February 01, 2008

Chinese are subsidizing the American way of life : $1.4 Trillion Question

The Chinese are subsidizing the American way of life. Are we playing them for suckers—or are they playing us?

Source: The Atlantic

by James Fallows

The $1.4 Trillion Question

Stephen Schwarzman may think he has image problems in America. He is the co-founder and CEO of the Blackstone Group, and he threw himself a $3 million party for his 60th birthday last spring, shortly before making many hundreds of millions of dollars in his company’s IPO and finding clever ways to avoid paying taxes. That’s nothing compared with the way he looks in China. Here, he and his company are surprisingly well known, thanks to blogs, newspapers, and talk-show references. In America, Schwarzman’s perceived offense is greed—a sin we readily forgive and forget. In China, the suspicion is that he has somehow hoodwinked ordinary Chinese people out of their hard-earned cash.

Atlantic senior editor Clive Crook weighs in on the private-equity business—why it's booming, where it's headed, and what it means for American capitalism.

Last June, China’s Blackstone investment was hailed in the American press as a sign of canny sophistication. It seemed just the kind of thing the U.S. government had in mind when it hammered China to use its new wealth as a “responsible stakeholder” among nations. By putting $3 billion of China’s national savings into the initial public offering of America’s best-known private-equity firm, the Chinese government allied itself with a big-time Western firm without raising political fears by trying to buy operating control (it bought only 8 percent of Blackstone’s shares, and nonvoting shares at that). The contrast with the Japanese and Saudis, who in their nouveau-riche phase roused irritation and envy with their showy purchases of Western brand names and landmark properties, was plain.

Six months later, it didn’t look so canny, at least not financially. China’s Blackstone holdings lost, on paper, about $1 billion, during a time when the composite index of the Shanghai Stock Exchange was soaring. At two different universities where I’ve spoken recently, students have pointed out that Schwarzman was a major Republican donor. A student at Fudan University knew a detail I didn’t: that in 2007 President Bush attended a Republican National Committee fund-raiser at Schwarzman’s apartment in Manhattan (think what he would have made of the fact that Schwarzman, who was one year behind Bush at Yale, had been a fellow member of Skull and Bones). Wasn’t the whole scheme a way to take money from the Chinese people and give it to the president’s crony?

The Blackstone case is titillating in its personal detail, but it is also an unusually clear and personalized symptom of a deeper, less publicized, and potentially much more destructive tension in U.S.–China relations. It’s not just Stephen Schwarzman’s company that the laobaixing, the ordinary Chinese masses, have been subsidizing. It’s everyone in the United States.

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. But because of political tensions in both countries, and because of the huge and growing size of the imbalance, the arrangement now shows signs of cracking apart.

In an article two and a half years ago (“Countdown to a Meltdown,” July/August 2005), I described an imagined future in which a real-estate crash and shakiness in the U.S. credit markets led to panic by Chinese and other foreign investors, with unpleasant effects for years to come. The real world has recently had inklings of similar concerns. In the past six months, relative nobodies in China’s establishment were able to cause brief panics in the foreign-exchange markets merely by hinting that China might stop supplying so much money to the United States. In August, an economic researcher named He Fan, who works at the Chinese Academy of Social Sciences and did part of his doctoral research at Harvard, suggested in an op-ed piece in China Daily that if the U.S. dollar kept collapsing in value, China might move some of its holdings into stronger currencies. This was presented not as a threat but as a statement of the obvious, like saying that during a market panic, lots of people sell. The column quickly provoked alarmist stories in Europe and America suggesting that China was considering the “nuclear option”—unloading its dollars.

A few months later, a veteran Communist Party politician named Cheng Siwei suggested essentially the same thing He Fan had. Cheng, in his mid-70s, was trained as a chemical engineer and has no official role in setting Chinese economic policy. But within hours of his speech, a flurry of trading forced the dollar to what was then its lowest level against the euro and other currencies. The headline in the South China Morning Post the next day was: “Officials’ Words Shrivel U.S. Dollar.” Expressing amazement at the markets’ response, Carl Weinberg, chief economist at the High Frequency Economics advisory group, said, “This would be kind of like Congressman Charlie Rangel giving a speech telling the Fed to hike or cut interest rates.” (Cheng, like Rangel, is known for colorful comments—but he is less powerful, since Rangel after all chairs the House Ways and Means Committee.) In the following weeks, phrases like “run on the dollar” and “collapse of confidence” showed up more and more frequently in financial newsletters. The nervousness only increased when someone who does have influence, Chinese Premier Wen Jiabao, said last November, “We are worried about how to preserve the value” of China’s dollar holdings.

When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.

When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England).

The dollar’s value has been high for many years—unnaturally high, in large part because of the implicit bargain with the Chinese. Living standards in China, while rising rapidly, have by the same logic been unnaturally low. To understand why this situation probably can’t go on, and what might replace it—via a dollar crash or some other event—let’s consider how this curious balance of power arose and how it works.

Why a poor country has so much money

By 1996, China amassed its first $100 billion in foreign assets, mainly held in U.S. dollars. (China considers these holdings a state secret, so all numbers come from analyses by outside experts.) By 2001, that sum doubled to about $200 billion, according to Edwin Truman of the Peterson Institute for International Economics in Washington. Since then, it has increased more than sixfold, by well over a trillion dollars, and China’s foreign reserves are now the largest in the world. (In second place is Japan, whose economy is, at official exchange rates, nearly twice as large as China’s but which has only two-thirds the foreign assets; the next-largest after that are the United Arab Emirates and Russia.) China’s U.S. dollar assets probably account for about 70 percent of its foreign holdings, according to the latest analyses by Brad Setser, a former Treasury Department economist now with the Council on Foreign Relations; the rest are mainly in euros, plus some yen. Most of China’s U.S. investments are in conservative, low-yield instruments like Treasury notes and federal-agency bonds, rather than showier Blackstone-style bets. Because notes and bonds backed by the U.S. government are considered the safest investments in the world, they pay lower interest than corporate bonds, and for the past two years their annual interest payments of 4 to 5 percent have barely matched the 5-to-6-percent decline in the U.S. dollar’s value versus the RMB.

Americans sometimes debate (though not often) whether in principle it is good to rely so heavily on money controlled by a foreign government. The debate has never been more relevant, because America has never before been so deeply in debt to one country. Meanwhile, the Chinese are having a debate of their own—about whether the deal makes sense for them. Certainly China’s officials are aware that their stock purchases prop up 401(k) values, their money-market holdings keep down American interest rates, and their bond purchases do the same thing—plus allow our government to spend money without raising taxes.

“From a distance, this, to say the least, is strange,” Lawrence Summers, the former treasury secretary and president of Harvard, told me last year in Shanghai. He was referring to the oddity that a country with so many of its own needs still unmet would let “this $1 trillion go to a mature, old, rich place from a young, dynamic place.”

It’s more than strange. Some Chinese people are rich, but China as a whole is unbelievably short on many of the things that qualify countries as fully developed. Shanghai has about the same climate as Washington, D.C.—and its public schools have no heating. (Go to a classroom when it’s cold, and you’ll see 40 children, all in their winter jackets, their breath forming clouds in the air.) Beijing is more like Boston. On winter nights, thousands of people mass along the curbsides of major thoroughfares, enduring long waits and fighting their way onto hopelessly overcrowded public buses that then spend hours stuck on jammed roads. And these are the showcase cities! In rural Gansu province, I have seen schools where 18 junior-high-school girls share a single dormitory room, sleeping shoulder to shoulder, sardine-style.

Better schools, more-abundant parks, better health care, cleaner air and water, better sewers in the cities—you name it, and if it isn’t in some way connected to the factory-export economy, China hasn’t got it, or not enough. This is true at the personal level, too. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

So why is China shipping its money to America? An economist would describe the oddity by saying that China has by far the highest national savings in the world. This sounds admirable, but when taken to an extreme—as in China—it indicates an economy out of sync with the rest of the world, and one that is deliberately keeping its own people’s living standards lower than they could be. For comparison, India’s savings rate is about 25 percent, which in effect means that India’s people consume 75 percent of what they collectively produce. (Reminder from Ec 101: The savings rate is the net share of national output either exported or saved and invested for consumption in the future. Effectively, it’s what your own people produce but don’t use.) For Korea and Japan, the savings rate is typically from the high 20s to the mid-30s. Recently, America’s has at times been below zero, which means that it consumes, via imports, more than it makes.

China’s savings rate is a staggering 50 percent, which is probably unprecedented in any country in peacetime. This doesn’t mean that the average family is saving half of its earnings—though the personal savings rate in China is also very high. Much of China’s national income is “saved” almost invisibly and kept in the form of foreign assets. Until now, most Chinese have willingly put up with this, because the economy has been growing so fast that even a suppressed level of consumption makes most people richer year by year.

But saying that China has a high savings rate describes the situation without explaining it. Why should the Communist Party of China countenance a policy that takes so much wealth from the world’s poor, in their own country, and gives it to the United States? To add to the mystery, why should China be content to put so many of its holdings into dollars, knowing that the dollar is virtually guaranteed to keep losing value against the RMB? And how long can its people tolerate being denied so much of their earnings, when they and their country need so much? The Chinese government did not explicitly set out to tighten the belt on its population while offering cheap money to American homeowners. But the fact that it does results directly from explicit choices it has made—two in particular. Both arise from crucial controls the government maintains over an economy that in many other ways has become wide open. The situation may be easiest to explain by following a U.S. dollar on its journey from a customer’s hand in America to a factory in China and back again to the T-note auction in the United States.

The voyage of a dollar

Let’s say you buy an Oral-B electric toothbrush for $30 at a CVS in the United States. I choose this example because I’ve seen a factory in China that probably made the toothbrush. Most of that $30 stays in America, with CVS, the distributors, and Oral-B itself. Eventually $3 or so—an average percentage for small consumer goods—makes its way back to southern China.

When the factory originally placed its bid for Oral-B’s business, it stated the price in dollars: X million toothbrushes for Y dollars each. But the Chinese manufacturer can’t use the dollars directly. It needs RMB—to pay the workers their 1,200-RMB ($160) monthly salary, to buy supplies from other factories in China, to pay its taxes. So it takes the dollars to the local commercial bank—let’s say the Shenzhen Development Bank. After showing receipts or waybills to prove that it earned the dollars in genuine trade, not as speculative inflow, the factory trades them for RMB.

This is where the first controls kick in. In other major countries, the counterparts to the Shenzhen Development Bank can decide for themselves what to do with the dollars they take in. Trade them for euros or yen on the foreign-exchange market? Invest them directly in America? Issue dollar loans? Whatever they think will bring the highest return. But under China’s “surrender requirements,” Chinese banks can’t do those things. They must treat the dollars, in effect, as contraband, and turn most or all of them (instructions vary from time to time) over to China’s equivalent of the Federal Reserve Bank, the People’s Bank of China, for RMB at whatever is the official rate of exchange.

With thousands of transactions per day, the dollars pile up like crazy at the PBOC. More precisely, by more than a billion dollars per day. They pile up even faster than the trade surplus with America would indicate, because customers in many other countries settle their accounts in dollars, too.

The PBOC must do something with that money, and current Chinese doctrine allows it only one option: to give the dollars to another arm of the central government, the State Administration for Foreign Exchange. It is then SAFE’s job to figure out where to park the dollars for the best return: so much in U.S. stocks, so much shifted to euros, and the great majority left in the boring safety of U.S. Treasury notes.

And thus our dollar comes back home. Spent at CVS, passed to Oral-B, paid to the factory in southern China, traded for RMB at the Shenzhen bank, “surrendered” to the PBOC, passed to SAFE for investment, and then bid at auction for Treasury notes, it is ready to be reinjected into the U.S. money supply and spent again—ideally on Chinese-made goods.

At no point did an ordinary Chinese person decide to send so much money to America. In fact, at no point was most of this money at his or her disposal at all. These are in effect enforced savings, which are the result of the two huge and fundamental choices made by the central government.

One is to dictate the RMB’s value relative to other currencies, rather than allow it to be set by forces of supply and demand, as are the values of the dollar, euro, pound, etc. The obvious reason for doing this is to keep Chinese-made products cheap, so Chinese factories will stay busy. This is what Americans have in mind when they complain that the Chinese government is rigging the world currency markets. And there are numerous less obvious reasons. The very act of managing a currency’s value may be a more important distorting factor than the exact rate at which it is set. As for the rate—the subject of much U.S. lecturing—given the huge difference in living standards between China and the United States, even a big rise in the RMB’s value would leave China with a price advantage over manufacturers elsewhere. (If the RMB doubled against the dollar, a factory worker might go from earning $160 per month to $320—not enough to send many jobs back to America, though enough to hurt China’s export economy.) Once a government decides to thwart the market-driven exchange rate of its currency, it must control countless other aspects of its financial system, through instruments like surrender requirements and the equally ominous-sounding “sterilization bonds” (a way of keeping foreign-currency swaps from creating inflation, as they otherwise could).

These and similar tools are the way China’s government imposes an unbelievably high savings rate on its people. The result, while very complicated, is to keep the buying power earned through China’s exports out of the hands of Chinese consumers as a whole. Individual Chinese people have certainly gotten their hands on a lot of buying power, notably the billionaire entrepreneurs who have attracted the world’s attention (see “Mr. Zhang Builds His Dream Town,” March 2007). But when it comes to amassing international reserves, what matters is that China as a whole spends so little of what it earns, even as some Chinese people spend a lot.

The other major decision is not to use more money to address China’s needs directly—by building schools and agricultural research labs, cleaning up toxic waste, what have you. Both decisions stem from the central government’s vision of what is necessary to keep China on its unprecedented path of growth. The government doesn’t want to let the market set the value of the RMB, because it thinks that would disrupt the constant growth and the course it has carefully and expensively set for the factory-export economy. In the short run, it worries that the RMB’s value against the dollar and the euro would soar, pricing some factories in “expensive” places such as Shanghai out of business. In the long run, it views an unstable currency as a nuisance in itself, since currency fluctuation makes everything about business with the outside world more complicated. Companies have a harder time predicting overseas revenues, negotiating contracts, luring foreign investors, or predicting the costs of fuel, component parts, and other imported goods.

And the government doesn’t want to increase domestic spending dramatically, because it fears that improving average living conditions could paradoxically intensify the rich-poor tensions that are China’s major social problem. The country is already covered with bulldozers, wrecking balls, and construction cranes, all to keep the manufacturing machine steaming ahead. Trying to build anything more at the moment—sewage-treatment plants, for a start, which would mean a better life for its own people, or smokestack scrubbers and related “clean” technology, which would start to address the world pollution for which China is increasingly held responsible—would likely just drive prices up, intensifying inflation and thus reducing the already minimal purchasing power of most workers. Food prices have been rising so fast that they have led to riots. In November, a large Carre­four grocery in Chong­qing offered a limited-time sale of vegetable oil, at 20 percent (11 RMB, or $1.48) off the normal price per bottle. Three people were killed and 31 injured in a stampede toward the shelves.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

What the Chinese hope will happen

The Chinese public is beginning to be aware that its government is sitting on a lot of money—money not being spent to help China directly, money not doing so well in Blackstone-style foreign investments, money invested in the ever-falling U.S. dollar. Chinese bloggers and press commentators have begun making a connection between the billions of dollars the country is sending away and the domestic needs the country has not addressed. There is more and more pressure to show that the return on foreign investments is worth China’s sacrifice—and more and more potential backlash against bets that don’t pay off. (While the Chinese government need not stand for popular election, it generally tries to reduce sources of popular discontent when it can.) The public is beginning to behave like the demanding client of an investment adviser: it wants better returns, with fewer risks.

This is the challenge facing Lou Jiwei and Gao Xiqing, who will play a larger role in the U.S. economy than Americans are accustomed to from foreigners. Lou, a longtime Communist Party official in his late 50s, is the chairman of the new China Investment Corporation, which is supposed to find creative ways to increase returns on at least $200 billion of China’s foreign assets. He is influential within the party but has little international experience. Thus the financial world’s attention has turned to Gao Xiqing, who is the CIC’s general manager.

Twenty years ago, after graduating from Duke Law School, Gao was the first Chinese citizen to pass the New York State Bar Exam. He returned to China in 1988, after several years as an associate at the New York law firm Mudge, Rose (Richard Nixon’s old firm) to teach securities law and help develop China’s newly established stock markets. By local standards, he is hip. At an economics conference in Beijing in December, other Chinese speakers wore boxy dark suits. Gao, looking fit in his mid-50s, wore a tweed jacket and black turtleneck, an Ironman-style multifunction sports watch on his wrist.

Under Lou and Gao, the CIC started with a bang with Blackstone—the wrong kind of bang. Now, many people suggest, it may be chastened enough to take a more careful approach. Indeed, that was the message it sent late last year, with news that its next round of investments would be in China’s own banks, to shore up some with credit problems. And it looks to be studying aggressive but careful ways to manage huge sums. About the time the CIC was making the Blackstone deal, its leadership and staff undertook a crash course in modern financial markets. They hired the international consulting firm McKinsey to prepare confidential reports about the way they should organize themselves and the investment principles they should apply. They hired Booz Allen Hamilton to prepare similar reports, so they could compare the two. Yet another consulting firm, Towers Perrin, provided advice, especially about staffing and pay. The CIC leaders commissioned studies of other large state-run investment funds—in Norway, Singapore, the Gulf States, Alaska—to see which approaches worked and which didn’t. They were fascinated by the way America’s richest universities managed their endowments, and ordered multiple copies of Pioneering Portfolio Management, by David Swensen, who as Yale’s chief investment officer has guided its endowment to sustained and rapid growth. Last summer, teams from the CIC made long study visits to Yale and Duke universities, among others.

Gao Xiqing and other CIC officials have avoided discussing their plans publicly. “If you tell people ahead of time what you’re going to do—well, you just can’t operate that way in a market system,” he said at his Beijing appearance. “What I can say is, we’ll play by the international rules, and we’ll be responsible investors.” Gao emphasized several times how much the CIC had to learn: “We’re the new kids on the block. Because of media attention, there is huge pressure on us—we’re already under water now.” The words “under water” were in natural-sounding English, and clearly referred to Blackstone.

Others familiar with the CIC say that its officials are coming to appreciate the unusual problems they will face. For instance: any investment group needs to be responsible to outside supervisors, and the trick for the CIC will be to make itself accountable to Communist Party leadership without becoming a mere conduit for favored investment choices by party bosses. How can it attract the best talent? Does it want to staff up quickly, to match its quickly mounting assets, by bidding for financial managers on the world market—where many of the candidates are high-priced, not fluent in Chinese, and reluctant to move to Beijing? Or can it afford to take the time to home-grow its own staff?

While the CIC is figuring out its own future, outsiders are trying to figure out the CIC—and also SAFE, which will continue handling many of China’s assets. As far as anyone can tell, the starting point for both is risk avoidance. No more Blackstones. No more CNOOC-Unocals. (In 2005, the Chinese state oil firm CNOOC attempted to buy U.S.–based Unocal. It withdrew the offer in the face of intense political opposition to the deal in America.) One person involved with the CIC said that its officials had seen recent Lou Dobbs broadcasts criticizing “Communist China” and were “shellshocked” about the political resentment their investments might encounter in the United States. For all these reasons the Chinese leadership, as another person put it, “has a strong preference to follow someone else’s lead, not in an imitative way” but as an unobtrusive minority partner wherever possible. It will follow the lead of others for now, that is, while the CIC takes its first steps as a gigantic international financial investor.

The latest analyses by Brad Setser suggest that despite all the talk about abandoning the dollar, China is still putting about as large a share of its money into dollars as ever, somewhere between 65 and 70 percent of its foreign earnings. “Politically, the last thing they want is to signal a loss of faith in the dollar,” Andy Rothman, of the financial firm CLSA, told me; that would lead to a surge in the RMB, which would hurt Chinese exporters, not to mention the damage it would cause to China’s vast existing dollar assets.

The problem is that these and other foreign observers must guess at China’s aims, rather than knowing for sure. As Rothman put it, “The opaqueness about intentions and goals is always the issue.” The mini-panics last year took hold precisely because no one could be sure that SAFE was not about to change course.

The uncertainty arises in part from the limited track record of China’s new financial leadership. As one American financier pointed out to me: “The man in charge of the whole thing”—Lou Jiwei—“has never bought a share of stock, never bought a car, never bought a house.” Another foreign financier said, after meeting some CIC staffers, “By Chinese terms, these are very sophisticated people.” But, he went on to say, in a professional sense none of them had lived through the financial crises of the last generation: the U.S. market crash of 1987, the “Asian flu” of the late 1990s, the collapse of the Internet bubble soon afterward. The Chinese economy was affected by all these upheavals, but the likes of Gao Xiqing were not fully exposed to their lessons, sheltered as they were within Chinese institutions.

Foreign observers also suggest that, even after exposure to the Lou Dobbs clips, the Chinese financial leadership may not yet fully grasp how suspicious other countries are likely to be of China’s financial intentions, for reasons both fair and unfair. The unfair reason is all-purpose nervousness about any new rising power. “They need to understand, and they don’t, that everything they do will be seen as political,” a financier with extensive experience in both China and America told me. “Whatever they buy, whatever they say, whatever they do will be seen as China Inc.”

The fair reason for concern is, again, the transparency problem. Twice in the past year, China has in nonfinancial ways demonstrated the ripples that a nontransparent policy creates. Last January, its military intentionally shot down one of its own satellites, filling orbital paths with debris. The exercise greatly alarmed the U.S. military, because of what seemed to be an implied threat to America’s crucial space sensors. For several days, the Chinese government said nothing at all about the test, and nearly a year later, foreign analysts still debate whether it was a deliberate provocation, the result of a misunderstanding, or a freelance effort by the military. In November, China denied a U.S. Navy aircraft carrier, the Kitty Hawk, routine permission to dock in Hong Kong for Thanksgiving, even though many Navy families had gone there for a reunion. In each case, the most ominous aspect is that outsiders could not really be sure what the Chinese leadership had in mind. Were these deliberate taunts or shows of strength? The results of factional feuding within the leadership? Simple miscalculations? In the absence of clear official explanations no one really knew, and many assumed the worst.

So it could be with finance, unless China becomes as transparent as it is rich. Chinese officials say they will move in that direction, but they’re in no hurry. Last fall, Edwin Truman prepared a good-governance scorecard for dozens of “sovereign wealth” funds—government-run investment funds like SAFE and the CIC. He compared funds from Singapore, Korea, Norway, and elsewhere, ranking them on governing structure, openness, and similar qualities. China’s funds ended up in the lower third of his list—better-run than Iran’s, Sudan’s, or Algeria’s, but worse than Mexico’s, Russia’s, or Kuwait’s. China received no points in the “governance” category and half a point out of a possible 12 for “transparency and accountability.”

Foreigners (ordinary Chinese too, for that matter) can’t be sure about the mixture of political and strictly economic motives behind future investment decisions the Chinese might make. When China’s president, Hu Jintao, visited Seattle two years ago, he announced a large purchase of Boeing aircraft. When France’s new president, Nicolas Sarkozy, visited China late last year, Hu announced an even larger purchase of Airbuses. Every Chinese order for an airplane is a political as well as commercial decision. Brad Setser says that the Chinese government probably believed that it would get “credit” for the Blackstone purchase in whatever negotiations came up next with the United States, in the same way it would get credit for choosing Boeing. This is another twist to the Kremlinology of trying to discern China’s investment strategy.

Where the money goes, other kinds of power follow. Just ask Mikhail Gorbachev, as he reflects on the role bankruptcy played in bringing down the Soviet empire. While Japan’s great wealth has not yet made it a major diplomatic actor, and China has so far shied from, rather than seized, opportunities to influence events outside its immediate realm, time and money could change that. China’s military is too weak to challenge the U.S. directly even in the Taiwan Straits, let alone anyplace else. That, too, could change.

A Balance of Terror

Let’s take these fears about a rich, strong China to their logical extreme. The U.S. and Chinese governments are always disagreeing—about trade, foreign policy, the environment. Someday the disagreement could be severe. Taiwan, Tibet, North Korea, Iran—the possibilities are many, though Taiwan always heads the list. Perhaps a crackdown within China. Perhaps another accident, like the U.S. bombing of China’s embassy in Belgrade nine years ago, which everyone in China still believes was intentional and which no prudent American ever mentions here.

Whatever the provocation, China would consider its levers and weapons and find one stronger than all the rest—one no other country in the world can wield. Without China’s billion dollars a day, the United States could not keep its economy stable or spare the dollar from collapse.

Would the Chinese use that weapon? The reasonable answer is no, because they would wound themselves grievously, too. Their years of national savings are held in the same dollars that would be ruined; in a panic, they’d get only a small share out before the value fell. Besides, their factories depend on customers with dollars to spend.

But that “reassuring” answer is actually frightening. Lawrence Summers calls today’s arrangement “the balance of financial terror,” and says that it is flawed in the same way that the “mutually assured destruction” of the Cold War era was. That doctrine held that neither the United States nor the Soviet Union would dare use its nuclear weapons against the other, since it would be destroyed in return. With allowances for hyperbole, something similar applies to the dollar standoff. China can’t afford to stop feeding dollars to Americans, because China’s own dollar holdings would be devastated if it did. As long as that logic holds, the system works. As soon as it doesn’t, we have a big problem.

What might poke a giant hole in that logic? Not necessarily a titanic struggle over the future of Taiwan. A simple mistake, for one thing. Another speech by Cheng Siwei—perhaps in response to a provocation by Lou Dobbs. A rumor that the oil economies are moving out of dollars for good, setting their prices in euros. Leaked suggestions that the Chinese government is hoping to buy Intel, leading to angry denunciations on the Capitol floor, leading to news that the Chinese will sit out the next Treasury auction. As many world tragedies have been caused by miscalculation as by malice.

Or pent-up political tensions, on all sides. China’s lopsided growth—ahead in exports, behind in schooling, the environment, and everything else—makes the country socially less stable as it grows richer. Meanwhile, its expansion disrupts industries and provokes tensions in the rest of the world. The billions of dollars China pumps into the United States each week strangely seem to make it harder rather than easier for Americans to face their own structural problems. One day, something snaps. Suppose the CIC makes another bad bet—not another Blackstone but another WorldCom, with billions of dollars of Chinese people’s assets irretrievably wiped out. They will need someone to blame, and Americans, for their part, are already primed to blame China back.

So, the shock comes. Does it inevitably cause a cataclysm? No one can know until it’s too late. The important question to ask about the U.S.–China relationship, the economist Eswar Prasad, of Cornell, recently wrote in a paper about financial imbalances, is whether it has “enough flexibility to withstand and recover from large shocks, either internal or external.” He suggested that the contained tensions were so great that the answer could be no.

Today’s American system values upheaval; it’s been a while since we’ve seen too much of it. But Americans who lived through the Depression knew the pain real disruption can bring. Today’s Chinese, looking back on their country’s last century, know, too. With a lack of tragic imagination, Americans have drifted into an arrangement that is comfortable while it lasts, and could last for a while more. But not much longer.

Years ago, the Chinese might have averted today’s pressures by choosing a slower and more balanced approach to growth. If they had it to do over again, I suspect they would in fact choose just the same path—they have gained so much, including the assets they can use to do what they have left undone, whenever the government chooses to spend them. The same is not true, I suspect, for the United States, which might have chosen a very different path: less reliance on China’s subsidies, more reliance on paying as we go. But it’s a little late for those thoughts now. What’s left is to prepare for what we find at the end of the path we have taken.

The URL for this page is http://www.theatlantic.com/doc/200801/fallows-chinese-dollars.

PAKISTAN : Drawn and Quartered

The NewYork Times

Published: February 1, 2008

WHATEVER the outcome of the Pakistani elections, now scheduled for Feb. 18, the existing multiethnic Pakistani state is not likely to survive for long unless it is radically restructured.

Given enough American pressure, a loosely united, confederated Pakistan could still be preserved by reinstating and liberalizing the defunct 1973 Constitution, which has been shelved by successive military rulers. But as matters stand, the Punjabi-dominated regime of Pervez Musharraf is headed for a bloody confrontation with the country’s Pashtun, Baluch and Sindhi minorities that could well lead to the breakup of Pakistan into three sovereign entities.

In that event, the Pashtuns, concentrated in the northwestern tribal areas, would join with their ethnic brethren across the Afghan border (some 40 million of them combined) to form an independent “Pashtunistan.” The Sindhis in the southeast, numbering 23 million, would unite with the six million Baluch tribesmen in the southwest to establish a federation along the Arabian Sea from India to Iran. “Pakistan” would then be a nuclear-armed Punjabi rump state.

In historical context, such a breakup would not be surprising. There had never been a national entity encompassing the areas now constituting Pakistan, an ethnic mélange thrown together hastily by the British for strategic reasons when they partitioned the subcontinent in 1947.

For those of Pashtun, Sindhi and Baluch ethnicity, independence from colonial rule created a bitter paradox. After resisting Punjabi domination for centuries, they found themselves subjected to Punjabi-dominated military regimes that have appropriated many of the natural resources in the minority provinces — particularly the natural gas deposits in the Baluch areas — and siphoned off much of the Indus River’s waters as they flow through the Punjab.

The resulting Punjabi-Pashtun animosity helps explain why the United States is failing to get effective Pakistani cooperation in fighting terrorists. The Pashtuns living along the Afghan border are happy to give sanctuary from Punjabi forces to the Taliban, which is composed primarily of fellow Pashtuns, and to its Qaeda friends.

Pashtun civilian casualties resulting from Pakistani and American air strikes on both sides of the border are breeding a potent underground Pashtun nationalist movement. Its initial objective is to unite all Pashtuns in Pakistan, now divided among political jurisdictions, into a unified province. In time, however, its leaders envisage full nationhood. After all, before the British came, the Pashtuns had been politically united under the banner of an Afghan empire that stretched eastward into the Punjabi heartland.

The Baluch people, for their part, have been waging intermittent insurgencies since their forced incorporation into Pakistan in 1947. In the current warfare Pakistani forces are widely reported to be deploying American-supplied aircraft and intelligence equipment that was intended for use in Afghan border areas. Their victims are forging military links with Sindhi nationalist groups that have been galvanized into action by the death of Benazir Bhutto, a Sindhi hero as was her father, Zulfikar Ali Bhutto.

The breakup of Pakistan would be a costly and destabilizing development that can still be avoided, but only if the United States and other foreign donors use their enormous aid leverage to convince Islamabad that it should not only put the 1973 Constitution back into effect, but amend it to go beyond the limited degree of autonomy it envisaged. Eventually, the minorities want a central government that would retain control only over defense, foreign affairs, international trade, communications and currency. It would no longer have the power to oust an elected provincial government, and would have to renegotiate royalties on resources with the provinces.

In the shorter term, the Bush administration should scrap plans to send Special Forces into border areas in pursuit of Al Qaeda, which would only strengthen Islamist links with Pashtun nationalists. It should help secular Pashtun forces to compete with the Islamists by pushing for fair representation of Pashtun areas now barred from political participation.

It is often argued that the United States must stand by Mr. Musharraf and a unitary Pakistani state to safeguard Pakistan’s nuclear arsenal. But the nuclear safeguards depend on the Pakistani Army as an institution, not on the president. They would not be affected by a break-up, since the nuclear weapons would remain under the control of the Punjabi rump state and its army.

The Army has built up a far-flung empire of economic enterprises in all parts of Pakistan with assets in the tens of billions, and can best protect its interests by defusing the escalating conflict with the minorities. Similarly, the minorities would profit from cooperative economic relations with the Punjab, and for this reason prefer confederal autonomy to secession. All concerned, including the United States, have a profound stake in stopping the present slide to Balkanization.

Selig S. Harrison is the director of the Asia program at the Center for International Policy and the author of “In Afghanistan’s Shadow,” a study of Baluch nationalism.

Libya Sovereign Wealth Fund to Shun U.S., Ghanem Says

Libya Sovereign Wealth Fund to Shun U.S., Ghanem Says (Update2)

By Francine Lacqua and Maher Chmaytelli

Feb. 1 (Bloomberg) -- Libya's $100 billion sovereign wealth fund will avoid buying U.S. assets because of politically motivated restrictions on investments by Arab states, the North African nation's top oil official said.

The fund will consider buying stocks, bonds, real estate and banks in countries from China and Indonesia to Europe and Latin America, Shokri Ghanem, the chairman of Libya's state-owned National Oil Corp., said in Bloomberg Television interview yesterday evening in Vienna.

``The only market which is unfortunately not a pleasant market is the United States,'' he said. ``It's a very active market, but it is full of politics and unpleasant actions. In Europe, politics is not very much interfering in trade.''

Muammar al-Qaddafi, Libya's ruler since 1969, mended relations with the West by agreeing in 2003 to compensate the relatives of those killed in the 1988 bombing of a Pan Am flight that crashed in Lockerbie, Scotland. He also pledged to give up efforts to develop weapons of mass destruction, paving the way for greater investment by foreign companies.

Ghanem, who was Libya's prime minister from 2003 to 2006, said the government would be looking ``with attention'' to European banking and finance stocks that have depreciated. He didn't name any.

International Opportunities

Libya current prime minister, Basghdadi Mahmudi, said in a December interview that the country is preparing to invest more than $100 billion abroad, joining the United Arab Emirates and other oil-rich Arab states searching for international investments.

U.S. lawmakers, citing security concerns following the Sept. 11, 2001, attack on the World Trade Center, opposed DP World Ltd.'s ownership of six port terminals two years ago, forcing the Dubai- based company to sell them to American International Group Inc.

``Even the relations of the U.S. with traditional allies like Saudi Arabia haven't completely recovered from Sept. 11,'' said Diaa Rashwan, a specialist in Arab and Islamic affairs at Cairo's Al-Ahram Center for Political and Strategic Studies.

``Libyan-U.S. relations had been strained for three decades and they still have some way to go before we can see complete normalization,'' Rashwan said.

The North African nation's foreign minister, Abdel Rahman Shalgham, failed at a meeting last month in Washington with his U.S. counterpart Condoleezza Rice to obtain the full restoration of diplomatic ties between the two countries.

Libya, which has the largest oil reserves in Africa, has built up a sovereign wealth fund to benefit future generations once oil fields run dry.

Football, Nasdaq

The fund, managed by the Libyan Investment Authority, will add to a portfolio of stakes it holds in foreign companies including Italy's Banca di Roma SpA and Juventus Football Club SpA. The country is emulating the United Arab Emirates, Kuwait and Qatar, which have spent billions of dollars this year on foreign acquisitions, including stakes in Citigroup Inc., Nasdaq Stock Market Inc. and buyout firm Carlyle Group.

Libya is a member of the Organization of Petroleum Exporting Countries and exports $135 million of crude every day when prices are at $90 a barrel, according to state-run National Oil. It pumped 1.75 million barrels of oil a day last month, according to Bloomberg estimates, and most of that was exported.

Since 2001, oil-importing nations have transferred a combined $3 trillion more to OPEC than they otherwise would have paid had oil stayed near $20 a barrel, according to Goldman Sachs Group Inc. The price of crude oil tripled in four years to a record $100.09 a barrel on Jan. 3.

OPEC's net oil export revenue may exceed $850 billion in 2008, a 26 percent increase from last year, according to the U.S. Energy Department. OPEC decided today to maintain its current output targets.

To contact the reporters on this story: Francine Lacqua in Vienna at flacqua@bloomberg.net Maher Chmaytelli in Vienna at mchmaytelli@bloomberg.net

Analysis: Shell to shut again in Nigeria

Published: Jan. 30, 2008 at 7:22 PM
UPI Energy Correspondent

Nigeria's oil production -- already well below capacity due to ongoing violence -- is set to take another hit totaling 225,000 barrels per day, according to a leading producer in the West African country.

Shell Nigeria Exploration and Production Co. announced earlier this week that it would shut down production at the Bonga offshore oil field in March for routine maintenance.

While the cutback is reportedly supposed to be temporary -- lasting 10 days, according to Shell officials, Nigeria's Vanguard newspaper reported -- there are lingering concerns that the Anglo-Dutch oil firm might keep the facility offline indefinitely due to the continuing militant attacks in the oil-rich Niger Delta.

While attending the recent World Economic Forum in Davos, Switzerland, Shell CEO Jeroan Van der Veer said, "We are prepared for whatever we face" regarding the numerous production setbacks the oil giant has faced in recent years in Nigeria.

"Conditions must improve for us to restart production," said Van de Veer, "and we're not there yet."

Shell is among the foreign energy firms hardest hit by the violence that has persisted in the delta since the end of 2005 when the leading militant group known as the Movement for the Emancipation of the Niger Delta began attacking oil and gas installations and taking foreigner workers hostage.

Attacks by MEND, other militant groups and armed gangs are blamed for decreasing Nigeria's once growing oil production by 20 percent to around 2 million barrels per day.

The Shell CEO said he wanted to speak with Nigerian President Umaru Yar'Adua about tackling the militant issue and funding for additional projects that would improve oil production in the country.

The scheduled shutdown at Bonga isn't the first time that Shell has cut back production in Nigeria citing the militancy issue.

Earlier this month Shell shut down operations at its Forcados terminal following pipeline attacks that threw its 100,000 barrel-per-day production offline.

The terminal had already been shut down once before because of violence and reopened in October 2007 after more than a year of halted production. Since its reopening, the facility, which can produce some 450,000 barrels per day, had been operating at a fraction of its capacity.

MEND and other militant groups have in recent weeks made good on promises to increase attacks on petroleum installations, raising fears that already hampered production would be stymied further.

The attacks came amid efforts by Yar'Adua to negotiate a peace settlement with the militants. For months, it appeared Yar'Adua's efforts would pay off as MEND said it would honor a cease-fire brokered while the president attempted to make good on promises to improve the lives of the residents of the impoverished delta.

Despite generating more than $300 billion worth of crude from the southern delta states over the last three decades, poverty and high unemployment persists. Environmental degradation due to oil and gas extraction, and a lack of basic resources such as fresh water and electricity, have angered some of the region's youth and incited them to take up arms.

Meanwhile, unrest in the delta is also causing a serious shortfall in oil for Nigeria's domestic needs.

Nigeria's refineries are reportedly only producing 20 percent of the oil needed for domestic use, forcing the country to import the rest at rising global prices on the international market, wrote Leonard Lawal for African Energy.

"Paralyzed refineries, unsustainable government price subsidies and far-reaching corruption all contribute to a disastrous situation where one of Africa's leading crude producers cannot meet domestic needs," said Lawal.

Though Yar'Adua has promised to tackle the domestic need issue, the growing concern over discontentment among oil firms like Shell should preoccupy his time for the coming months leaving the shortfall issue on the back burner until the militancy problem can be curtailed, if not controlled.

© 2008 United Press International. All Rights Reserved.

ALBA, an Economic Alternative for Latin America

February 1st 2008, by Medea Benjamin - CommonDreams

"With ALBA the Unity of our America is Reborn" (AFP) The sixth conference of the Latin American alternative trade alliance known as ALBA-which stands for the Bolivarian Alternative for the Americas and means “Dawn” in Spanish-was held in Caracas on January 25-26. The brainchild of Hugo Chavez and Fidel Castro, ALBA was founded by Cuba and Venezuela in 2004 as a fair trade alternative to US-backed free trade policies and is made possible thanks to Venezuela’s oil money.

When Evo Morales was elected in Bolivia and Daniel Ortega in Nicaragua, they too joined ALBA, which Chavez has nicknamed the Club of “Chicos Malos”, or bad boys, because of its opposition to U.S. domination. At this weekend’s meeting, the Caribbean island of Dominica also joined, and representatives attended from Ecuador, Honduras, Uruguay, Haiti and several other Caribbean nations.

Chavez opened the session talking about the need for a trade system that addresses people’s needs, not corporate profits. He railed against the “dictatorship of global capitalism”, and encouraged Latin American countries to withdraw their international reserves from United States banks, warning of a looming US economic crisis. “Why does that money have to be in the north?”, he asked. “We should start to bring our reserves back home.”

His thoughts were echoed by Daniel Ortega, who blamed the capitalist system for the environmental crisis. “The capitalist model of development is simply unsustainable,” Ortega declared. “If your economy is controlled by speculative capital that only cares about profits, you can’t solve the huge problems affecting humanity. Once we renounce the free trade model, we can begin to address the massive problems of unemployment, poverty and global warming.”

Bolivia’s Evo Morales, who is facing fierce opposition in part because of his efforts to nationalize natural gas and oil, insisted that key public resources such as land, water and energy should not be for private profit but for the common good. He also insisted that Latin America should not look to the United States for solutions, since U.S. aid always comes with strings designed to increase its hegemony.

“In 1990s, the World Bank and the International Monetary Fund imposed their disastrous policies, and then the U.S. tried to impose the Free Trade Agreement of the Americas-which should really be called the Free Profits Agreement of the Americas because it is meant to increase the profits of US corporations,” said Morales. “But people of the hemisphere rejected that agreement, so now the U.S. is trying-country-by-country-to get bilateral trade agreements. They are always trying to divide us, but we salute the great resistance to empire that we see throughout the hemisphere.”

The leaders noted that it was no coincidence that just at the time of the ALBA summit, Condoleezza Rice was visiting neighboring Colombia to promote a U.S.-Colombia Free Trade pact. Chavez, who recently called Colombia’s President Urribe a “sad peon of the empire”, laughed at U.S. accusations that he, Chavez, was facilitating the flow of Colombian cocaine through Venezuela.

The talk of drug-smuggling turned into comic relief, however, when Chavez launched into a discourse on the benefits of the coca leaf, which, he insisted, was very different from cocaine. U.S. officials have long tried to eradicate coca cultivation, which has been grown and chewed by Andean Indians for centuries.

“Speaking of drugs,” Chavez turned to Bolivian President Evo Morales, who is himself a former coca farmer and is a strong defender of the coca leaf, “where are the coca leaves you used to bring me?”

A Bolivian Indian sitting behind Morales got up and offered up his personal stash of coca leaves. Delighted, Chavez took a leaf and put it in his mouth. “The sacred leaf of the Inca, the Aymara Indians,” he declared. “Thank you, brother.” Emphasizing the great qualities of coca, Chavez said that he had become used to chewing the leaves every morning and invited the other heads of states to try some.

The laughter reached new heights when Chavez welcomed Prime Minister Ralph Gonzalez of St. Vincent and Grenadines to the Club of the Bad Boys and asked, in broken English, “Do you want some coca?” Imagining the headlines back home, the Prime Minister politely declined. “I’m a good Catholic boy who only occasionally associates with bad boys,” he joked.

The meeting turned serious, however, when it came time to sign economic agreements. Nicaragua, for example, pledged to help supply milk, corn, beans and beef to Venezuela, while Venezuela will sell Nicaragua oil under preferential terms to Nicaragua. Cuba has an agreement to send doctors to Venezuela in exchange for oil discounts.

The most significant moment of the summit was the announcement of the creation of a regional development bank intended to strengthen their alliance and promote independence from U.S.-backed lenders like the World Bank. The ALBA Bank will be started with $1 billion to $1.5 billion of capital. Venezuela, with its plentiful oil earnings, will be the leading financier. The funds will go toward joint efforts from farming projects to energy ventures, such as hydroelectric energy using Dominica’s abundant rivers and Nicaraguan technology.

Chavez and the leaders of six other South American countries last month launched a similar venture, the Bank of the South, which is projected to have as much as $7 billion in startup capital and offer loans with fewer strings attached than those given by the World Bank or the International Monetary Fund.

A major question about the future of ALBA is whether more countries will join to give it more clout. Ecuador and Haiti, for example, would like to join but are facing strong internal opposition. Several small Caribbean nations attending the meeting mentioned how difficult it is to counter attacks by the conservative media. “The principles of ALBA-solidarity, non-interference, respect for independence, complementarity instead of competition, fair trade-they are like motherhood. You can’t be against them,” Prime Minister Ralph Gonzalez of St. Vincent and Grenadines reasoned. “But when you start to add names-Chavez, Castro, Ortega-people get scared. So we have to educate our people before we can become full members.”

Dominica, a nation that defied elite pressure by joining ALBA, was already facing the backlash. “While we are here talking about ways to improve the lives of our people, the conservative media is talking about economic ruin, communist influence, Iranian takeovers, an end to tourism,” tourism minister Ian Douglas told me. “We will weather the storm, but it’s not going to be easy.”

One way to get around such government pressure is to allow the participation in ALBA of social movements throughout the hemisphere. At last year’s summit, the ALBA Council of Social Movements was formed with representatives from farmers groups, women, environmentalists, unions and other civil groups. But there were unresolved questions over how to structure the Council, so this year, only the social movements in the four member countries were invited. The Council, however, proposed expanding membership.

“The best way to strengthen ALBA is to include social movements from throughout the hemisphere,” said Joel Suarez of Cuba’s Martin Luther King Center, one of the five movement reps from Cuba to attend the Summit. “Governments may be pressured not to join, but the social movements are anxious to be part of an alliance that promotes fair trade over free trade.” Indeed, the proposal is to even include social movements from the United States. Venezuela is already working with U.S. groups and local governments to provide discount heating oil to poor U.S. communities.

With ALBA countries, particularly Bolivia and Venezuela, facing strong internal opposition, improving the population’s economic well-being is critical. The future of progressive victories in Latin America rests on turning the rhetoric of fair trade and sustainable development into concrete gains. This year will be a critical test of whether Venezuela’s oil money can indeed be used to develop an alternative economic model.

Medea Benjamin (medea@globalexchange.org) , cofounder of Global Exchange (www.globalexchange.org) and CODEPINK: Women for Peace (www.codepinkalert.org), was an invited guest at the ALBA Summit. Global Exchange organized monthly people-to-people delegations to Venezuela and other ALBA countries.

QUOTE OF THE DAY : Indo-Afghan Relations

"After the US, Japan and the UK, India provides the highest aid to Afghanistan, not counting the institutions. But this is not why the Afghans have an incredible affection for India. The reasons must lie in shared histories. The barrier of religion is crossed here. In no country have I felt more welcomed than in Afghanistan. We need to put ourselves out a little more at the people level to return some of the warmth we receive in Afghanistan, where the heart opens when you say where you are from. "

--ANAND K. SAHAY, " Remember the Khabuliwallah "

Source: From Tehelka Magazine, Vol 5, Issue 5, Dated Feb 09, 2008

AFGHANISTAN : Honored to Be Your Host
By Lisa Moore
Posted 3/18/07

U.S. News & World Report

Special Report: How They Do It Better

Being a generous host in Afghanistan is akin to a sacred duty-an obligation of honor, even of life and death. A host must provide food, shelter, and protection for a guest, whether friend or stranger. "Not to do so would be dishonorable," says Fawzia Etemadi, an Afghan author who's writing a book on her nation's codes.

Scottish writer Rory Stewart owes his life to such hospitality. In 2002, he walked across Afghanistan, and then told his story in his book The Places In Between. Stewart had hiked alone across much of Asia, but, he says, "only in Afghanistan did I find it difficult to walk alone, because the people have such a strong sense of obligation to a guest." Owners of even the poorest homes designate space as the guest room, where a visitor will be fed and housed. In wealthy homes, this space is called the memaan khana. "There's a strong sense that proper behavior toward guests brings back benefits to the host-honor, prestige, status, but also luck, that God will reward people who are generous to a guest," says Stewart.

Values. Such hospitality has deep roots in this country, a crossroads of the Silk Road where global merchants met to exchange wares, meals, and stories. Afghans adopted a philosophy of ayaraan, focused on trust and generosity. "If a person comes to your house it means that they trust you, and you would never betray that trust," says Etemadi. After more than two decades of war, many Afghans, especially in cities, have become wary of foreigners. Yet, says Etemadi, "most Afghans still carry the old values."

She describes her own upbringing in the war-torn country, which she fled after the Soviet invasion in 1979: "If I were home alone and friends of my parents came to visit, I would have 100 percent responsibility to bring them tea, feed them, and talk with them until my parents came home. We do this out of a sense of hospitality and respect." The poorest villagers share whatever they have, "and they would be embarrassed if you tried to repay them."

"I have been in 110 countries in the world, but the people who really touched me deep in my heart were the Afghans," says Iranian-born photojournalist Reza Deghati, a veteran of more than 50 trips to Afghanistan. On his first, in 1983, he was traveling along narrow mountain passes with mujahideen who were fighting the Soviets. They had to walk single file, or risk falling over cliffs. Yet occasionally the men would crowd near Reza despite the peril. When he asked why, they told him they knew when they were near hidden pockets of Soviets and wanted to protect him from gunfire. "The commander told me that from the moment he took responsibility for me, I was his guest," Reza says. "If I had been killed, all his tribe's and family's honor would be gone."

This story appears in the March 26, 2007 print edition of U.S. News & World Report

Remember the Kabuliwallah?


Incensed at the Western occupation but fearful of the Taliban’s return, ordinary Afghans are looking up to old friend India. ANAND K. SAHAY looks back on a trip full of surprises

AFGHANISTAN IS a hard place; its hills and mountains are symmetrical but bare, and loom when least expected; the plains are dusty places that run unbroken, despairingly, for miles, now narrowing when mountains take shape, now widening, and then without warning turning into forbidding deep gorges that elicit both awe and anxiety. The people of the country have a well deserved reputation as gritty fighters. But there is something else about them too. They have a soft side which is hard to miss. This is the least expected part of being in Afghanistan.

Mostly, our images derive from imperial era stories of brave but brutal men who sent British armies scurrying back through the Khyber Pass in disarray, who would first kill and only then ask questions. More recent images are of a people who despatched the army of a superpower, fighting the Soviet military force with bare hands and a lot of derring- do. And then, again, of the time of the Taliban when men or women could be shot dead on the street or beheaded by uncouth and cruel rough men in power, for as little as unwittingly transgressing a medieval dress code imposed on them — the kind of images given currency by The Kite-Runner, the runaway bestseller. All of these word-pictures are about men of action, or men in action; in all of them women are behind the veil if they are not missing altogether.

So, it comes as a huge surprise when one meets on the streets men who are not mean and burly and seven feet tall but as ordinarily built as men on Delhi streets. The roads of Kabul in the post-Taliban era are also full of women on their way to work, women in buses (supplied typically by India or Japan as a gesture of goodwill) or maxi-vans returning home, women doing the daily shopping. They have their heads covered but mostly not their faces. But what may strike an Indian visitor to Kabul most of all is that Afghan men — even big men with bushy beards and outsize traditional turbans, or soldiers and policemen carrying weapons — speak in soft voices, unlike in India where the tone is generally loud and the voice often grating.

These were my first impressions of Afghanistan and its people that helped me decide I could take a chance on living in Kabul, working to help set up an English-language daily newspaper and writing for an Indian news agency. When I would leave that remarkable country a year later, I saw no reason to re-work my earliest mental snap-shots of the place. First impressions became firm impressions.

Rebel Capital A boy stands next to a Russian tank in the Panjshir Valley
I became fond enough of the place to invite my wife and daughter for a small vacation though the security situation was deteriorating. We motored around as much as we could in ten days and they came to be as passionate about the country as I was.

Afghanistan holds a peculiar fascination for most foreigners on account of its dramatic landscape and history, its great civilisational past as archaeology attests, the directness of its people, and their friendly conduct and composure in dealing with outsiders. There are said to be about 3,000 Indians in Kabul alone — businessmen, doctors, road-builders, engineers, capacitybuilders, and infrastructure-wallahs of all types associated with Indian public and private sector companies building small and big projects across Afghanistan.

The country, in fact, teems with expatriates — UN-mandated American and European troops, foreign experts of every description, NGO sector workers, aid providers, officials of multilateral institutions of every variety and foreign embassies and businesses. There is also a small community of scholars whose hub is the Afghanistan Research and Evaluation Unit (AREU) in Kabul, a research and policy-dissecting institution supported, among others, by the UN, the World Bank, and the EU, that boasts a splendid library and a superlative chief librarian, a New Zealander with a doctorate in ancient Indian history who once pored over Jain manuscripts in Sanskrit and Pali.

The visiting scholars at AREU are typically from European and American universities. As a library regular, I came to know a number of them over time, each passionate about a different facet of Afghanistan. For all the securityrelated fears and restrictions that encumber living in a war-torn country, Afghanistan exerts a pull on those who have come to know it.

Louis Dupree, the great American scholar of Afghanistan who lived a quarter century in the country before the Soviet invasion, has observed that “every Afghan is a poet at heart”. The Afghans are also music-mad. Many of their“ragas” are the same as ours. Perhaps this is a reason they are obsessive about Bombay film music which plays ceaselessly in homes, offices, restaurants, bazaars, and cars and taxis. It is not possible to escape it. Because of the cultural and linguistic affinity we share, they are also crazy about our films and television serials.

PEOPLE RUSH home from work and often skip out early when Saas Bhi Kabhi Bahu Thi is on air. This surprises foreigners, not least Pakistanis. I asked a young Afghan woman why “Saas Bhi” (and its principal character “Tulsi”) was such a draw. She said the serial — I am paraphrasing — brought home to the women week after week that a woman could also be an autonomous person. (That of course still does not say what charm it holds for the men!) They can’t go that far in Afghanistan yet, but it is more than clear that the women are on the move and want to be. Perhaps the memory of the past lingers. In the Communist period (1979-91), a time of resistance but also secularisation and forced modernity (a project that would be derailed and destructed in the gory civil war that followed in which the principal actors were mostly proponents of political Islam, and later upon the arrival on the scene of the Taliban), women accounted for half the work force in teaching (at all levels) and about a third in the medical field and civil administration.

Women have begun to occupy public spaces again. Today, they are well represented in the media and many are television anchors. (Afghan cinema, however, languishes for want of female actors.) Cultural traditionalists can’t handle this and media women have been killed. But the others take it on their chin and carry on.

Not long ago, in Logar province, which is just outside Kabul, a group of young girls was sprayed with bullets from a passing motorcycle as they stepped out of school, killing half a dozen on the spot. Weeks before the tragedy ‘night letters’ (apparently a technique favoured by Islamists: its use was also frequent in Kashmir some years ago) had begun to circulate in the area, warning people not to send their daughters to school. The school was hastily shut down after the group killing which shocked the country. But the people hit back. Barely a week later the school was up and running again with girls returning to it in droves. This can hardly be possible if parents didn’t want to educate their daughters.

One of the most significant statistics coming out of Afghanistan in the six years since the fall of the Taliban is that of school enrolment. About 70 percent of all children of school age are now in school and a third of them are girls. One doesn’t have to look far for proof. Look out of your window about six any morning bar the Friday weekend and they’ll be there — unending lines of girls in uniform walking to school. Five months of the year the temperature is well below freezing at that hour, but the cold is no dampener. The same striking picture again about two in the afternoon as most schools do double-shifts.

Is this democracy? One can never say. But no democracy can exclude girls from schools and colleges and public affairs. For the first time in Afghanistan, a quarter of the Wolesi Jirgah (House of the People, corresponding to the Lok Sabha) are women, in compliance with a constitutional requirement. No other country in the world can boast such representation. It is noteworthy that outside of seats in the reserved category, many unknown women fought against established political figures and feared local warlords in the 2005 election for parliament and won hands down.

Bright as this picture is, everything that can go wrong has gone wrong with Afghanistan. The US officially recognises that American and NATO’s military intervention has not succeeded in routing the Taliban whose staging area in Waziristan in north-western Pakistan, abutting Afghanistan, now functions as a better launch pad than at any time in the recent past. Welltrained and well-equipped Taliban fighters infiltrate through the border regions in eastern and southern Afghanistan on an everyday basis — it is the Kashmir story except that in Afghanistan their strategic aim is to re-take Kabul. Suicide bombings and planting of IEDs in the path of military convoys has dramatically shot up in the past two years, mimicking the situation in Iraq.

But the difference between the two countries is a real one: in Afghanistan, even those who politically oppose President Karzai, and are getting more and more unhappy with the presence of international troops, do not favour the return of the Taliban. That is why there is no “green zone” — whose protected denizens can be assumed to be anti-Islamist — in Kabul as in Baghdad; indeed there is no need of one since the country as a whole opposes the return of the Taliban. That, in fact, might become a distinct possibility if the foreign forces upped and left. The nascent Afghan army and police are too small and too ill-equipped to be a match for the well-supplied Taliban fighters (a significant number of whom are Arabs, Chechens and Uzbeks) though the army has consistently given a good account of itself in battle over the past two years.

The creaky security sector is not the only downside. Too few boots on the ground — exacerbated by President Bush’s Iraq misadventure which needed troops diversion to Iraq — is just one of Afghanistan’s many problems, though it is clear that if security is not set right, nothing else can be. It is important to consider that the process of recovery in the country is badly under-funded. That is no way to deal with the mess created by three decades of revolution, war, displacement of millions, and social turmoil.

The international community has put in less money per capita in Afghanistan than in tiny Timor, to say nothing of Iraq or the Balkans. Pakistan, although not a war zone, has received as much if not more than Afghanistan from the US since 9/11. Besides, a significant portion of the aid goes for the upkeep of foreign forces. Domestic tax collections count for very little, being barely five percent of the GDP which is pumped up artificially through aid, an unrealistic exchange rate, and opium sector revenues ploughed into the economy. Fortunately, however, the rate of growth is high, averaging at about 14 percent a year for the past three or four years, though the GDP per capita is still very low.

THE DRUG mafias — Afghanistan produces nearly all the world’s opium — are powerful, especially in the belt where the Taliban is the most active, ie. at the border with Pakistan. Their link with terrorism is obvious. They are successful for many reasons, but among them is the patronage of top guns in the system. Corruption is all-pervasive, and there is thought to be little transparency and accountability in the State machinery which is in the process of being built from scratch. The parliament, dominated by the socalled warlords, is frequently at odds with the president’s office, hampering executive action.

In the Western world, which does the bulk of Afghanistan’s funding (laughable though the sums are in relation to the problem), there is little appreciation that the major questions pertaining to governance, state building, and societal reforms are hardly peculiar to this land-locked mountainous land. The sponsors just want a bang for their buck to show to home audiences, and they want it quick. Since this is impossible as time moves slowly outside North America and Western Europe, all that the Afghanistan government gets from its donors is a litany of complaints about slowness, inefficiency and corruption, and lectures on how to smarten up. The Taliban are naturally laughing up their sleeve. An extremist fighter was once quoted as saying, “They have the watches; we have the time.”

Prof Ishaq Nadiri, a Columbia don, is the senior economic advisor to the president, and co-chairs the powerful group (along with the UN Secretary-General’s representative for Afghanistan) that oversees aid flows as well as its effective utilisation for state-building by the Afghan side. He once told me, “Afghanistan is not a post-conflict society; it is a post-devastation syndrome where conflict is ongoing.”

Western governments haven’t grasped this yet, and it is unlikely they will. But the ordinary folk know that everything in the country must be re-born. The 30 years of war left nothing standing — no agriculture, no industry, no village life, no government, no roads, no hospitals, no schools, no army, no police. All that it left was a lot of people fleeing from the terror. Those who have not lived in Afghanistan are unlikely to comprehend the sweep of the devastation wrought.

The one place that symbolises the destroyed country is the capital — Kabul, which bore the brunt of the fighting, especially in the civil war years when 50,00 of its citizens were killed as rivals shelled each other’s positions from tanks and aircraft in a bid to capture the seat of power.

Once an imposing city of tree-lined avenues and beautiful people, Kabul today is a rutted town, choking with armour-plated four-wheel drive vehicles of the foreign aid givers, and sewers spilling on to dust-tracks that go for roads. Unemployment runs high, as do prices. A tiny section has grown very rich very quickly, thanks mainly to the filching of foreign aid and the drugs money. The guest-houses, restaurants and the malls thrive on them. For the ordinary Afghans, however, life is a daily uphill battle which they mostly lose.

But they have lost none of their sentimentality and continue to possess a wonderful dignity about their person. Poor they may be, but their generosity of spirit is not dimmed. When she saw my bags packed for a short trip to Delhi, the “khala” or cleaning lady who worked at the guest-house where I lived removed a silver ring from her finger and insisted I take it for my wife whom she had met. She wouldn’t take no for an answer. A carpet-seller on Flower Street in the trendy section of Kabul, whom I barely knew, pressed on me a carpet I had liked. “You have done me the honour of liking it, it can only be yours”, was his simple logic. I had some money on me but not the full price, but he wouldn’t hear of taking any. I returned another day with a small gift to make the payment.

After the US, Japan and the UK, India provides the highest aid to Afghanistan, not counting the institutions. But this is not why the Afghans have an incredible affection for India. The reasons must lie in shared histories. The barrier of religion is crossed here. In no country have I felt more welcomed than in Afghanistan. We need to put ourselves out a little more at the people level to return some of the warmth we receive in Afghanistan, where the heart opens when you say where you are from.

From Tehelka Magazine, Vol 5, Issue 5, Dated Feb 09, 2008

January 31, 2008

Medvedev’s Last Battle Before Kremlin Debut

Russia Intelligence
Politics & Business inside Russia
31 January 2008
No. 70

Reposted from Russia Profile

The arrest of Semyon Mogilevich in Moscow on Jan. 23 is a considerable development on Russia’s current political landscape. His profile is altogether singular: linked to a crime gang known as “solntsevo” and sought in the United States for money-laundering and fraud, Mogilevich lived an apparently peaceful existence in Moscow in the renowned Rublyovka road residential neighborhood in which government figures and businessmen rub shoulders. In truth, however, he was involved in at least two types of business. One was the sale of perfume and cosmetic goods through the firm Arbat Prestige, whose manager and leading “official” shareholder is Vladimir Nekrasov who was arrested at the same time as Mogilevich as the two left a restaurant at which they had lunched. The charge that led to their incarceration was evading taxes worth around 1.5 million euros and involving companies linked to Arbat Prestige.

The other business to which Mogilevich’s name has been linked since at least 2003 concerns trading in gas. As Russia Intelligence regularly reported in previous issues, Mogilevich was reportedly the driving force behind the creation of two commercial entities that played a leading role in gas relations between Russia, Turkmenistan and Ukraine: EuralTransGaz first and then RosUkrEnergo later. The first was officially set up in December, 2002, the second in July, 2004.Their aims were identical: to insure the sale of Turkmen and Russian gas to Ukraine and insinuate themselves as middle-men between Gazprom, its Turkmen supplier and the Ukrainian customer, raking in the money resulting from the transactions in the process. The stakeholders in the two companies are virtually the same even though the offshore entities that hold their shares are numerous and the owners mere frontmen. Since 2006 it has been known that, apart from Gazprom, which owns 50% of RosUlkrEnergo, the other stakeholders are Dmitry Firtash and Ivan Fursin.Firtash was also the mainstay of EuralTransGaz. And links between Firtash and Mogilevich have been proven even if Mogilevich denies being involved in the companies (regarding Firtash, read Ukraine Intelligence No. 13).

But how can Mogilevich’s arrest be tied to the succession process currently unfolding in Russia? Eural-TransGaz was set up at a time when Dmitry Medvedev was chairman of Gazprom but the venture was really under the authority of Alexandre Ryazanov who was deputy chairman and didn’t exactly form part of the Medvedev clan. Indeed, it was only when RosUkrEnergo was set up that Gazprom (through the intermediary of entitles linked to Gazprombank) “officially” came into the picture. Medvedev and Alexey Miller took matters in hand only gradually. Ryazanov was discreetly shown the door at Gazprom in November, 2006 (RI 44). One of Gazprom’s representatives in RosUkrEnergo is none other than Konstantin Chuychenko, a class-mate of Medvedev at the law faculty at the University of St. Petersburg (RI No. 68). Up to then, Mogilevich had lain low. But with Firtash serving as a smokescreen he began handing out some of the money managed by RosUkrEnergo to certain hard-line security figures in Moscow. It can now easily be imagined the alarm his arrest has triggered in Moscow but also, naturally, in Kiev. (Ukraine Intelligence No. 49).

It can also be noted that the police who collared Mogilevich belonged to neither the Investigation Committee of the prosecutor’s office nor the FSB, two organizations controlled by men linked to Igor Sechin but came from the interior ministry. The number two man at the ministry is the recently-appointed Yevgeny Shkolov, a former colleague of Vladimir Putin at the KGB outpost in Dresden and adviser to Medvedev at the presidential administration (RI No. 67).Shkolov has authority over the criminal police in his capacity as deputy interior minister under Rachid Nurgaliev. In addition, limiting the charge against Mogilevich to tax evasion enables the ministry to keep him out of the hands of FSB or the prosecutor’s office and therefore “protected” and under Medvedev’s control, at least for a time.

Medvedev has thus responded to the intrigues by the Sechin clan that Russia Intelligence has largely analysed in previous issues. The final battle has been engaged and the future Russia president has chosen the terms and can be counted upon to fight it as long as Putin remains in the Kremlin. The outcome of the battle depends largely on the amount of authority Medvedev will wield as president over those who opposed him so bitterly over the years within the walls of the Kremlin.

Full reports on EuralTransGaz, RosUkrEnergo, Mogilevich and Firtash can be found on our site www.Russia-intelligence.fr

De?mo-narchy Of Democratic Republic of India - 2


By Published 07/27/2007 Indian Politics

Indians are proud to declare theirs is the largest democracy in the World --undisputedly so. The question in this article is - is it the best, or how good is Indian Democracy, not how large. The answer is depressing for all of us, who grew up dreaming during British occupation of India, that one day we would form a great democracy the envy of the world. Westerners claim that democracy is inherent to their culture with the beginnings of Roman State- albeit it was limited to a few thousand elite, the rest being slaves. Indian political theorists claim that we had even richer history of democracy from Vedic times as illustrated in village panchayats.
(See www.nipissingu.ca/department/history/MUHLBERGER/HISTDEM/INDIADEM.HTM )
However, current trends in Indian constitutional democracy are disheartening.

The real threat to Indian democracy is from the new breed of politicians who are taking advantage of the institution of democracy to create dynasties, a form of demonarchy such as that perpetuated by the Nehru Dynasty. There was an interesting editorial in Wall street Journal prior to UPA's election to power in India. The editorial starts with a quote from Jawaharlal Nehru: "HISTORY TELLS US THAT HEREDITY BREEDS FOOLS IN POLITICS AND EMPIRES." What a profound quotation! The editorial was in reference to Sonia Gandhi of India who claims entitlement to power, because her mother-in-law, Prime Minister Indira, died in her lap! The editorial cites others as well, Sukarno Putri of Indonesia for one who has a similar hold on the literate and semiliterate citizenry of Indonesia. She claims that her father shows up in her dreams to advise her. Then, of course, we have Sirimavo Bandaranaike, Benazir Bhutto, all from fledgling democracies. Little did poor Jawaharlal Nehru dream that heredity breeding fools would apply to his family too after his demise! It is unthinkable that Jacqueline Kennedy would even remotely be proposed to succeed her fallen husband or Itzak Rabin"s wife to succeed her assassinated husband. Indian politics so deteriorated after Nehru"s death that Socialist Party leader Ram Manohar Lohia called Indian Democracy "A Brahmin-Baniya Oligarchy." We will explore whether he was correct or hyperbolic. There are four conditions that are required for demonarchy: 1. Government control of media 2. Dictatorial laws, and/or non-enforcement of law and order, 3. Control of economy (centralized), and 4. Manipulation of electoral process. For example, by first appointing candidates from top to bottom by party hierarchy at the apex and then electing them. All these conditions prevail in Indian democracy which makes it demonarchy.

Let us examine demonarchy of Nehru/Gandhi dynasty first. Kuldip Nayar outlines the events surrounding Nehru"s terminal days and the succession to the prime minister"s position. One of his loyalists, Kamaraja Nadar, approaches Nehru and asks whether he should install his daughter as the Prime Minister (P.M.). Nehru was supposed to have said "not now" which implied "later." Nehru could not degrade himself to ask that his daughter be chosen to succeed him. He had the dignity and cognizance of his place in Indian History and reputation in the world. Then the Congress party operatives elected Lal Bahadur Shastry to Prime-minister-ship as a stop-gap. After his untimely death in a short time Nehru"s daughter Indira Gandhi was elected as the P.M. with the help of party operatives. She had no legislative experience. The socialist leader Ram Manohar Lohia called her a sugar doll " gudia ki daal (it would melt away if he licked it!). She was not a natural democratic leader by popular assent, although she mastered political intrigue under the tutelage of her father for 17 years. The very first time she encountered a threat to her power, she resorted to tyranny by declaring the state of Emergency, the only emergency being nothing but a threat to her power.

Nehruvian Democracy Vs Jeffersonian Democracy

Jeffersonian constitutional democracy sets the constitution as supreme law of the land, which is pledged to be protected and defended by the president, legislature and judiciary severally. It is a sacred document that embodies civil liberties and basic human rights that protects the minority, even a single man, in the land against the tyranny of majority rule and against the might of the overbearing Government. The US constitution had been amended only 27 times in 200 years history. (The amendment on child labor is still not ratified after 82 years!). The founding fathers of the U.S could envision such a constitutional democracy because of inherence in their culture of tolerance for -in fact, respects for - minority positions. People who lightly talk of spreading the democracy all over the world forget that it should be ingrained in the culture and be defended by patriotic people with eternal vigilance; America is still in the process of achieving the ideal set by the founding fathers.

Indian constitution has the same lofty ideals as the American written by Thomas Jefferson including its preamble and the fundamental rights. But Nehru, as unchallenged leader of his Congress party, and the leader of modern India wielding enormous power since Emperor Ashok and commanding enormous adulation of his countrymen, never established democratic traditions; it is not that he did not know how to construct a democracy but he was impelled to secure unchallenged power. His generation of leadership, though was educated in the West, was weak and helpless to stand up to him. He was so drunk with power after suffering a stroke in 1963 and having ruled for 17 years, he would not give up his power. TIME magazine reported once that Lohia "gracelessly" remarked whether India needed an invalid as its P.M., when the P.M. did not gain his gait after a stroke. While Gandhiji was an example of complete self-sacrifice, none emulated him amongst his followers, alas, except ironically Nelson Mandela of South Africa who abdicated power after one term. Leaders of India had a different story. Media were controlled by the state with only one government owned radio station. Every day the news papers carried photo opportunity of the P.M. creating a myth that only he could carry out the foreign affairs, for he alone knew the world. His sister was appointed ambassador to the Soviet Union. The Ministry of External affairs under the single-handed and tight-fisted control of Jawaharlal Nehru was not subject to audit nor the treaties with other countries subject to ratification by the parliament, precisely the root cause for the problem India is facing today with Manmohan Singh"s agreements with the U.S regarding the nuclear treaty. Travel to outside world under Nehru regime was a privilege for a few and not a right. Passport could be denied with no explanation! The senior author waited four months to get a passport in 1962 to study abroad. It is not that Nehru did not know the rights enjoyed by the free world that he had to be forced by the decision of Supreme Court to admit that Citizens of India are entitled to the freedom to travel abroad. His Government tried to restrict study abroad on need basis, with exception made for two of his grandsons who were privileged to study as under-graduates in England with no special distinction, as though India then could not provide quality undergraduate training in India. All other "commoners" were to prove their merit to pursue only post-graduate training before being "licensed" by the Nehru-Gandhi "democratic" government to qualify for the passport. Such double standards are the order of the day in implementing lofty "equality" establishing policies of the UPA government even today and are not considered a form of nepotism even by the Nehru-Gandhi dynasty when it comes to judging the privileges extended to their own family members. Of course, the concept of "conflict of interest" is absent even on the ethical scene of Indian politics.

Dictatorial laws of India

Nehru ruled the country by the same arbitrary laws by which British controlled India, including the notorious preventive detention act, by which anyone could be arrested. It is under this act that he arrested and kept Sheik Abdullah of Kashmir, his friend whom he called "Lion of Kashmir," in jail for years. Of course, Abdullah could not be defeated after his release. It is the same law used indiscriminately by his daughter Indira in arresting and throwing Jaya-Prakash Narayan in Jail, a man regarded as one of the founding fathers of Indian democracy, venerable leader respected by her own father as his equal. Indira Gandhi arrested student leaders from the college classes without revealing their hidden locations or their fate to their parents. Nehru dared not go that far as it would tarnish his image as a Great democratic leader in the world. But he was very close. He surreptitiously let the dirty job be done by state governments without ever criticizing them publicly. Chief Minister of Bombay, ignoble Morarji Desai, opened fire on unarmed protesters during Nehru regime and was later rewarded with the Ministerial post by the Congress High Command and later as a P.M. by Janata Government! Communist party was banned in several States (not by central government, though!). The members and affiliates were arrested and in extreme cases released and shot in forests as terrorists (in encounters). This continued for years during Nehru"s and the subsequent Nehru-Gandhi regime. Consequently, the communists won the election contesting from jails in Andhra! An event rarely heard of in the history of any democratic country!

The political immaturity of the Indian leadership is evident in that not a single voice was raised by the other opposition parties not subjected momentarily to such treatment. After Gandhiji"s assassination several RSS leaders and intellectuals were arrested, many lost their jobs, and the rest were released after prolonged incarceration. Guruji Golwalkar wrote to Nehru that he was unfairly, illegally, and without due process kept in Jail even without any charges being filed or affording any trial. Nehru simply referred him to the Home Ministry as though he had nothing to say about the incarceration of a leader of one million followers. The communists and socialists regaled in the pleasure this man was sinking in jail, not knowing that when the bells toll they toll for them too and their time would come. When their day came nobody was there to raise voice.

Indira Gandhi used a very rare legal provision, never used before her time in Independent India, "the law of sedition," violation of which is a very serious offense. It was enacted by the British. Lokamanya Tilak was punished by the British charging him under this law although Tilak protested that "Swarajya" did not have the connotation of sedition. When Bindranwala, who was indeed a true seditionist, was killed along with other terrorists in Amritsar, an Indian correspondent of a foreign paper reported that some of the victims were shot in an assassination style while their hands were tied behind their backs. The law of sedition ridiculously states that such a serious allegation can only be leveled after verifying facts with the Government officials ("Collector"!). No other modern democracy would accept such a law. Provisions of search and seize in this law justified by Indira included ransacking the Indian Express office and Printing Press in Delhi during the emergency. The leaders of Janata who succeeded Indira Gandhi found all this "no big deal." The reason perhaps is that they had a similar mind-set. Such practices in Communist China caught international attention but in the democratic Republic of India these atrocities went unnoticed without any ado. The word democracy can thus be seen to provide a cover for many injustices. Such state of affairs tempts one reconsider democracy in India as a masquerading form of demonarchy.

Indian Socialism:

While Indian political leadership was not allowed to develop, flourish, and to be perpetuated by using the tactic of controlling the media and all means of communication, and also by exercising arbitrary laws, there was more pernicious factor in setting back Indian democracy and paving the way for dynastic succession. That was the tactic of controlling the economy without facilitating free enterprise. Nehru was an ideologue but not necessarily an idealist. He was excellent in creating slogans. His most powerful slogan was "socialism." Later many African countries used this slogan. His practice of socialism can be summarized from his own observation of Sir Stafford Cripps, who according to Nehru enunciated a strategy, "tell the poor that they will get wealth distributed from rich and tell the rich they would be protected from the poor." The poor never got anything of substance in 60 years from the government of India, no effective land reforms, welfare, any advancement, or betterment until recently when the economy was liberalized. However, monopolistic capitalism was encouraged, with only one car manufacturer for a long time and later second one headed by the members of the Nehru-Gandhi family, licensed to produce cars, and only one major drug company was licensed to package the drugs produced in the West. Still with all liberalization and propaganda, government tight control of the economy is transparently evident even today. During Nehru"s rule, one had to register a purchased radio and get a license to use it! Even today, Government permit is needed to open a gas station ("petrol pump") in India. One of the grand schemes of Nehru to socialize the farmland was by bringing the farms under cooperatives, which would have eliminated any free enterprise remaining. This initiative failed because of wide spread opposition. Still the entire production and distribution, and all entrepreneurial activity were tightly controlled by the Indian Government leading to wide-spread corruption. This set India decades behind China economically. It will continue to cause India to lose its race with China in the competitive world economy. Only recently is a beginning made to minimally use private initiatives in building infrastructure in India which is in a dismal state in comparison to China, leave alone the evening entertainment for the hard working foreign born business executives. Solid good infrastructure and quality of life for its employees are two main factors attracting multinational manufacturing industries and other multinational corporate headquarters or business establishments to India. Nehru-Gandhi dynasty has failed terribly in these two areas namely the building of infrastructure, improving the standard of living for all citizens and not just a few (one third), to compete with non English speaking China that can easily learn English.

With the rise of Janata Party and the agitation for separation of Punjab, Indira Gandhi bemoaned the rise of the middle class as responsible for the growing strength of Janata Party and its viable opposition. Early on Nehru was very much aware of the overall social and economic structure of India. On a visit to Mongolia, a reporter asked him whether India would become Communist. His answer was that it was not possible, because India was essentially a feudalistic country. The ruling class was thus the landed aristocracy with no interest in democratic reform but only loyalty to the idolized leader. India had no Jefferson or Jeffersonian concepts of democracy.

With centralized economy and with Government as major employer, press depended on the favors from the Government as a major source of revenue and thus lost its freedom to report unbiased. Together with the state controlled radio, all means of communication were so monopolized that the only way public dissent was frequently expressed was by massive demonstrations, at times violent, leading to burning of buses and trains, naturally, joined by antisocial elements confusing the issue of meaningful dissent. Even today every party organizes bundhs (forcibly closing shops and disrupting traffic) in India. There are instances in which the ruling Congress party organized such demonstration in the states ruled by opposition party and removed the government by presidential decree claiming the breakdown in law and order! The main media in India, especially English language ones, are seen as the stooges of the ruling Congress Party, and the Government, behaving so for the entire period of Congress rule, indicating a sign of lachari even in the press.

Congress High Command Structure:

The structure of the one and only one organization, the Indian National Congress, under whose banner diverse groups fought the British, had only one controlling command center called "High Command" which was totally undemocratic not unlike the Soviet inner cabinet. The leaders at the top in Delhi including, Gandhiji, Nehru, Patel and a few others controlled the party. There was no grass roots democracy. The party commanded from top to bottom. While the High Command was justified to fight the enemy, the British, it was never intended or justifiable as a model for democracy. The continuation of this structure led to idolatry of the then freedom fighting self-sacrificing leaders evolving in the current dynastic rule. Later the high command was replaced by the Congress Working Committee. There were no organizational elections in the congress party for the last 25 years. The Working Committee acting as High Command virtually rules the party and the Country. The power is so concentrated in a few hands that from one State, U.P., 9 of the 13 Prime Ministers were elected.

To contest for an election either at the level of State legislature or at the Center (parliament), candidates are selected at state level and approved at the center which retains the tight-fisted overall control. The selected candidates are given "tickets", a process unheard of in the U.S. or other democracies. There were charges that these tickets were sold and the state congress party leader in Andhra Pradesh made millions in 1995. By this practice, if one party is in overwhelming majority it can control the entire leadership of the country. There are no primaries to select or elect the candidates freely nor re-runs when multiple candidates contest. Democracy is "just in name" and if not a "farce" in the Democratic Republic of India.

Political system creating Desperate Destitution at every level:

The so called Socialist Government of India by planned economy is almost a sole monopolistic employer commanding the power to distribute jobs as political patronage with very little free enterprise as an alternative. What little free enterprise was there had to submit to the control of the State and thus the politician in power directly and indirectly controlled all private enterprises for they had to obtain licenses to start and operate a business. Even after liberalization, one cannot open a gas station without a Government license. Early on, the political patronage controlled and interfered with all employments as well as business permits and even college admissions. Once employment is obtained, the person was still subject to the control of the state since he could be at will, without any reason, be transferred from place to place, a process reversed by begging his benefactor for whom he and his family is expected in gratitude to vote his/her way or bribe in cash or kind. Such large-scale transfers were started during British days, un-heard-of in any free country, which affect every employee top to bottom, teachers, doctors, clerks, and bankers, except mailmen. The consequences of "dislocation" are that the affected person can never establish lasting social or even family relationships or own investments or a home in any community. Children of such transferable job-holders developed only superficial relations with their peers, which is unhealthy psychologically during the formative period of their personality. In the U.S people forgo a job promotion in order to avoid moving for their school-age children. This kind of control on a citizen breeds desperate destitution ("laachari" alluded to in Part I of this article on www.sookta-sumana.com) and sense of servility ("dasyu vritti") stripping man"s dignity, leaving the helpless feeling in him/her that the only way to survive is to beg on ones knees. Such laachari or desperate destitution is so endemic and ubiquitous in the British and post-colonial India that it has become an inherent ego-syntonic feature of the Indian National Character to the point that it is confused with humility (Namrata). Obsequiousness is thus seen as a virtue while it is a symptom of a toxic political system afflicting every individual in India in some measure, through unconscious cultural internalization, whether he/she knows it or not. Such "Dasyu vritti" seen in the blood and bones of majority of Indians stemming from "laachari" must not be confused with "Vinaya" or "Namrata."

Sons of Indira Gandhi as Successors:

When Indira Gandhi was defeated after the emergency, Sen. Patrick Moynihan exulted in praise of Indian Democracy. That excitement was short-lived because of an inept Government that succeeded her. She came back to power and got an amendment to the constitution altering the preamble to the constitution stating that "Republic of India shall have a Socialist Government with a purpose to distribute wealth." In actuality no sane Indian would be opposed to the slogan of "Gareebi Hatao" or "eradicate poverty." By implication she created an illusion for her psychological warfare with her political rivals to make them look like they obstinately preferred to keep India poor. Indian constitution was thus on a course to be amended 94 times by the Congress government in 58 years after the birth of the Republic. Her earlier amendment exempting her election to the office to judicial review was rejected by a landmark decision by the Supreme Court of India which stated that a right to amend did not include destruction of the constitution and the amendments should conform to the preamble! So she cleverly decided to change the preamble itself to make "socialism" as the over-riding governing principle of the constitution and subject to interpretation to suit the ruling congress party. "Socialism" a buzz word slogan, used by her father, was thus included in the Constitution without defining it just as the buzz word "Secular" was used in the Indian Constitution without defining it, subject to being interpreted variously and indeed entirely idiosyncratically on the Indian political scene. Harold Laski, the author of the "Grammar of Politics," will not recognize any true "socialism" in the Indian democracy, nor will he recognize "democracy" as the form of government in India, although Jawaharlal Nehru is said to have chosen Laski as his idol. Indira Gandhi practiced socialism by nationalizing banks and capitalism by financing her son"s unsuccessful adventures into free enterprise, including Maruti Car manufacturing. Unable to raise private sector capital Sanjay made a run on the banks and obtained unsecured loans after nationalization of banks. He vindictively retaliated against those who previously questioned the loans. In short he terrorized the bureaucracy at the Center. Nothing said herein needs to be interpreted as the authors being opposed to pristine socialism or secularism which are essentially lofty guiding principles if not corrupted by the politicians and the judiciary.

During and after the emergency, Indira"s youngest son Sanjay Gandhi was next to her directing the Government. Politicians from different states courted him. When he came to Andhra Pradesh (A.P.) a Congress M.P. and later Minister of Parliamentary Affairs (K. Raghuramaiah) introduced him to a public gathering saying, "I served your father, I served your mother, and I am ready to serve you the rising son of India." Such was the Indian sycophancy, an illustration of "laachari." Sanjay Gandhi was shoe-in for the post of P.M. But fate had it otherwise. He died in reckless adventures with aircraft flying. Also, Indira Gandhi, soon thereafter, was assassinated.

After Indira"s death the most capable successor to the post of P.M. in the cabinet was P.V. Narasimha Rao. He was a poet, an author, linguist, statesman, and a diplomat of considerable experience. He was, however, not to succeed Indira Gandhi as it would break the succession to dynasty. The cronies of Indira Gandhi, within hours of her death, while her body was still warm, before her cremation was complete, inducted her other son Rajiv Gandhi to the position of P.M.

Who was Rajiv Gandhi"

Rajiv Gandhi, who along with his brother went to England to study, married an Italian and was content to be a pilot. Although he was the older of the two, he was initially not a candidate for the throne. He was, in stark contrast with P.V. Rao, a mediocre student and showed no signs of any distinction. In the records of Government of India listing of the Prime Ministers of India, it is stated (with some pride) that Rajiv never was interested in "studies"- which were defined in this document as "mugging for the examinations," disparagingly implying that sincere students interested in studies are "muggers" and the elite chosen to rule the country and hold the helm of the national affairs was a cut above them during his formative years for neglecting his "studies." Obviously, his concept of education and learning was limited to "Mugging." Two of the remarkable tragedies during his brief rule were interfering in the free elections in Kashmir sparking years of terrorism, and another, sending troops to Sri Lanka to control the Tamil Freedom Movement in which effort several Tamils were killed and which finally resulted in his assassination. He was also accused of promoting the retaliatory killings of Sikhs in Delhi after his mother"s assassination.

P.V.N Rao, a non-dynasty leader, succeeded Rajiv Gandhi, who for the first time in the history of Independent India led India to liberalizations of economy, partly because of his own political philosophy as well as efforts and partly propelled by the World Bank conditioning the liberalization. With all his brilliance, he was perhaps the most monumental of the P.M.s India has seen. He needs to be given his due credit for initiating the process for Indian "abhyudaya," but sadly he shared the common trait with almost all other modern congress leaders, that of "corruption." He was accused of corruption, tried, and disgraced. In this manner the history of India will, we are afraid, deface him rather than recognize him as the father of economically strong modern day India.

Cronies of Nehru Family, who themselves have no ability for leadership, ganged behind Sonia Gandhi, the wife of Rajiv, and elected her as the Head of the party. Anyone opposed to her was removed from the party for "disciplinary reasons".

They arranged Darshan (holy viewing) of her by crowds in Delhi. To show that she was the leader, they arranged dancing before her residence. One man stood on a bus and declared that he would commit suicide if Sonia was not elected a premier (P.M.). But Sonia does not or cannot give press interviews or hold a press-conference. When she came to the U.S no press correspondent including any reporter of Indian press was allowed to talk to her for the fear of exposing her. Her only claim for leadership, - in fact entitlement, - is that she is the daughter-in-law of Indira Gandhi and the latter died in her lap! When B.J.P Government fell, she claimed the post of premier but because of certain constitutional challenges she was made to withdraw her application by the President Abdul Kalam, for which he is paying a price of not being supported by her party for the second term.

Although she is not the Prime Minister, she acts as one, by sitting next to the current Prime Minister. Virtually she is in control.

Sonia has a son and a daughter, both of whom are spoken for leadership. A congress leader in A.P. recently called for Sonia"s son to be elected as the leader of the party. That is where the Nehru Dynasty stands at the moment. The Indian media have been wooing Sonia"s son and daughter for many years now and building for last many years the groundwork for her succession. Thus the dynasty will be perpetuated regardless what the people want or by asserting that the dynasty is what the people actually want.

Mini Demonarchies of India:

If the dynasty is acceptable at the center, where, because of the distance from the states mystery can be maintained, the process can be effective in the states as well. In Andhra, N.T. Rama Rao was succeeded by his son-in-law and new attempt is made to induct his son into politics. Laalu Prasad Yadav of Bihar went to jail on corruption charges and his wife kept the court and held the fort until he returned. M.G. Ramachandran was the Tamilnadu Chief Minister succeeded by his wife Janaki Ramachandran and the "other woman" (his mistress) Jayalalitha succeeded the latter claiming that she was the wronged woman (Wikipedia). (Shashi Tarror in New York Times). We have the other established case of Sheik Abdullah succeeded by his son Farooq in Kashmir, and in Orissa Navin Patnaik succeeded his father Biju. In Tamil Nadu, Karunanidhi is trying to anoint his son Stalin as his successor and grooming his daughter of a second wife to be a Central Minister. In Maharashtra, Sharad Pawar of Nationalist Congress Party is grooming his daughter by making her a member of Rajyasabha. Even in Shivasena of Maharashtra aspiring to establish national presence two rivaling mini-dynasties have recently emerged. So the phenomenon of using democracy to build dynasties keeps on going. This is also the plight of many other fifty some political parties that are emulating the Congress party or UPA. The phenomenon is also seen on the Bollywood scene. That brings us to closing the circle by asking the question: Is monarchy in the eyes of the beholder because of the deep-seated fascination for the same in the population of the immature democracies or are there small groups who are exploiting the fascination for monarchy in the immature population to gain and retain the power in some influential families by manipulating the population at large and by manipulating the political system they call democracy"


The people of India despite all the abuses they suffered under the political systems of the British and the succeeding Indian aristocracy represented by Congress is resilient. Over 70% of Indian electorate vote compared to about 50% in the U.S. The liberalization of economy has changed the picture of India rapidly. As Indira Gandhi feared the rise of Janata Party because of the emergence of a large middle class, entrepreneurship is rising, foreign investment and urbanization is changing the political landscape of India very rapidly with expanding middle class. The state does not control the fate of people, not so much as it did before. While the power is in the same segment of population still, challenge to it is bound to come. It is no longer easy to amend the constitution as no one party is likely to have absolute majority in the foreseeable future. Once the hold of the "Congress" is gone, because of the inability to dole out patronage, the power lost will never be regained by Congress or UPA. Thus in Bengal, congress could not defeat Communist party for the last 30 years. At least in India communists did not practice demonarchy as in North Korea! In the state of U.P from which nine of thirteen prime ministers were elected, a power house of politics, congress was the distant third. In Tamilnadu, congress has no hope of returning to power but content to court the regional party for alliance. The rise of regional parties according academic politicians in the U.S Universities is leading to speculation that India may break away and disintegrate like Yugoslavia and this issue will be discussed further in a sequel to this, a future article. Because of all this it is imperative and important to support the National parties which were built by the sacrifices of so many great leaders, be it Congress, Communist, or BJP. It is, therefore, inappropriate for the leaders of B.J.P to argue that Sonia is the problem of Congress party alone and it is an internal matter for the Congress party. Who leads a National party and by what process is of National Importance. If such national party retains power term after term, it is a reflection of immature democracy and affects every Indian"s image. Demonarchy cannot be allowed to replace democracy in India. It is up to the major parties to reexamine their mode of thinking and advance democracy. Why do the parties proliferate" Why did Congress split into two [Congress (O) and Congress (I)], and Communists also into two separate parties ( CPI and CPI(M))" The answer lies in the unfortunate fact that in India democratic thinking, tolerance of dissent, and respect for minority opinion were never practiced as a part of the Indian political culture, for just conducting elections on large scale is misconstrued as democracy and thus, mature democracy is a whole new culture for India. In the name of party discipline, anyone criticizing the leader or his policy is removed. This is not any different than the Communist parties of Soviet Union or China. Meanwhile, if the youth of the country learns to distinguish between propaganda and truth, rhetoric and relevance, democracy can be secured and demonarchy can be averted. In short, the youth of India should reflect how the ruling party in India of billion people is beholden to a foreigner (Italian) with Mafia connections such as with Ottavio Quattrocchi, after the country being ruled by the British for 200 years. Regardless of political affiliation, all Indians, and even Indians without any political inclinations or ambition, would find this state of affairs an embarrassment. Only a Pollyanna in Politics would justify it as a reflection of broadmindedness of the Indians and take pride in such picture.

II Vande Mataram II

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