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Reflect

Wednesday, January 6, 2010

China gains more than India from an FTA with Asean simply because it is a much larger exporter of goods than we are. India’s gain, for the moment, is mostly in the diplomatic and strategic domain
reference for Asia’s leading economies was the West. The credit card-swiping American consumer and high-paying Western client firms were the end points for most exporters of goods and services in Asia. But the financial meltdown since 2008 has reconfigured these horizons and brought home the imperative for Asian producers to diversify theirexportmarkets. The Asean-China FTA is driven by this logic. While negotiations on constructing this pact between China and 10 Asean membershadbeeninitiatedasfar back as 2002, they were stalled by legitimate fears in Southeast Asian countries about being swamped by massively subsidised Chinese products. But the great crash of 2008, followed by the Chinese government’s massive stimulus spending package, made Southeast Asia realise that its exporters had a huge market next door. Cambodiaillustratesthisshift. Despite being an old ally of Beijing, Phnom Penh nursed justified apprehensions about becoming commercially disadvantaged if it had to dismantle tariffs on agricultural commodities. Thailand’s farm sector too objected to predatory Chinese agricultural exports of garlic, lychees, oranges and apples capturing the domesticmarketviatheFTA. But the financial crisis overobvious. India is not a major manufacturer or exporter of goods on the scale of China and it enters into this exchange with Asean with a great deal of trepidation about being outclassed by Southeast Asia’s Tiger Cub exporters. A senior Indian official familiarwiththeFTAnegotiationswas quotedinthemediaassayingthat, “Asean will gain substantially from the market access and Asean’s exports to India will increase substantially but our , exports will be modest”. Indian producers of tea, coffee, fish, coconut, cashew and spices are especially nervous that they wouldbedrownedbycompetition from Malaysian, Thai and Singaporean exports. While China looks set to reverse its negative trade balance with Asean via its FTA, India could end up exacerbating its negative trade balance with Asean through its FTA. Interestingly Indian exporters of fruits, , vegetables and grains are not only on the defensive about New Delhi’s pact with Asean but also over Beijing’s FTA with Asean, whichisbeyondtheircontrol. In the latter case, Indian producers had been hoping to make some inroads into the Chinese market and will now face an unwelcome scenario of 10-12% Chinese tariffs on Indian goods while their Asean substitutes enjoy minimal 0.1% duties. WhydidIndiapressaheadwith its FTA with Asean despite this economic sting? The reason is geo-strategic. Several Southeast Asiancountriesarewaryof being Shanghaied into a Chinese dominion that leaves them at the mercy of the renminbi and the Chinese People’s Liberation Army Against the backdrop of a . declining US, Southeast Asia needs a counter-balance to the Chineseempire. Indiaknowsthisandismaking a strategic investment in this subregiontoprojectitsownambition of beinganequaltoChinathatcan offset Beijing in its own backyard justasChinacutsandthrustsinto South Asia. The India-Asean FTA is a strategic reassurance whose diplomatic gains outweigh the economic costs. In fact, even the China-AseanFTAhasunderlying political underpinnings because Beijing seeks through trade to assuage wary Southeast Asia about China’s so-called peaceful rise. The irony of both the FTAs is that they are likely to integrate Asia economically without mitigating the predestined strategic competition between China and India. Peace in Asia remains a chimera but business hardly needstowaitforit. The author is associate professor of world politics at the OP Jindal GlobalUniversity

Free trading Asia

SREERAM CHAULIA
WITH two gigantic Free Trade Agreements (FTAs) entering into effect on New Year’s Day—ChinaAsean and India-Asean—Asia’s economic interlinking has taken off. Asia has for long been divided into self-contained sub-regions like South Asia, West Asia, Central Asia, Southeast Asia and EastAsia.Barringtheinstitution of the East Asia Summit (EAS), there was no formal pan-Asian or continental project that tied key Asianstatesintoanetworkof mutuallybeneficialrelations. Now, Asean’s two path-breakingFTAswithAsia’ssecond(soon to be first) largest economy Chi, na, and third largest economy In, dia,enmeshthefortunesof South Asia, Southeast Asia and East Asia into a mosaic. Together with the currency swap agreements among South Korea, Japan and China, these FTAs signal a definiteturntowardsAsiancountries viewing each other as valuable partners, markets and investors. For decades, the target of

ROHNIT PHORE

rode these naysayers because of sudden loss of Western markets for Southeast Asian exporters. Cambodia’s commerce minister toldXinhuaontheeveof theFTA’s operationalisation last week that his country “has a lot of agricultural products to export and right now China may have more money than the US to buy the goods”. Asean’s other less advanced economies are also expecting an infusion of Chinese investment under the aegis of the FTA, which would help build their manufac-

turingbases. Southeast Asia’s search for alternative sources of capital and markets in the wake of the depressed condition of Western economies was a catalyst for the FTA to finally sail through. Asean’s Secretary General clearly indicated this was the case by remarking that the FTA, which covers a total population of 1.9billionwithacombinedGDPof $6trillion,would“helpeconomies recoverfromthefinancialcrisis”. In comparison to the China-

Asean FTA, the India-Asean FTA encompasses a market of around 1.8billionpeoplewithacombined GDP of over $2 trillion. Only Malaysia, Thailand and SingaporewillimplementtheFTAwith India in the first phase, making it a smaller venture as compared to the megalithic China-Asean pact that could eventually surpass the European Union and give Nafta a runforitsmoney . The reasons for the IndiaAsean FTA being a poor cousin of the China-Asean agreement are

One size doesn’t fit all
Government health initiatives will yield much better results if they are evaluated independently and in context
Mission. The figures for China and Sri Lanka are 45 and 58 per 1,00,000 live births, respectively . With no dearth of government initiatives to ensure better health for all, the natural question that arises is why are these initiatives notachievingthetarget? The main reason why health programmes are unable to achieve the desired outcome is our ‘one size fits all’ approach. Given the social, religious, politicalandculturaldiversityinIndia, centrally sponsored health programmes unfold differently in different states. Therefore, the programmes should be designed inawaythattheyareself-adaptive to the needs of the states. However, some generic characteristics of a successful programme can indeedbescaledupandreplicated acrossstates.Todothat,oneneeds to identify the generic from the specific aspects that makes a programme successful. It is here that we need a thorough impact evaluation of such programmes. Impact evaluations provide quantitativeevidencethatclearly shows what works and what does not. A well-designed impact evaluation must identify the reasons behind success and failure of such programmes, keeping in mind the target group and the specific context. Quantification serves two purposes. It can assist policymakers in taking informed decisions about the effective allocation of scarce resources and it can clearly identify the portions that are scaleable and replicable. Impactevaluationsinvolvethe use of experimental designs in which two groups are randomly selected so that they are the same in every respect except that one has been a part of the programme and the other has not. Such studies establish whether there is a causal chain of events between a programme and observed outcomes. Thus, in order to attribute observed changes to a health programme, one must understand what changes would have occurred in the absence of the programme.Inprinciple,conducting suchexperimentsisonlypossible if abaselinesurveyisdonesothat the system for measuring impact is in place from the start of the programme. One then needs to ‘construct’ a control group that hopefully matches the target group in all respects other than participating in the programme. The role an impact evaluation canplaycanbeexplainedthrough the recently rolled out National Health Insurance Programme or the Rashtriya Swasthya Bima Yojana(RSBY)bythegovernment of India. The programme offers medical insurance of Rs 30,000 to all households below the poverty line (BPL). The ultimate goal of the scheme is to provide financial protection to the BPL households against unforeseen expenditure on medical illnesses. It is important to evaluate the programme because the initial analysis of the baseline data of the below and above poverty line households presents a rather curious fact. From the baseline data of households surveyed in Delhi, it appears that prior to RSBY there was no gap in the health-seeking behaviour of both men and women in the BPL families while more men than women were seeking healthcare in the above poverty line (APL) families. Does this mean that when people have increased financial access, gender bias in accessing healthcareincreases? UndertheRSBY,withinthegiven rate of the packages, a single hospitalisation cannot consume the entire amount of Rs 30,000. It is, therefore, expected that the benefits will be shared within the entire family However, if the . RSBYistreatingmoremalesthan females, then this will be a reason for concern and the programme will have to be fine-tuned. It is to be evaluated if this pattern is uniform across all states or is it specific only to Delhi, to identify the generic from the specific aspects so that the programme can be fine-tuned accordingly . Observations like this, which may prevent scalability would , arise only when the evaluation is impartial,objectiveandfreefrom perverseincentives. A good evaluation is one in which the evaluator is different from the implementing agent so that the assessment is not biased. Ideally ,thedemandforevaluating their programmes should come from the policymakers. The researchers should respond to this demand by informing them about the research that is already available, as well as commit to carrying out research that will help the policymakers fine-tune theirprogrammes. With an objective evaluation framework in place, one can create an environment where policymakers, practitioners and researchers come together to exchange information. This interaction will go a long way in helping programmes achieve their goals and in turn improve the health indicators. Too many new programmes have been announcedlately .Onlyaftertheyare evaluated objectively should it be decided whether they should be continued, scale up or scrapped. Theauthorisfellow,India DevelopmentFoundation

FE-IDF PERSPECTIVES

SONAM SETHI
STATISTICS from the World Health Organisation’s latest report (2009) reveal that India continues to perform poorly on health indicators. For example, the infant mortality rate in India is 57 per 1,000 live births, which for countries like China and Sri Lanka is 20 and 11 per 1,000 live births, respectively The Indian . maternal mortality ratio (MMR) is 450 per 1,00,000 live births and this is despite the focus on MMR under the National Rural Health

EAVESDROPPER
This New Year season was pretty patchy for the government departments that typically see a lot of ‘action’. As explanation, an official in one of these departments pointed to an interesting impact of the meltdown: it has shortened the queues in the visitors’ lobbies of ministers. This trend was also evident in the alacrity with which some of the officials called in the hacks in the morning, unlike most years.

New Year tales-I

Bubbles threaten as China shakes off bank crisis
andfirms’inventoryrebuilding. Theimpactof suchdriving forceswillinevitablytaperoff in 2010.Third,theglobalfinancial marketsremainvulnerableto variousshocksandthe subsequentlossof confidence, asexemplifiedbytherecent Dubaidebtcrisis.Finally ,many governmentsareunder tremendouspressuretoremain solventinthefaceof unprecedented,highlevels of publicdebt. Tomany ,Chinastandsout amongthebrightestspotsinthe globalrecovery .TheChinese economymaywellhaveended 2009withmorethan8%gross domesticproductgrowth. Importshavegainedasdomestic demandremainsstrong.After pricedeclines,bothcapitaland propertymarketsareona dynamicrebound.Asthe backboneof thecountry’s financialindustry ,banksare alsooftenapplaudedforcapital strengthandassetquality ,as wellastheirabilitytoavoida worldwideliquidityshock. Evenwiththisrosypicture, challengesareeverpresentin China.Economicgrowthhas largelybeenfuelledby governmentstimulus,inthe formof surginginfrastructure investmentandamassive increaseinbanklending,nota turnaroundinexports,or ‘organic’consumerdemand.In thefirst10monthsof 2009,banks pumpedalmost9trillionyuan ($1.32trillion)intotheeconomy , markingaYoYincreaseof 34%. Withthestrongreboundin realestateandstockmarkets, structuralbubblesalsothreaten toemerge.Beyondourborders, China’smainexportmarkets remainweak.Although consumerspendinghaspicked upsomeeconomicslack,China’s underdevelopedsocial-welfare systemstillrestrainsdomestic demandfrombecomingamajor partof China’sgrowthstory . Afterthe1997Asianfinancial meltdown,China’sleadership decidedtooverhaulChina’s bankingsystembytaking resolutemeasurestofoster banks’capitalstrength, provisioningcapacity , corporategovernanceand riskmanagement.These effortsledtoasubstantial improvementintheresilienceof individuallendersandthe bankingsectoratlarge. Whenthelatestfinancial crisishitChina,99%of banks’ assetswereheldbylenderswell abovethemandatorycapitaladequacyratio,withlittle exposuretooverseastoxic assets.Suchasolidpositionhas enabledChinesebankstopump liquidityintotheeconomywhen manyothercountrieswere sufferingfromacreditcrunch. Clearly ,banksplayeda crucialroleinachievingChina’s economicgoalsin2009.In2010, theywillcontinuetobe importantinservingthemacroeconomicgoalsof stabilising growth,stimulating buildstrongbuffersinthe bankingsystemtocovercapital, liquidityandprovisioning.For thispurpose,wehaveadheredto sometraditionallimitsand approachesforprudential regulation.Theselimitsand approachesmaylookbasicor simple,buttheyhaveprovento beeffectiveincarryingbanks relevantprojectfinancing. Similarly ,whenwefoundbank loanswerechannelledintothe propertyorstockmarketsfor speculativetrading,westepped intostopthat. Inthemeantime,banksare encouragedtodirecttheir lendingtoboostconsumer spending,supportrural developmentandqualified SMEs,improvehealthcareand thesocialsecuritysystem,and facilitatepollutionreduction andenergysaving. Someof theseareuncharted waterstobanks,butmanyhave provedsuccessfulinturning once-ignoredmarketsinto goldmineswhilekeepingrisks undercontrol.Theseeffortswill accumulateintoapotentdriving forcetoenablebalancedand sustainableeconomicgrowth. Inretrospect,China’s economyandfinancialindustry haveweatheredthestormwellin thepasttwoyears.Itwasn’t throughluck,butbylearning fromthepast.Criticsoftensay theonlythinghumanslearn fromhistoryisthathumans don’tlearnfromhistory .Itis timetomakeachange. Theauthorischairmanof the ChinaBankingRegulatory Commission Bloomberg

LIU MINGKANG
THEworstof thecrisisseemsto beover.Whenwelookbackat 2009,encouragingsignsof economicrecoveryare emerginginbothdevelopedand developingmarkets.Yet,when welookahead,uncertainties andchallengesloomlargeon manyfronts. Signssuggestingrecovery includeapick-upinglobal manufacturing,thegradual reboundinworldtrade,aslower paceof joblossesinsome advancedeconomies,andthe resurgenceof stronger domesticdemandinanumberof developingmarkets.Still,there aresomeimportantobstaclesto ameaningfulrecovery . First,progressisstillfairly unevenacrossmanyregionsand industries.Second,the resurgenceof growthismainly accountedforbygovernments’ ‘quantitativeeasing’policies, unconventionalfiscalstimulus,

Delhi’s blinding fog extracts a higher cost than just harrying passengers. Planes are having to wait for a long while after landing to find a parking slot, such is the congestion that builds up. DGCA rules require pilots to keep engines running until they have reached their parking spot. At least one pilot estimated that he had burnt some 26 tonnes of aviation fuel while waiting. Imagine the cost, and the huge carbon footprint!

New Year tales-II

The 300-odd delegates that have come to the Capital to participate in the 20th Conference of Speakers and Presiding Officers of Commonwealth nations are being treated to five-star hospitality, never mind the government’s austerity drive. The budget for creating a temporary setup for the delegates to have lunch has apparently run into eight digits!

New Year tales-III

consumptionandoptimising theeconomicstructure.Evenif aggressivelendingstrainsthe banks’capital,individual lendersandtheindustryasa wholearenowmorethan adequatelycapitalised. Onethingwehavelearned fromthepastisthatweneedto

throughturbulence. Asregulators,wealsofeel obligedtoscrutiniseeconomic developmentsandactpromptly inresponse.Whenovercapacity wasdetectedincertain industriesorregions,weissued directivestoalertbankstothe potentialrisksassociatedwith