the spirit and message of the talks as well. The legitimacy of any climate agreement will depend on answers to four questions:
1. Where will the deal get struck and who will participate?
2. How will commitments be implemented?
3. Who will pay for the sharing of burdens?
4. How will firms and private citizens respond to the signals that come out of the climate negotiations?

My article on the GEG blog, Making Copenhagen count, engages with these questions to highlight the prevailing and potential tensions in climate change discussions. A longer list of my current research on climate change governance (on technology transfer, financing, trade and climate links, monitoring and enforcement) is available here.

Lotteries and poker games in climate finance

Lotteries are games of pure chance. Poker is a game of part chance, part strategy. Climate negotiations hinge on, among other things, creating a pool of finance to share the burden of mitigating and adapting to climate change. The game is not one of a winner taking all by sheer luck, but of who contributes how much to the common pot. No country is willing to act first; doing so would be to fold. Countries are taking a chance on the level of aggregate effort needed to avoid dangerous climate change, but their strategy is to avoid revealing preferences.

The absence of internationally enforceable mitigation commitments means that the burden on climate finance will increase. Unilateral promises will depend on whether sufficient financing is available to achieve the scale of actions needed. So, who will pay, how much, and through which mechanisms? I explore some of the games being played in climate finance and the implications for the Copenhagen meetings in my latest op-ed in the Financial Express, Even climate is about money.

Monday, 30 November 2009

Climate finance - it's still the one

Climate finance is one of the four issues on which a future climate regime will rest (the others being mitigation, adaptation, and technology development and transfer). It will also prove to be the main stumbling block during the Copenhagen meeting on climate change this December.

This weekend came the news that the Commonwealth Heads of Government Meeting (CHOGM) in Trinidad had agreed to UK Prime Minister Gordon Brown's and French President Nicolas Sarkozy's proposal to establish a $10 billion fund to help developing countries reduce their emissions and adapt to a changing climate. The fund, expected to kick in by 2010, is an important step - one more push towards securing at least a political outcome in Copenhagen.

But several issues remain unresolved. The most important is the 'additionality' of funding. This is jargon for the demand from developing countries that funding made available for climate change should be over and above existing allocations for official development assistance. In other words, they do not want climate change finance to simply substitute money intended for education, health and other development aspirations. Today, The Guardian reports that it has evidence that the European Union is trying to delete references to additional funding from the Copenhagen text. The United Kingdom supports additional funding, but even its climate-related aid allocations have come from existing aid budgets, not as extra money. As a clarification, a Department for International Development spokesman said, 'Additional funding for climate change would be made available from 2013...'

At one level, the question of additionality is problematic because it is difficult to distinguish between assistance for general development programmes, say improving water management systems, and activities geared towards climate adaptation.

But the bigger problem is that the funds required are several multiples of what is currently spent (only $1 billion a year on adaptation). On mitigation, too, scholars suggest that at least $50 billion might be needed annually in the form of public financing support (see my paper with Kevin Watkins; Lord Nicholas Stern repeats the point in an op-ed today). But current levels of public financing are much lower (since 1991, the Global Environment Facility has cumulatively provided only $2.5 billion for climate financing and leveraged another $15 billion).

A further problem - and related problem - is the long history of unmet commitments on development assistance, which has resulted in an atmosphere of sheer mistrust and bad faith between rich and poor countries. Moreover, the richest country (the United States) has yet to table any offer regarding climate financing. President Obama admitted at the G8 summit in July this year that the United States had 'sometimes failed to meet its responsibilities so let me make it clear those days are over.' It doesn't look like those days are over yet.

So, why will climate finance prove to be the stumbling block? Because all other actions will be contingent on the available funding. Over the last few weeks, we have seen one country after another offering unilateral commitments to reduce emissions (Brazil; Russia; South Korea; United States) or carbon intensity (China; even India is considering an announcement). Fast growing developing countries are adopting measures that they believe to be in their interest anyway. But any additional actions will depend on additional funding. As one developing country delegate in climate negotiations earlier this year complained, asking poor countries to take on climate-related actions without promised financing was like selling lottery tickets without announcing the prize! Such tickets would not find many buyers, he noted.

Monday, 12 October 2009

No toilet, no bride

Women in rural north India are demanding toilets before consenting marriage. The Washington Post reported today about a 'No toilet, no bride' campaign, whereby parents of girls are insisting that their prospective grooms have toilets in their homes. In Haryana state, 1.4 million toilets have been built since 2005. The local government subsidises the costs incurred.

Globally, some 2.6 billion people do not have access to improved sanitation facilities. In India, alone, that number is closer to 700 million, with a greater proportion of Bangladeshis having access than Indians, even though per capita incomes in India are 1.6 times higher. Women are worst affected by this condition, facing a loss of dignity in conjunction with health problems. In addition there is an economic cost in the time spent to walk to a safe place to defecate or to collect water. In 2006 the Human Development Report argued, '[T]he weak voice of women in shaping spending priorities within the household means that the constituency with the strongest expressed demand for sanitation has little control over expenditures...Empowering women may be one of the most successful mechanisms for increasing effective demand.' The ability to say no to a hand in marriage is turning out to be a significant source of such empowerment.

Supported by the Total Sanitation Campaign, in Haryana the idea has caught on in the popular imagination. A radio jingle teases, 'No loo, no "I do"!' Soap operas are using the the campaign for plot lines. And it seems to be having an effect. Christian Science Monitor reported in May that there was at least one case of a woman who divorced her husband for lying that he had a toilet in his house. According to the local representative of Sulabh International (the sanitation advocacy organisation) in the past four years the proportion of rural households in Haryana with a toilet has reached 60% (up from 5%). The Hindu reports that one-third of these toilets have been built by households under the poverty line.

In his autobigraphy, Mahatma Gandhi recounted a meeting in 1896 with the Rajkot Sanitation Committee. At the meeting, members of the 'untouchable' caste voiced their frustration: 'Latrines for us! We go and perform our functions out in the open. Latrines are for you big people.' More than a century later that message is still not heard widely enough but there are signs of change.

Friday, 9 October 2009

Indian embassy in Kabul attacked

At 0827 hours local time, a suicide bomber detonated a car bomb outside the Indian embassy in Kabul. Today's attack was similar to the one on 7 July 2008, which had cost the lives of two Indian diplomats and about 60 Afghans. This time the casualties were lower (17) but no less unfortunate. Innocent Afghans on a busy commercial street in Kabul paid the price.

Even as investigative agencies gather evidence (the Taliban has claimed responsibility but they might not be the only ones responsible), a few questions arise immediately.

First, is this a reaction to India's growing influence in Afghanistan? The answer is yes and no. Yes, there is certainly concern within Pakistan that India's activities in Afghanistan are giving it 'strategic depth' at a level that makes Pakistan uncomfortable. No, India's development-related activities in Afghanistan cannot be a justification for wanton acts of terror.

India has no military presence in Afghanistan. It has built a 281 KM road that connects the landlocked country to Iran (and by extension to seaports). It has installed a new power transmission line to bring 24-hour electricity to Kabul. In addition, there are projects for building hospitals, women's training, administrative training, hydropower, solar power, etc. (A fuller listing of development activities can be found here.) Unlike other countries which have built fortresses out of their embassies, and despite the bombings last year as well, India has refused to move its embassy out of a commercial part of Kabul. India believes that a simultaneous and fuller engagement in many sectors of Afghan society and economy is a more constructive approach to nation building than merely military activities.

Many argue that this is mere hogwash, that India has ulterior motives in giving more than $1 billion in aid and that this is just another segment of the Great Game. At one level, this is an obvious point. All official development assistance has explicit political purposes. No one can dispute that. Further, all countries have intelligence assets in regions where their national interests are affected, including in friendly countries. The question should not be whether India has interests in Afghanistan, but how is it exercising its influence? To suggest that development assistance has political motives would imply that diplomatic contact between sovereign states cannot ever be possible without hints of political suspicion. More importantly, there is a tendency to paint the actions of different countries differently. Thus, NATO/western assistance is meant to 'win hearts and minds' whereas Indian assistance is called 'meddling' in Afghanistan's affairs. Diplomacy is the art of finding common interests. The explicit Indian and Afghan position is that it is mutually beneficial for both countries that India engage in development activities there rather than put troops on the ground. This is why India's activities in Afghanistan cannot be equated to NATO's; nor can terrorism against Indian civilians (diplomats as well as private workers, road-builders, engineers, medical personnel, teachers, administrators) be justified.

A second question: do these attacks prove that India (and Kashmir) must be roped in an Af-Pak strategy? This was the original plan of the Obama administration. But there is a serious risk in linking Kashmir to the Af-Pak issue. Just because groups linked to the Taliban are tactically deployed in Kashmir does not make it the same problem. Linking the two would be only a short-term military tactic; it would not resolve the underlying political factors that drive the two conflicts. The administration believes that resolving the Kashmir problem (or in the least easing tensions between India and Pakistan) would free up Pakistani forces to fight the Taliban on its western border. But this would not necessarily increase political stability in Afghanistan. The Af-Pak border has never been accepted by the Pashtuns, an ethnic-political grievance that has taken on religious dimensions. That is a political issue that Pakistan and Afghanistan would have to resolve together - and it is going to be a long process. Kashmir has nothing to do with it. That does not mean that Pakistan's tensions with India do not distract it from the Afghan war effort. The point is that the problems are different and need different political solutions. What is militarily imperative in the short term is not a long-term political solution.

Saturday, 26 September 2009

Foreign students keep flowing into Australia

The attacks on Indian students in Australia do not seem to have dampened the flow of students to the country. China Daily reported this week that China and India were the biggest source countries for foreign students studying in Australia. Until June 2009, Australia was hosting 146000 Chinese students (an annual increase of 16% for the past six years) and 121000 Indian students (up by 46% during the same period). Together, these students contribute 38% to Australia's international education sector worth nearly USD12 billion. But, since the numbers are only until June, next year's intake would reveal if there has been any real impact of the attacks. Education services are Australia's third largest export, so the government should be keeping a close watch on the numbers.

Monday, 3 August 2009

China doubles wind power capacity

At the end of 2008 China had an installed wind power capacity of 12.2 GW (behind the United States with 25.2 GW, Germany with 23.9 GW and Spain with 16.8 GW). Today China Daily reports that it has added another 11.8 GW of wind power capacity in the first six months of 2009, a year-on-year growth of 101% by end-June.

Meanwhile, in remote Gansu province in China's northwest construction has begun on the country's first 10 GW-sized wind power plant. The Jiuquan Municipal Development and Reform Commission projects that capacity could increase to 20 GW by 2020, making it the largest wind power station at a projected cost of $17.6 billion. If it succeeds, municipal authorities claim, it would rival the 18.2 GW Three Gorges Dam, thus fulfilling their dreams of building a 'Three Gorges on the Land'.

Saturday, 1 August 2009

Rating the raters

Kevin Gallagher writes in an excellent piece in the Guardian that credit rating agencies are getting away with little more than a 'slap on the hand'. To summarise:
1. Credit rating agencies have skewed incentives because the owners of financial assets also pay the agencies to rate them
2. The agencies face little competition: three cover three-quarters of all ratings
3. They consistently fail to predict defaults and face no accountability for their lapses
4. Worse, their response in post-crises situations is more questionable, threatening to downgrade any country embarking on an expansionary fiscal or monetary policy.

In the past decade credit rating agencies have failed remarkably on at least three occassions. The question is whether new regulation to govern the financial services industry will monitor and appraise the performance of the raters as well.

Monday, 20 July 2009

G8, G17 or G192?

Last week I wrote a column about the G8 summit in L'Aquila, Italy and the climate change discussions that were held there under the Major Economies Forum umbrella (comprising 17 economies). I argued that for the climate negotiations to succeed, much greater levels of trust is needed between developed and developing countries. And in order to build such trust, I suggested that joint activities are needed more than ever - activities to develop and diffuse technologies, to collect and share satellite-based emissions information, or cooperation to reform multilateral financial institutions.

I received a range of comments, some of which focused on the need for sticks and carrots, some of linkages between climate and other regimes, others on domestic politics, and finally on the issue of trust. Let me elaborate a bit on these points.

Carrots and sticks are of course necessary. The main carrot is financing but the U.S. has yet to put something on the table, something that Obama acknowledged in L'Aquila. So, China and
India are playing a wait-and-see game. Another carrot is through access to markets, particularly in environmental goods and services (already a $500bn market). But we're not going to get a deal on that without a comprehensive conclusion of trade talks under the Doha Round.

Meanwhile, the sticks could also be employed through linkage with other regimes, particularly trade sanctions. But that would raise the threat of protectionism, in the least, and make the trade regime ungovernable, at worst. More on this in a future post.
Therefore, in addition to the carrots and sticks approach, there is a need to shift domestic politics in developing countries, a point I have been trying to push via the technology and renewable energy investments route. I am just sceptical (given India's WTO experience) whether the interests in favour of curbing emissions will line up that easily. In the WTO case, the interests that benefited from participation in the trade regime realised it post hoc, not during the Uruguay Round negotiations. Similarly, there will be interests in the new energy sectors that would benefit from a higher carbon price, stronger regulation on emissions, cap & trade, etc. But I do not yet see a strong enough lobby to shift the official position. It has not moved beyond the
North-South posturing.

Trust is not a fluffy term. In international relations, it is the basis for any agreement, no matter how we line up the incentives. The question is how we build trust. I see joint technology development (with public-funded R&D and of course private investments, like GE's investments in China on cleaner coal tech) as one of the ways forward, so that the win-win benefits become more obvious to the actors. Otherwise, the competitiveness concerns of individual economies could overwhelm the public good benefits of responding to climate change.

Ultimately, the G8 or the 'G17' cannot substitute for the G192, namely the full membership of the United Nations for a comprehensive deal on climate change. Smaller negotiating groups might deliver a bargained outcome (although they failed to do so in L'Aquila). But such an outcome will neither enjoy trust nor legitimacy in the wider international community, unless an inclusive process engages with the wide range of governance issues plaguing the climate regime, from negotiations to implementation to monitoring and enforcement.

Friday, 12 June 2009

Growth, energy and climate change - no easy reconciliation

In her speech to Parliament last week, President Patil declared that one of the top priorities for her government would be ‘energy security and environment protection’. The intention is commendable. India and other developing countries face a triple challenge of increasing income growth, building energy infrastructure and confronting climate change. Reconciling these challenges would depend on financing, regulatory and institutional reforms, and international cooperation. Continue reading my article, published today in The Financial Express, here.

Monday, 11 May 2009

China's cleaner coal surge

It was only yesterday that I was giving a lecture on the need for 'cleaner coal' investments in China's power infrastructure, to raise efficiency and reduce emissions. Today the New York Times reports that China has overtaken the United States in its quest for building more efficient coal power plants.

Although the average efficiency of the U.S. plants (40%) still exceeds China's (29-30%). The best plants can reach up to 44-45% efficiency, cutting emissions by a third. More interestingly, by scaling up the investments, China is managing to generate cost efficiencies as well: an ultra-supercritical plant now costs a third less in China than a low efficiency plant in the United States.

Of course, there are many other ways to improve efficiency as well. As the International Energy Agency reported on China recently, rational mining, modern management practices, matching fuel quality to users' specifications, and reducing losses during transport can deliver efficiency gains along the supply chain.

A point of contrast with India is that China's higher efficiency plants are coming on stream towards the tail end of a decade-long building boom. As the economy slows, the pace of new (more efficient) plants will also reduce. India is about to embark on a similar journey of huge investments in the power sector (its coal power capacity is about 87GW, which has to rise to 440 GW by 2032). India has a chance to upgrade to higher technology plants from now itself, rather than locking itself in poorer infrastructure for another three to four decades.

For both China and India to deploy cleaner coal technologies, we would need an international agreement that encourages investments in such technologies, and facilitates them with public-private partnerships and credible technology transfer arrangements.

Monday, 27 April 2009

Powering a change - cleaner coal technologies for India

Is it possible for India to make a significant contribution towards mitigating climate change without undermining its growth and poverty-reduction imperatives?

Indian policymakers view calls for reducing India’s greenhouse gas emissions as both illegitimate and a threat. They are illegitimate because rich countries are primarily responsible for the historic stock of emissions. The calls are a threat because curbing emissions could undermine growth, necessary to lift millions out of poverty.

But the fact remains that despite historically low per capita emissions, India will increasingly become a major source of emissions. Developing countries (led by China and India) will account for three quarters of the projected increase in emissions up to 2050. Unless developing countries’ emissions are also stabilized by 2020-25, any meaningful action by rich countries would be negated.

The transfer of cleaner coal technologies to India holds one of the keys to reconciling these competing concerns.

Continue reading my latest article, on the transfer of cleaner coal power technologies to India, which has been published in Indian business newspaper, Mint.

Saturday, 4 April 2009

Climate cleavages

This week the G-20 leaders met in London to discuss the global financial crisis, which is set to dominate the international agenda for some time. A parallel debate has been under way here in Bonn on another financial question, which affects an even greater systemic crisis: the funding required to tackle global climate change.

Click here for my op-ed on the state of climate finance negotiations, published in The Indian Express today.

Thursday, 2 April 2009

Bonn climate meetings 3 - Trust, but verify - and comply

A more technical but hugely important issue in climate negotiations is measurement, reporting and verification (MRV). Monitoring what states are doing and whether their actions meet their commitments is a fundamental basis for international cooperation. There can be no credible global agreement unless there is trust that countries will comply - and that trust is contingent on monitoring mechanisms that can notify non-compliance and identify deliberate cheating. In the climate regime, MRV is meant to serve that purpose.

I have been listening to negotiators and experts outline their positions on the issue. Meanwhile, the Pew Center on Global Climate Change organised a side-event today to launch a new report by Dan Bodansky (international law professor at the Georgia School of Law and a former negotiator) and Clare Breidenich (a former State Department official who has also worked at the UNFCCC Secretariat). The paper explains in great detail the existing provisions -and challenges - for MRV for different parts of the climate regime: greenhouse gas inventories, trading of emission permits, mitigation actions by individual countries, and financial and technology commitments.

Since I know something about monitoring and review processes (a.k.a. my doctoral thesis!), I think there are four big questions that have to be answered.

First, what needs monitoring? Developing countries argue that MRV primarily applies to `quantified emission reduction commitments´ of developed countries. Developed countries it is important to measure the actions of developing countries as a condition for financial transfer to them. In other words, even if developing countries do not take on specific commitments to reduce emissions, their `nationally appropriate mitigation actions´(NAMAs) should be reported. In turn, developing countries point out that their NAMAs are contingent on support from rich countries. And so the debate goes on. There were a lot of references to chickens and eggs in the discussions.

Second, how do we overcome the capacity constraints in building monitoring systems? Reporting on their emissions accurately and regularly would impose a huge cost on developing countries. Until now the funding made available to poor countries to build monitoring capacity at home has been woefully inadequate. If data is collected from other sources, by international organisations or by NGOs, then serious issues of sovereignty arise.

Third, how would assessment and verification happen at the international level? Once the data on emissions, policies and actions, and financial and technological flows have been reported, it has to be independently verified. Currently, the climate regime checks whether developed countries follow international guidelines when preparing their reports - the actual data is not verified. For other actions, the procedures are even weaker. And developing countries' data is not verified at all. Going forward, these procedures would have to be strengthened to increase all-round confidence in the system.

Fourth, how would MRV help in promoting compliance? Verification is a technical process; reviews are inherently political. This is the elephant in the room, which is being sadly ignored. In other regimes, say WTO and the IMF, monitoring procedures have suffered precisely because developing countries have felt that they do not have adequate influence in promoting compliance by rich countries. What is the point of extensive and expensive procedures for generating information if enforcement is still affected by the power asymmetries between member states? In the climate regime, too, compliance and enforcement have been weak. If developing countries secure guarantees for financial and technological transfers, they would want effective compliance review as well.

The climate regime certainly needs robust monitoring. But it will fail in its objectives if there is no clear endgame. Trust yes, verify yes, but also comply.

Tuesday, 31 March 2009

Bonn climate meetings 2 - Climate financing and four-letter words

I spent much of today attending plenary sessions and 'side-events' on financing and technology transfer. It is easy to get lost in the rhetoric that envelopes the debates. I have seen this happen so many times in trade negotiations, and am witnessing the same in climate talks. But the essential issue is this:

1. The climate change problem is real to which there could be two responses: either countries can try to mitigate the problem by reducing greenhouse gas emissions (the world needs at least a 50% cut in emissions by 2050 to restrict average temperature increases to 2 degrees Celsius); or countries can adapt to an already changing climate, which means changing agricultural practices, building flood defences, preparing for sharp changes in water availability, etc. In practice, both mitigation and adaptation are necessary and sometimes the activities cannot be easily distinguished.

2. In order to do so, all countries need money and access to new technologies. Developing countries argue that since they played no part in creating this problem, they should receive funding from developed countries. The UN Framework Convention on Climate Change recognises this obligation of developed countries, in principle.

The consensus ends there and the debates begin.

1. The first issue is the amount of funding required for techology research, development, deployment and diffusion (or RD3 in the jargon). Estimates vary wildly. For mitigation, the spending is anywhere between $70 billion and $165 billion a year; and additional funding of $262 billion to $670 billion is needed. Adaptation spending is about $1 billion a year when some estimates suggest $86 billion are needed. Thanks to such a wide range, one NGO representative told me that developing countries are hesitating to put any specific estimate in their proposals. Fair enough, but then how do you get a concrete commitment and, more importantly, by what standard would you measure compliance? Compliance has been one of the biggest problems with the climate regime so far, and there has been little progress so far to overcome it on the question of climate financing.

2. Where will the money come from? There is a major debate about private versus public financing. Developed countries argue that since much of the technology spending comes from private sources, that would also be the source of funding for developing countries. Developing countries are calling the bluff. They argue that private investment can flow into developing countries only when profits are expected, not when the higher capital, operational and intellectual property costs make a project commercially unviable. Hence, public funding has to cover the difference in costs. As the Indian delegate put it, "If the initial upfront capital investment and lifetime expenses [of a clean technology project] are positive, then developed countries must recompense developing ones. I'd love to see which are the commercial institutions that will invest in projects that have no return!"

3. Under what conditions will the funding be given? There is a fear that, even if commitments for funding mitigation and adaptation activities were secured, developing countries would be treated as aid recipients, subject to conditionalities imposed by rich donors. Developed countries are, of course, interested in ensuring that the money is spent in a verifiable manner. But poor countries argue that the process cannot be top-down, there has to be a sense of "ownership", as the Filipino delegate noted.

In the end, the debate boils down to the purpose of climate funding. Developing countries, like Uganda, insist that "funding climate change is a commitment, not a donation." For them it is a right, both from a legal point of view and from an ethical one. But the modalities of financial and technology transfer will not be resolved easily. The Indian delegate ended his intervention by asking for grants, not loans: "A 'grant' is a four-letter word in some dictionaries, so I will introduce a new phraseology: we want interest-free, non-repayable transfer of money." The current climate negotiations are meant to conclude in December this year. There will be many more four-letter words whispered under diplomatic breaths before then.

Monday, 30 March 2009

Bonn climate meetings 1 - U.S. setting expectations on climate change?

U.S. climate envoy, Todd Stern, is trying to set expectations on the prospects for climate negotiations. Speaking in Bonn at the climate meetings, he said, 'I don't think anybody should be thinking that the U.S. can ride in on a white horse and make it all work.'

As I have written before, President Obama has already taken steps to move away from the Bush era's almost complete lack of engagement with the climate issue. There is palpable enthusiasm among climate activists about potential U.S. leadership to drive through a global agreement in Copenhagen at the end of this year. Meanwhile, developing countries have announced measures of their own.

But here in Bonn, the first of three major sets of meetings before Copenhagen, the United States is making it clear that ambitious targets for emission reductions will not be politically or economically feasible. 'It is in no one's interest to repeat the experience of Kyoto by delivering an agreement that won't gain sufficient support at home,' says Stern. As always, the United States wants China and other major developing countries to share the burden of cutting greenhouse gas emissions.

Sure, the global economic crisis complicates matters (see my previous blog): climate-friendly investments are not as profitable, and the domestic political economy of distributing the costs of shifting to lower carbon trajectories is complicated further by rising unemployment.

Yet, for all the reality checks, there is still nothing concrete on offer for developing countries. They want specific commitments on financing, technology transfer and adaptation measures. The trouble is that the discussions and the rhetoric focus on targets for emission reductions and the remaining issues are treated more like 'side payments' to induce cooperation by developing countries. Unless the demands of poor countries are elevated to the same status, there is little hope for progress.

Friday, 27 March 2009

Rebuilding global trade, during and beyond an economic crisis

Today the International Centre for Trade and Sustainable Development (Geneva) and the Global Economic Governance Programme (Oxford) published a collection of essays by trade scholars and experts from around the world: Rebuilding Global Trade: Proposals for a Fairer, More Sustainable Future.

In the context of the current economic crisis, the contributing authors propose concrete trade-related actions for the G20 leaders meeting in London next week, outline longer-term reforms for global trade governance, and focus attention on the needs of developing countries.

You can download an electronic copy here. Individual contributions can also be accessed here.

My contribution was on the need for strengthened trade monitoring at a time when there is a heightened threat of protectionism. Trade is one of the first casualties of a global economic crisis. We saw this happen during the Great Depression, after the oil shocks of the 1970s, in the early 1980s, and now the first contraction in global trade since 1982. A reformed and robust trade monitoring system should be among the top priorities for world leaders meeting in London in April and beyond. Continue reading here. I look forward to your comments.

Thursday, 26 March 2009

Reserve Bank of India Governor explains India's response to economic crisis

Central bankers are in the lecturing mode. Soon after I wrote about the Chinese central bank governor calling for a new reserve currency, I came across this speech by the Governor of the Reserve Bank of India (RBI) on how India is managing the impact of the financial crisis.

Addressing the Confederation of Indian Industry today, Governor Duvvuri Subbarao explained that, although India's banking sector had no direct exposure to sub-prime mortgages, India has been hit by the crisis because of its 'rapid and growing integration into the global economy'. India's trade (merchandise exports plus imports) to GDP ratio increased from 21.2% in 1997-98 (when the Asian financial crisis hit) to 34.7% a decade later. More significantly, India's financial integration with the global economy has accelerated: the ratio of total external transactions (current and capital account flows) to GDP jumped from 46.8% to 117.4% in the same period.

The financial and real economies in India have had to take the blow. Since a large proportion of corporate investments was financed by incoming capital flows, the global credit crisis has badly hit Indian firms. Demand from India's major export markets (US, Europe and Middle East) has slumped simultaneously. The dominant services sector will see slow growth. And remittances have fallen.

India responded with a relaxed monetary policy and a fiscal stimulus. On the monetary policy side, the RBI reduced interest rates, reduced bank reserve ratios, relaxed external commercial borrowing for firms, allowed non-banking financial companies (NBFCs) and housing companies to tap into foreign debt. RBI also established a rupee-dollar swap facility to help banks with their short-term funding requirements. More importantly, it has established exclusive refinance facilities with increased resources for vulnerable sectors: micro, small and medium enterprises, the housing sector, the export sector, and NBFCs (plus a special purpose vehicle for the latter).

On the fiscal side, the government used emergency provisions in the Fiscal Responsibility and Budget Management Act to offer stimulus packages in December 2008 and January 2009 (amounting to 3% of GDP). The stimulus includes funding guarantees for infrastructure, indirect tax cuts and support to exporters. (The government has also offered farm loan waiver package and is hoping social safety nets like the rural employment guarantee programme will insulate the poor, but it is too soon to tell.)

The RBI expects these strategies to succeed. For the moment, although bank lending rates have dropped, bank credit has not grown as fast as in previous years and not fully cushioned the impact of lower NBFC lending. But Governor Subbarao expects that with the refinance facilities, lower interest rates and higher government spending, India will be able to manage its balance of payments. He remains optimistic that 'once the global economy begins to recover, India's turn around will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential.'

China wants a new international currency

Last week I blogged that China is concerned about the value of its investments in US Treasuries. This week, Zhou Xiaochuan, the governor of the People's Bank of China, proposed a new international reserve currency to replace the U.S. dollar. The full essay can be found here.

Zhou's main argument is that countries that issue reserve currencies face a conflict of interest: between their domestic monetary policy goals (inflation targeting) and the demand for the currency abroad. So, inflation-control measures at home would not meet international demand and, as China fears now, fiscal stimulus measures at home could create excess liquidity in global markets and reduce the value of Chinese dollar-denominated assets. Instead, Zhou argues that an international reserve currency would eliminate the 'inherent risks of credit-based sovereign currency' and allow the IMF to 'manage global liquidity'.

Zhou wants the IMF's Special Drawing Rights (SDRs) to be given an expanded role. (SDRs were created in 1969 to bolster official forex reserves, to be allocated to countries based on their IMF quotas. But their use has fallen since the collapse of the Bretton Woods fixed exchange rate system in 1973.) In the short to medium run, Zhou's plan would include: an increase in SDR allocations; a settlement system between SDRs and other currencies; greater use of SDRs in international trade; new financial assets denominated in SDRs; and SDR valuation based on a basket of currencies of all major economies, not just the four currencies used today. In the longer run, centralised management of the reserves of IMF member countries could mean that SDR allocations would eventually replace existing reserve currencies.

The dollar briefly fell 1.3% against the euro yesterday after Tim Geithner, U.S. Treasury Secretary, said that the U.S. was 'quite open to that' idea. He cautioned, however, that greater use of SDRs would be an 'evolutionary step', not a move towards 'global monetary union'. The U.S. insists that the dollar is still the world's dominant currency.

Given China's losses on investments in other currencies, at least in the near future China will still hold much of its reserves in dollars. And despite the proposal, calls for China to raise domestic consumption and stop artifically holding the renmimbi down to boost its exports are not going to get drowned out any time soon.

China in Africa - staying in or getting out?

The New York Times reports that, thanks to the global economic crisis, China is becoming more hesitant with its investments in Africa. With falling commodity prices and unstable political environments in some countries, the Chinese are apparently driving a hard bargain. But the government still wants to take a long view.

The Times's report focuses on Guinea, the West African nation awash with mineral deposits, especially bauxite and iron ore. In the current climate, China (according to its Ambassador to Guinea) finds the political situation 'not stable' and the international markets 'not favourable' for billions of dollars of investments in Guinean infrastructure in return for access to its minerals. Instead, China is building a 50,000-seat stadium in Conakry, the capital.

Similarly, a $9 billion deal struck in 2007 with the Democratic Republic of Congo (copper, cobalt, tin and gold in return for roads, railways, dams and schools) is stuck. Chinese investments are in the form of minerals-backed loans , so falling commodity prices means higher debt burden for African countries and lower potential investments by Chinese companies. Unlike until a year ago, when China was pouring billions of dollars into Africa, it is now making clear that large infrastructure projects are 'not gifts, but investments'.

But the story is more mixed than it seems. Ngaire Woods, professor of international political economy at Oxford, reports in a recent BBC documentary that even as Chinese companies are exiting Africa, the Chinese government is staying put. China's banking system is 'awash with liquidity' and the government has a strategy for using nearly $2 trillion in foreign exchange reserves. One such strategy is to buy mineral assets at low prices. In the same programme, Deborah Brautigam, who researches Chinese investments in Africa, argues that China has past experience in buying mines (like a copper one in Zambia in 1995) at 'bargain basement prices'. It is now looking for similar opportunities. Brautigam quotes the President of the Chinese Ex-Im Bank: 'We have a very long-term view...we're in Africa for the long-term...we have increased our reserves at the Ex-Im Bank.'

Postscript: Meanwhile, other continents might not be as welcoming. Chinalco (the state-owned aluminium company) wants to invest $19.5 billion in Rio Tinto, an Anglo-Australian mining giant. Although Australia's competition commission approved the deal yesterday, there is a stir among some Australian MPs that Chinese investments in Rio Tinto (and other mining companies) would be against Australia's national interest. (They draw inspiration from China's own rejection of Coca-Cola's bid for Huiyuan Juice.) Australia's Foreign Investment Review Board is now putting the deal through 'national interest' compliance tests. Tit-for-tat protectionism is on the rise.

Monday, 23 March 2009

Where is Sweden on the map?

Last Thursday, the U.S. House of Representatives slapped retroactive taxes of up to 90% on bonuses for employees earning more than $250,000 at companies which received more that $5 billion of government aid. The Senate is also working on a 70% tax on bonuses at companies beyond the financial sector. By Friday howls of protest had gone up, some justified (about the arbitrary design of the tax and its unintended consequences) and others not so much. In the latter category fell those who are happy for the banks to be bailed out but unhappy to take any share of the responsibility. "Is this Sweden?" some screamed (on Facebook and other online forums), a reference to the Nordic land's high tax rates.

Well, not really. Sweden has actually refused to bail out one of its biggest companies, Saab Automobile. In February, Saab's owner, General Motors, set out a plan to phase out the brand by 2010. Most of Saab's 4000-odd Sweden-based workers come from Trollhättan. The centre-right government does not want to set a precedent by bailing out one company, even as important as Saab. The government is annoyed that GM has let Saab stagnate and is now trying to pass on the costs to the Swedish taxpayer. In the absence of a viable business plan, the government is saying no (or nej, as the Swedish case may be).

But the Swedish government's bailout package of SKr5 billion for the automobile industry (which employs 150,000 in a country of 9 million) is not that pristine either: to qualify for state aid, companies like Saab would have to shift production back to Sweden from other lower cost countries. Swedish jobs for Swedish people, etc. etc. Haven't we heard that before?

Coming (back) to America, the Detroit automakers are meanwhile happily using bailout cash to offer discounts and low-interest loans to attract customers. Such strategies are aimed at keeping the assembly line moving and maintaining market share, even though they hurt profits as well brand value. Chrysler is now giving incentives of up to a fifth of the average sticker price and GM is planning more promotions. In short, the strategy is: take public money (already $17.5 billion and more being demanded), pay it back to the public (with discounts) to increase sales, pretend commercial viability, and do little about real restructuring. The auto companies might be in for a nasty surprise when the public realises this. More punitive taxes? Watch this space.

Monday, 16 March 2009

Keeping it in the family

How ubiquitous are political dynasties? In India we often talk of politics as a family-run business. But India is no exception.

I was struck today by an article on the stranglehold of dynasties over Japanese politics. An astonishing 40% of legislators from the Liberal Democratic Party are descendants of former legislators. Given that the LDP has governed Japan for much of the period since 1958 onwards, the political power of family dynasties has entrenched itself into the machinery of the state. Shinzo Abe (who resigned as Prime Minister in 2007) and Yasuo Fukuda (who resigned from the same post a year later) are the grandson and son, respectively, of former Prime Ministers. Shinjiro Kouzumi, the son of another PM (Junichiro) is contesting a seat that has already been in the family for three generations. Edward Lincoln, an NYU professor, found that in the 18-member cabinet of current PM Taro Aso, four members had fathers or grandfathers who had been PMs and ten were children of former LDP lawmakers. A senior researcher at the Tokyo Foundation, Sota Kato, sums up the situation: 'It takes a blood test to get elected these days.'

Australia is not immune either. Former Foreign Minister Alexander Downer's father was Immigration Minister and his grandfather was Premier of South Australia. Current Trade Minister, Simon Crean, is the son of a former Trade Minister. And so forth.

Meanwhile in the United States, according to a recent report by the National Public Radio, 45% of members of the first U.S. Congress had relatives follow them into the legislature. That rate is still high at 10%.

Intrigued, I looked for more data and came across a fantastic paper by Ernesto Dal Bó (Berkeley), Pedro Dal Bó (Brown) and Jason Snyder (Northwestern). They argue that in U.S. politics, 'power begets power': the longer a legislator enjoys power, the greater are the chances that she/he would start (or continue) a political dynasty. If a politician holds power for more than one term, the likelihood of a relative entering Congress in future increases by 70%. Using data for 1972-2004, the authors compute a 'dynastic bias' for different occupations: the odds that both son and father are in the same profession. For legislators, the bias is seven times stronger than for economists, ten times stronger than for doctors, and forty-seven times stronger than for carpenters! I copy below a table (p. 44) of notable political dynasties in the U.S. Congress.

The Indian elections for the 15th Lok Sabha are exactly a month away. The above data and evidence could be easily misconstrued as justification for condoning political dynasties in India as well. Why should we bother to change when even advanced democracies are susceptible to similar degrees of nepotism? The answer: there are 714 million votes at stake.

Are China's assets 'SAFE'?

On Friday the FT reported that Wen Jiabao, the Chinese Premier, was worried about the value of China's investments in U.S. assets. Now we know why.

One reason is that China is the largest foreign holder of U.S. public. Increased fiscal spending in the U.S. to boost the economy (if not backed by spending elsewhere) could lead to inflation and a drop in the dollar's value.

Another reason is how China's investments have fared in the equity markets. The State Administration of Foreign Exchange (SAFE) started diversifying into equities early in 2007 and continued until the collapse of Freddie Mac and Fannie May in July 2008. During this time, some 15% of China's $1800 billion of foreign exchange reserves were pushed into the equity market. According to the FT, the subsequent fall in stock prices means that half the value of China's investments in equities has been wiped out.

To add to the lack of transparency in China's handling of its sovereign funds, SAFE uses a Hong Kong subsidiary to invest in foreign equities (Chinese investors are largely barred from investing overseas). Brad Setser of the Council on Foreign Relations reports that SAFE buys Treasuries both through China and through London. But the latter shows up in U.S. data only as purchases by a UK-based bank, thus understating the value of Chinese investments.

Meanwhile, the China Investment Corporation (the official sovereign wealth fund) has become the target of the Chinese blogosphere thanks to the losses it has incurred on investments in Morgan Stanley and Blackstone (the private equity group).

Are further losses in the offing and, if so, when will China's citizens - and the rest of us - get to know?

Monday, 9 March 2009

Animal spirits, snake oil and big banks - what would you regulate?

Have banks become big by selling snake oil? If so, do we stop them selling snake oil or should we stop them becoming too big?

Robert Shiller wrote a column in Monday's Financial Times arguing that standard economic assumptions about the corrective behaviour of markets do not hold when set against recent findings by behavioural economists. In short: so-called rational agents demand things they want and their collective wants determine an equilibrium price; but there are also times when individuals demand things that they 'think' they want, based on what others are demanding. In such situations, individuals could even end up paying for snake oil if they were convinced enough that others also found snake oil valuable.

Shiller, a Yale professor, argues that, despite buyers not being able to fully evaluate the quality of financial assets, the market has managed to sell the financial equivalent of snake oil because of how the psychology of 'animal spirits' affects economic behaviour. Stories of people making money on, say, securitised mortgages led others to buy and sell these products without proper due diligence. The influence of 'animal spirits' on economic behaviour results in crises on a regular basis. (Shiller is the co-author of 'Animal Spirits' (Princeton University Press, 2009) along with George Akerlof, who won the Nobel Prize in 2001 for his seminal work on asymmetric information in the famous 1970 article, "The Market for 'Lemons'".)

If the above is correct, then the question for a policymaker or a regulator would be either to ensure that snake oil (a.k.a. dodgy assets) is not sold or that no financial institution becomes so big that it has to be bailed out when its own balance sheet is full of snake oil.

Last Friday, I had the opportunity to be a fly-on-the-wall in a closed-door meeting of central bankers, senior investment bankers and policymakers from around the world. They were discussing what had brought the world economy to its current state, what rules would be needed to prevent this in future, and what institutional reforms were needed to govern the new rules. I cannot mention what was discussed, but later I had a chance to pose three questions that I think are also relevant in light of Shiller's column:

1. As a central banker/regulator, is there a rule/principle/trigger that tells you that a bank or non-banking financial institution has become 'too big to fail'?

2. If not, what kind of boundaries would you put around different activities of financial institutions so that insurance companies, say, do not become hedge funds or put their fingers in so many pies that it is hard to distinguish between legitimate and dodgy transactions?

3. And how is the situation further complicated when institutions that previously operated as investment banks have now become deposit-taking institutions?

What do you think? Since many central bankers have previously been investment bankers, I'd especially like to hear from my banker friends. Information asymmetries are always going to hamper oversight by external agencies. So, if you had the responsibility of overseeing a healthy financial system, what would your answers be? Would you look out for animal spirits (individual behaviour), would you look out for snake oil (dodgy assets/transactions) or would you look out for financial institutions that had become 'too big' too soon?

Wednesday, 25 February 2009

Economic crisis complicates climate crisis in more ways than one

California is a leader in the United States when it comes to environmental regulation. But the economic crisis threatens to undermine its climate-friendly plans. The New York Times gives the example of CalPortland, a cement company in Colton, which is struggling to find the resources to retrofit its plant to reduce CO2 emissions. Whereas lawmakers had estimated it would cost $200 million to upgrade all eleven cement plants in the state, now it looks like that much would be needed just for the Colton plant. And with the economic crisis, cement prices have fallen to levels that force a revision of the cost-benefit calculus for climate-related investments.

I think the bigger lesson is that the economic crisis presents policymakers with a "double distributive" burden: the distribution of costs and benefits resulting from a process of decarbonising our economies, complicated further by the loss of jobs and economic opportunities during a severe recession. It's one thing to claim that 'green' jobs can be created; quite another when the pressure of job losses in other sectors builds up. Any economic restructuring would involve distributive questions; this time it's just doubly challenging.

Which brings me to my final point: what happens when developing countries try to reduce their emissions? One feasible pathway for countries like China and India is to increase the efficiency of their coal-fired power plants, using already available improved technologies (more on those details in a few days). While improved efficiency would have economy-wide benefits, it is hard to find good estimates of how the incremental costs of upgrading plants would affect individual sectors of the economy (power generation, cement, iron and steel, etc.). Without such estimates, it would be harder still to measure the distribution of costs and benefits across sectors. And, more importantly, it would undermine developing countries' efforts to secure guaranteed financing from rich countries for technological upgrades.

Sunday, 15 February 2009

The anger - Part II

We've read so much and heard so much about the financial crisis, the banking crisis and the economic crisis. But it's usually a pundit confusing us with more jargon and less clarity.

I wrote last week about the inequality - and the anger - that has pervaded the U.S. economy. But this article is a must-read. This one, The Blow the Working Class Saw Coming, seems more to the point than anything else I've read. And it's by a working class bloke, the people we don't tend to listen to. Iain's article is full of economic insights, disguising the anger that is simmering under the surface. I picked out seven pointers that the pundits ought to be listening to:

1. If you drive through a town after a big factory layoff, you'll notice peeling paint and weeds, the first signs of a community's economic distress, the lesions that warn of troubles to come.

2. The working poor always see it coming, well before the Wall Street analysts and the Federal Reserve wonks. Mark knows that when he makes $8 an hour, and gets a flyer in the mail telling him that he has guaranteed approval on a $40,000 SUV, there is something amiss in the world of finance, a disruption in the force.

3. The people for whom [the crisis] really is urgent have stopped listening [to the TV pundits], and not just because the cable is getting cut off. The problems are simply too immediate for them to pay attention to people who talk about economic theories, about bailouts and tariffs and gross domestic product. In this world, there are actual sheriffs with actual eviction notices. Something needs to be done now, today.

4. This time around [as compared to the Great Depression], we appear to have a class of individuals who think that they should not have to suffer with the rest. Circuit City, currently liquidating all its stores and laying off thousands, asked a bankruptcy court judge to let it give bonuses to executives to convince them to stay for the "wind-down process."

5. I earned $3.35 an hour at my first job washing dishes in 1981, and today, 28 years later, the minimum wage has barely doubled. Congress voted not to raise it for nearly 10 years, while members awarded themselves pay raises on a nearly annual basis. And during the years that the minimum wage was stalled, the pay of a CEO swelled to hundreds of times the wage of an average worker.

6. The people I work with have an arcane belief that money comes from somewhere, that value is added when things are made, and that the only real way to acquire money is to work.

And here's the best one:

7. The people who understand money the best are the ones who don't have it.

Monday, 9 February 2009

When the economy is heading south, where are the young heading?

Two recent news items, one from China and one from India, showcase the challenge of employing millions of graduates in the world's fastest growing, although now much slowed down, economies.

The IMF has revised its growth forecasts for Asian economies in 2009 at just 2.7% (just two months ago it had predicted 4.9% for Asia). China and India are now expected to grow at 6.7% and 5%, respectively. Given that expected growth rates have halved in a year, both countries face severe employment challenges. Already factory closures have meant that 20 million migrant workers in China have been forced to head back into the countryside. India also has to deal with thousands of retrenched workers returning from the Middle East (already some 30,000 have been sent back).

At the same time, skilled workers are not finding it any easier. The story from China is that the government has developed plans to send college graduates into rural areas. Unemployment among recent college graduates is at 12%, nearly triple the national average. So, in Shanghai the government is promising to pay off student loans if they sign up to work in the countryside: 78,000 students have agreed. Beijing municipality says an additional 3,000 will work as village officials this year. The tasks range from working as librarians, handing out health notices, conducting agricultural surveys, or helping to build the local Communist Party organisation. In reality, the young engineers and other skilled professionals have little say in village governance. Despite the boredom, they hope to collect brownie points for future civil service exams. Moreover, they have no other option: the moneyed jobs in the city are fewer and far between.

In contrast to the state-led programmes in China, the story from India points to a growing demand among business school graduates for non-profit work. Investment banks, the graduates' top choice until last year, were offering salaries up to $200,000 a year. Now, among the firms still hiring, offers are 25% lower and there is no guarantee that the students will retain their jobs for any significant length of time. So, business schools are encouraging more students to take up entrepreneurial ventures. But many are also opting for pay cuts and are seeking work in NGOs or volunteering their time with charities. The Financial Times says that the 'mad pursuit of money' has started to slow in India.

Money might not be the sole motivation anymore but that is because there is little to go around in the current crisis. But whether young, skilled workers are being driven into 'development' work by the state (China) or because of their own choices (India), there is an opportunity to harness the talents of the youth for a range of public policy issues. The challenge would be to channel skills into the right jobs; if the only outcome is temporary 'CV-building', then the opportunity would have been lost.

Sunday, 8 February 2009

The anger and the inequality

Two weeks after I wrote a blog on Slumdog Millionaire, I was struck by an op-ed in today's New York Times titled Slumdogs Unite. The article, by Frank Rich (who has been a columnist for the Times since 1994), tries to capture the seething populist anger within the United States against the double standards of Washington. The anger is directed against bankers who continue to receive large bonuses; officials like Tom Daschle who had to withdraw his nomination for Secretary of Health due to overdue taxes; or others like Timothy Geithner, the new Treasury Secretary, who also had a tax issue. But more importantly, the anger could be directed against Obama too if his rhetoric is not matched by his deeds and that of his deputies. Rich makes his point clear:

The public's revulsion isn't mindless class hatred...But we do know that the system has been fixed for too long. The gaping income inequality of the past decade — the top 1 percent of America’s earners received more than 20 percent of the total national income — has not been seen since the run-up to the Great Depression. This is why “Slumdog Millionaire,” which pits a hard-working young man in Mumbai against a corrupt nexus of money and privilege, has become America’s movie of the year.

As I wrote earlier, everyone would like to make good on opportunities. That is the basis of a meritocratic society. Americans are angry because they do not see the merit in the vast inequalities that have developed on the weak foundations of dodgy banker-created paper assets. And even in America, inequalities are not restricted to income: 45 million Americans lack health insurance, African American children are twice as likely to die before their first birthday compared to white children, and there is wide divergence in the life chances of babies born to rich and poor families.

Adam Smith wrote, 'No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.' America is not India, but the anger over unequal opportunities and, worse, over undeserved rewards seems increasingly universal.

Monday, 26 January 2009

The Slumdog Guide to Republic Day

“We are going to enter into a life of contradictions. In politics we will have equality and in social and economic life we will have inequality.” Fifty-nine years after B.R. Ambedkar (chairman of the Drafting Committee) spoke these words to introduce the Indian Constitution to the Constituent Assembly, India is celebrating its Republic Day amidst debates about whether Slumdog Millionaire depicts the 'real' India or not.

Ambedkar knew well that political equality in a democracy was not a sufficient condition for human development more broadly. He was right. As democracy has flourished, so has the political participation and political power of once marginalised groups. Yet, inequality continues to hamper not just the development prospects of the country as a whole but of individual citizens.

The problem is that we don't always think of inequality in the same terms. For many, any talk of inequality raises the spectre of communist redistribution. They ask, 'If everyone's incomes are growing, then why worry?' They note that relative to the 1980s, when India first started enjoying a consumption-driven economic boom, incomes have grown faster in the last decade. Despite the current downturn, the past five years have recorded the fastest growth in national income than any other five-year period in post-1947 India. Such achievements must be celebrated and economic reforms must be credited, strengthened and deepened. Redistribution in a slow-growing economy cannot be a panacea.

But inequality has many other faces, and we need to remember only young Jamal's in Slumdog to know what I mean. Let's take his survival. For director Danny Boyle, the greatest threat to young Jamal's life came from religious rioters and eye-gouging slum lords. For real-world Jamals, disease and malnutrition are often bigger threats. The rate at which child mortality fell in India was lower in the 1990s compared to the 1980s, exactly the period when income growth was surging. A rising tide might lift many boats out of poverty, but it is no guarantee that a boat's passengers would get to shore alive. Again, Jamal's childhood sweetheart, Latika, might have been shockingly left behind when the kid brothers escape ('Theek rahegi woh'), but she would have even fewer chances in the real world: girls are 50% more likely to die than boys thanks to inequalities in access to nutrition and healthcare. Further, when the reel-world Jamal jumps into a pit of excrement to secure an autograph, we cringe. But at least he had access to a pit-latrine. Many real-world Jamals don't: in real-world Dharavi there is 1 toilet for every 1440 residents.

But Slumdog's narrative also offers a glimpse of what addressing real inequalities can achieve. This is not a film about making money - in fact, Jamal doesn't become rich until he wins the gameshow. This is a film about opportunities and how Jamal makes the most of each chance he gets. The millions of Indians who have become part of the burgeoning middle class are proud of what their merit has achieved. But they also made good on the 'basic' opportunities of an immunisation, a functioning primary school, clean water, and a flush toilet. The question is whether Jamal's real-world cousins can also have the opportunities that many of us take for granted. Their lot has much to do with structural inequalities, discriminations and prejudices.

Recently, P. Chidambaram, India's home minister and former finance minister, celebrated Slumdog for showcasing the enterprise and innovation in slums like Dharavi. True. But that cannot be an excuse for ignoring other more basic opportunities like a school, a toilet, a vaccine, and a glass of water. After nearly six decades of the Republic of India, let's celebrate all that we've achieved, despite the odds. Let's also celebrate Slumdog not just for the grit of its protagonist, but for what real-world Jamals with real opportunities could really achieve. They too constitute the 'We' in 'We, the People', the first three words of our Constitution.

First signs from Obama on climate change

The Obama administration has signaled intent on climate-related issues within its first week. The New York Times reported this morning that the new President favours allowing states to set their own automobile emission and fuel efficiency standards, which are sometimes higher than federal standards. California and thirteen other states in the United States wish to regulate tailpipe emissions, but their request had been rejected by President Bush. Obama's memorandum to the Environmental Protection Agency to review Bush's order opens up the possibility that more states will take the lead. Obama has also ordered the Department of Transportation to issue new nationwide fuel efficiency standards, raising them from the current 27 miles per gallon to 35 miles per gallon by 2020.

Another idea is that of a 'smart grid', which would use information technology to manage the flow of power through the electricity grid. The objective is to reduce the irregularities associated with renewable energy sources like wind and solar, thereby actually increasing the potential for their use and also cutting transmission losses. Further, 'smart meters' would monitor energy consumption and are expected to reduce household use by 10-15%. The project has the support of Obama's new energy secretary, Nobel laureate Steven Chu.

But Obama is also insisting on action by India and China. While saying that 'America is ready to lead' he also warned that 'we will ensure that nations like China and India are doing their part.'

India has its own complaints, particularly the unwillingness of rich countries to commit more money to help developing countries adapt to the adverse impacts of climate change. As India's negotiator, Prodipto Ghosh, put it, 'Obama's announcement of US$15 billion a year - for ten years - is significant but is probably far from enough.'

Here lies the real tension. For rich countries, climate change action means the reduction of emissions globally. For poor countries, the responsibility of causing global warming lies with rich countries who should also bear the burden of financial transfers, technology transfers and accelerated action on adapation. As I've written before, these tensions raise many governance questions. Despite Obama's initial signals, 2009 is not going to be an easy road for climate negotiations.