India Needs Jets: Sweden's Saab, US Overstretch

[NOTE: This still is the IPE Zone, not Jane's Defence Weekly. Still, you may want to pull the bomber jacket out of the closet and groove to Steve Stevens for old time's sake.] Here's an interesting IPE angle on the machinations of defence procurement that I came upon totally at random alike much of the most interesting blog fodder. It's funny how time flies when Top Gun is 25 years of age this year. Back then the Cold War was still very much in full swing with Maverick and Goose encountering the (fictional) MIG-28. As late as 1986, India was still more sympathetic to the Soviet Union than the United States in the belief in central planning and a mistrust of unfettered markets. This was before Manmohan Singh started loosening the reins of the infamous "Licence Raj" that kept India on the infamous Hindu rate of growth.

So it will be of no surprise to anyone that aside from the custom of writing five-year plans, the Indians also purchased a lot of their military hardware from the Russians. They Still do--but even that may change. Manmohan Singh, now prime minister, famously signed a nuclear technology sharing agreement with the Yankees in 2006, causing his then-Communist allies great consternation. In the commercial realm with India becoming perhaps the offshoring destination of choice for Western firms, the globalization game was well and truly on.

Now resurgent India is flush with cash as its aging fleet of MIG-21s reaches the end of the red brick road. To be sure, the nation has a fair need for military hardware. India's main security concern remains nuclear-armed Pakistan--the suspicion is mutual--while its border dispute with China remains a point of contention. In geopolitical terms, it is troubled by both US-Pakistan and China-Pakistan military cooperation. Internationally, there is now a massive race to see who can get India's signature for a multibillion dollar deal that is arguably the most eagerly anticipated one in the international arms bazaar. Aside from the Soviets and the Americans, the French and the Swedes are also vying for this lucrative contract.

For comprehensive information on India's Medium Multi-Role Combat Aircraft(MMRCA) competition, let us turn to Defense Industry Daily for the first time ever:

“It’s the biggest fighter aircraft deal since the early 1990s,” said Boeing’s Mark Kronenberg, who runs the company’s Asia/Pacific business. India’s planned multi-billion dollar, 126+ plane jet fighter buy became a contest between Dassault, Saab, MiG, American competitors and EADS’ Eurofighter...

The original intent of India’s fighter purchase was to replace hundreds of non-upgraded MiG-21s that India will be forced to retire, with a complementary force of 126 aircraft that would fit between India’s high end Su-30MKIs and its low-end Tejas LCA lightweight fighter. While plans to develop a “fifth generation fighter” in conjunction with Russia have received a lot of press, they are uncertain at best, address a different requirement, and offer no solution to the immediate problem of shrinking squadron numbers as existing aircraft are forced into retirement.

Let us now segue into Saab's story. Unlike ill-fated Saab Automobile AB which was bought by GM in 1990, Saab Aerospace--maker of sleek fighters and other defence gear--has remained in Swedish hands. The Swedes are a go-it-alone sort, preferring not to join the Eurozone while keeping the krona, for instance. So it has been in defence: its jets are not Eurofighters but homegrown designs. Through persistence and individuality, Saab is now in the frame with the world's top defence concerns in a race to replace India's MIG-21s even if its name recognition handicaps it somewhat:

The biggest contract that everyone is fighting for at the moment is an anticipated $11bn (£6.7bn) Indian order for 126 fighter jets, set to become one of the biggest export orders in the history of the defence industry. Saab was recently told it had not been shortlisted for the Indian contract, due to be awarded in March 2012, but remains hopeful nevertheless...

Saab is convinced its lightweight single-engine multirole fighter aircraft is both as capable as and much cheaper to buy and operate than larger, twin-engined jets such as the Eurofighter Typhoon, Dassault's Rafale and Boeing's Super Hornet - not to mention Lockheed Martin's F-35 Joint Strike Fighter, which has suffered from cost overruns running into billions of dollars. By contrast, [Saab's] Mr Sindahl observes: "We made the Gripen demonstrator at 40% of the original budget because we introduced new ways of working.

At any rate, there are other customers for the Swedes even if India doesn't sign on:

Saab's gain is a commercial product that is marketable across the world, according to Lennart Sindahl, head of Saab Aeronautics, the largest of the group's five divisions. The Saab JAS 39 Gripen has so far been bought not only by Sweden, but also by the Czech Republic, Hungary, South Africa and Thailand, and the UK is using it as its advanced fast jet platform for test pilots worldwide...

Saab is convinced it can extend its list of customer countries considerably over the next decade or so, as some 5,000 of the 13,000 fighter jets currently in operation are scheduled for retirement, and as emerging nations prepare to gear up their air forces. "For the Gripen, there are new markets and market possibilities coming along all the time," Mr Sindahl tells BBC News in an interview.

Those crafty Swedes have used the oldest trick in the book, industrial policy, of keeping its defence industries competitive:

The Gripen project has emerged from Sweden's desire not to rely on foreign companies for its defence capabilities. The programme has been further strengthened by the country's supportive industrial policy.

Sweden has realised that targeted investment in hi-tech sectors, such as the military aircraft industry, can be hugely beneficial for the nation as a whole, according to Gunnar Eliasson of Sweden's Royal Institute of Technology and the Ratio Institute, a free-market think tank. "Long-term competitive sustainability of an industry requires the local presence of one or more technology-leading firms for the rest of industry to learn from," he says in a book on advanced public procurement as industrial policy. Investment in the Gripen project "has generated an additional social return to society on the order of magnitude of at least 2.6 times the original development investment", according to Mr Eliasson.

Now let us turn to the Yanks. Lockheed's F-35 Joint Strike Fighter (JSF) programme has famously been beset by delays and cost overruns. Like America itself, US defence contractors are seldom on time or on budget. That figures. While it is certainly one of the more advanced and highly rated designs in the race to replace the ageing MIGs, it is beset by--you probably guessed it--industrial policy, this time on both sides. On one hand, while the Indian economy has certainly liberalized compared to the pre-Manmohan Singh days, it seems they are still keen on not just being paying customers by availing of technology transfer and accompanying "offsets" that benefit local industry:

The vendor who finally wins will be required to undertake 50% offset obligations in India. That’s a boost from the usual 30%, which is required for Indian defense purchases over $70 million. The additional 20% was added because India is looking for a large boost to its aerospace and defense electronics industries, and understands that the size of their purchase gives them additional leverage. The Indian MoD’s RFP release adds that “Foreign vendors would be provided great flexibility in effecting tie up with Indian partners for this purpose.”

On the other hand, you also have American defence firms alike Lockheed being obliged to keep proprietary knowledge in-house that are not keen on sharing this knowledge--even at a price:

India has been invited to F-35 events. With potential US [domestic] order numbers dropping, India might even be accepted into the program if they pushed for it. The F-35’s killer weakness was timing that coudn’t deliver the fighters in India’s timeframe, and India’s pursuit of its FGFA program with Russia offers it a semi-indigenous alternative. Even if India changed its mind, the F-35’s advanced systems, established industrial partnership structure and program procurement policies could also make it nearly impossible to meet India’s technology transfer and industrial offset rules.

Just as international trade policy largely fashioned on American preferences as exemplified by the WTO discourages subsidies, so does US foreign military sales (FMS) procurement policy discourage "offsets":

The general policy of the Department of Defense with regard to offsets is that they are market distorting and inefficient. In accordance with an April 16th, 1990, Presidential Policy statement, the decision whether to engage in offsets, and the responsibility for negotiating and implementing offset agreements, resides with the companies involved. The Presidential Policy mandates that "no agency of the U.S. Government shall encourage, enter directly into, or commit U.S. firms to any offset arrangement in connection with the sale of defense goods or services for foreign governments."

Let's be honest here: Americans have BS artists from here to eternity, and the defence industry certainly isn't free from them. Even when the US military cannot afford jets due to overstretch--broke America probably has more pressing priorities--it still turns up its nose to countries that can actually pay for these killing machines.

Security matters often receive less IPE attention, but we have an interesting triple comparative political economy here depicting countries on different trajectories. India is definitely shining with many keen on sharing design know-how with it. Sweden is maintaining its reputation for engineering through well-applied industrial policy. And the US is, industrially speaking, a beggar being a chooser that is flushing itself down the toilet of history through overstretch. That's about par for the course as far as the global pecking order is concerned.

Modern American defence policy isn't up there with the best of the best, to put it mildly. It's funny what a difference a quarter of a century makes.

Realizing the ($134 Trillion GDP) Asian Century

With all due to apologies to the late economic historian Angus Maddison (requiescat in pace), will half of world GDP be accounted for by Asia in 2050? It may seem a far-fetched notion now, but the Asian Development Bank has a new report out which suggests it's within the bounds of plausibility.

The key to achieving this feat says the ADB is for populous and fast-growing China, India, Indonesia, and Vietnam (two SE Asian countries, yay!) not to fall into a middle-income trap. That is, not succumbing to slowing growth rates and concomitantly stagnating income levels in the next five to ten years. If this trap is avoided, Asian GDP may approach $148 trillion and account for 51% of global output by 2050. But, if the region falls into this trap, it will "only" account for 32% of global output with a combined GDP of $61 trillion. It almost makes you proud to be an Asian during this exciting time when old Europe and enervated America are busy competing to see who can flush their continents down the toilet of history faster (I got tired of the dustbin of history, so there).

While these eye-catching figures are more conjectural than anything else, the challenges listed of making more optimistic scenarios come true are certainly worth paying attention to as we try and realize the Asian Century. Focuses the mind, eh? What follows are the key snippets from the executive summary, though the rest is well worth reading for all of those interested in geopolitics and IPE:

Makings of the Asian Century

The Asian Century scenario essentially extends Asia’s past success into the future, putting it on the cusp of a truly historic transformation. In this scenario, Asia’s GDP (market exchange rates) would increase from $16 trillion in 2010 to $148 trillion in 2050, or half of global GDP, similar to its share of the global population. With a per capita GDP of $38,600 (PPP), Asia in 2050 would have incomes similar to Europe today. It would have no poor countries (with average per capita GDP of less than $1,000), compared with seven today. All this assumes that Asian economies can maintain their momentum for another 40 years and adapt to shifting global economic and technological environment by continually recreating their comparative advantage.

Actions at three levels

But in its march towards the Asian Century, the region must tackle daunting policy, institutional and governance challenges along the way. Given widely varying country conditions, the precise actions and their timing must vary. Still, it is possible to draw the contours of the major changes necessary for the region along three dimensions: (i) national strategic and policy actions; (ii) collective regional actions to bridge the national and global agendas; and (iii) Asia’s interactions with the global community (Figure 1). The ability of the diverse countries in Asia to realize the promise of the Asian Century will be determined by their success, individually and collectively, in addressing these imperatives.

Ghandian Ideas Don't Work in 21st Century India

I forgot to blog about this interesting WSJ piece from a few days back about how current efforts by the Congress Party to provide work to the mass of unemployed are quite lacklustre. Congress Party heirs of Gandhi and Nehru will of course be sensitive to questions of social justice, but you really must question if this is the way to go about it. Although it may provide more ammunition to rational choice types in providing state funds for dubious work projects, I believe that the broader matter of inequality and overall social stability deserves a broader framing than that. While the effects of globalization on inequality in developed countries are endlessly debated--hollowing out of the middle class, barbell society, etc--similar anxieties about how spoils are divided in an increasingly integrated world resonate in the developing world. Having defeated the BJP in the 2004 elections despite most expectations to the contrary given that India's economic resurgence was well underway, the Congress Party is well-attuned to the electoral consequences of those left behind. But is this the way to go?

India has its own version of America's Depression-era Works Progress Administration: a gigantic program designed to create jobs through building infrastructure in a developing nation's most-backward rural areas. But unlike its American counterpart eight decades ago, the Indian program, its detractors assert, is keeping the poor down, rather than uplifting them.

The Mahatma Gandhi National Rural Employment Guarantee Scheme, as the $9 billion program is known, is riddled with corruption, according to senior government officials. Less than half of the projects begun since 2006—including new roads and irrigation systems—have been completed. Workers say they're frequently not paid in full or forced to pay bribes to get jobs, and aren't learning any new skills that could improve their long-term prospects and break the cycle of poverty.

In Nakrasar, a collection of villages in the dusty western state of Rajasthan, 19 unfinished projects for catching rain and raising the water table are all there is to show for a year's worth of work and $77,000 in program funds. No major roads have been built, no new homes, schools or hospitals or any infrastructure to speak of. At one site on a recent afternoon, around 200 workers sat idly around a bone-dry pit. "What's the big benefit?" said Gopal Ram Jat, a 40-year-old farmer in a white cotton head scarf. He says he has earned enough money through the program—about $200 in a year—to buy some extra food for his family, but not much else. "No public assets were made of any significance."

Scenes like this stand in stark contrast to India's image of a global capitalist powerhouse with surging growth and a liberalized economy. When it comes to combating rural poverty, the country looks more like a throwback to the India of old: a socialist-inspired state founded on Gandhian ideals of noble peasantry, self-sufficiency and a distaste for free enterprise [in a nutshell, swadeshi].

Workers in the rural employment program aren't allowed to use machines, for example, and have to dig instead with pick axes and shovels. The idea is to create as many jobs as possible for unskilled workers. But in practice, say critics, it means no one learns new skills, only basic projects get completed and the poor stay poor—dependent on government checks. "It actually works against the long-term future of the poor because it doesn't give them any long-term solutions to poverty," says Gurcharan Das, an author who has written about India's economic development. "It's a Band-Aid solution."

Indian officials acknowledge that the program is flawed, though they say it has provided an important safety net for the 50 million households, comprising more than 200 million people, that have participated in the past year alone. Proponents of the plan, including left-leaning economists and activists, say that because the pay is often better than other rural jobs, it has given workers a bargaining tool to demand higher wages. Echoing the Gandhian ideals for which the program is named, they say workers are also better off staying in their villages, close to their families, instead of moving to the cities in search of work and winding up in slums.

"The scheme has been a big success in creating employment for rural people," Sonia Gandhi, president of the ruling Congress party, told a meeting in February of officials who administer the program. "However, there have been complaints of irregularities and corruption, too."

Niten Chandra, a senior official at the federal rural affairs ministry, says the aim was never to build major highways or other large infrastructure, but to create work and raise wages. He says that state governments, whose job it is to monitor projects and ensure audits are carried out, are at fault for failing in many cases to guard against corruption and unfinished work...

The repercussions go far beyond irrigation projects. India's failure to uplift its poor and improve the economy in rural areas—where two thirds of the country's 1.2 billion people live, mostly untouched by the boom—threatens the country's growth, economists say. India has so far relied on its services industry in cities to fuel growth. But the country is running out of skilled workers and its agricultural dwellers are ill-suited to fill the gap. India's success or failure in boosting the size of its middle class will determine the long-term attractiveness of the market to foreign investors.

Yet the number of people relying on the program is expected to rise after the government earlier this year decided to tie wages to the cost of living, automatically increasing the 100-rupee maximum for a day's work to about 125 rupees in many states. That's higher in some places than the daily wage for farm labor. The result is that many more millions will likely become dependent on the government for income despite a two-decade-old push to reduce the state's role in the economy.

As quaint as it may sound, transitioning from agrarian to industrial or even post-industrial service-oriented societies is still the issue of the day in many of the world's emerging economies. With faith in "trickle-down" economics having been conclusively dashed via the example of developed economies where inequality remains on an upward trend, LDCs are experimenting with alternatives to redress this situation. Still, I have doubts whether a neo-primitivist work programme prone to corruption can help ensure the transition from agricultural-based societies as well as reduce inequalities on a sustained basis.

Dev't Battle: Jagdish Bhagwati v Muhammad Yunus

[NOTE: This is the first of two posts reflecting on the ouster of Muhammad Yunus from Grameen as demanded by the Bangladeshi government.] Here is a clash of the titans from the Indian subcontinent if there ever was one. On one side we have Jagdish Bhagwati, arguably the most influential international economist of his generation. On the other side we have Muhammad Yunus, Nobel Peace Prize winner and the man recognized by most for having popularized microfinance.

I make these qualifiers about Yunus and microfinance for a reason: Apparently, his fame has not gone down so well with a number of economic commentators--including Bhagwati. To wit, the venerable Professor Bhagwati highlights four criticisms of Yunus in a recent op-ed in Al Jazeera:

1. It wasn't Muhammad Yunus who invented microfinance but rather Ela Bhatt who founded the Self-Employed Women's Association (SEWA) in April 1974--two years before the former made his start in Jobram Bangladesh;
2. Yunus has relied on periodic inflows of foreign cash to keep Grameen afloat, whereas SEWA has never been reliant on foreign donors;
3. What is more, SEWA has been regulated by Indian authorities practically since its inception, while the same doesn't hold true for Grameen which resists such regulation;
4. Microfinance does not promote large-scale development.

There are interesting points which Muhammad Yunus would probably be better served rebutting himself. However, I can offer some counterpoints and suggestions here:

1. Yunus' innovation was perhaps more a case of marketing; that much is true. Prior to him, the term "microfinance" had barely entered the lexicon and was certainly not widespread worldwide. That said, why begin with SEWA? Those who've worked in development studies for any period of time are familiar with the Rotating Savings and Credit Association (ROSCA) which has similar features of credit pooling and turn-based lending among a small group. As far back as 1962, the famous anthropologist Clifford Geertz had already written about "The Rotating Credit Association: A 'Middle Rung' in Development." It's hardly an obscure work since Google claims it has 397 citations. ROSCA was already operative long before Geertz described it, so the origin of ROSCA certainly predates SEWA by an even more considerable margin. But if neither the ROSCA nor the SEWA folks coined the term "microfinance" despite having essentially similar mechanics, then I'll give Yunus the nod for doing so.

2. It would of course be good if Bhagwati came up with evidence to back his claim that could be very damaging to Yunus' operation not being self-sustaining by relying on periodic cash infusions from abroad.

3. It is incorrect to say that Bangladeshi microfinance institutions (MFIs) do not face banking regulation. Instead, they have a separate banking regulator in the Microcredit Regulatory Authority (MRA) which oversees their operations and has the power to impose sanctions. Instead of saying Grameen gets by with lax regulation, it would have been better if Bhagwati could explain why microfinance and conventional banking are similar enough to warrant coming under the same regulatory body (such as the Reserve Bank of India). Given India's own woes with allegedly usurious interest rates, the specificities of microfinance may warrant having a separate regulator as Bangladesh has decided to do. Yunus, after all, has been instrumental in creating a microfinance monitoring body in Bangladesh and calls for one in India as well:

“We have been lobbying for a regulatory authority in Bangladesh and as a result created the microcredit regulatory authority in Bangladesh,” Yunus said. “That’s what I have been recommending for India also.”

Speaking of which, Bhagwati should note this provision of Bangladesh's MRA:

MFIs should not be permitted to accept deposits from the non-member/ general public.

4. Alike many other things in development--remittances come to mind, personally--it is unlikely that microfinance is the "magic bullet" to development. Although some folks do a disservice as styling it as such, perhaps Yunus is even culpable to an extent. I personally think Clifford Geertz suggested as much since he termed ROSCA as a "middle rung" in development long before the chattering classes arrived on the scene. Microfinance is an intermediate stage in the development of financial institutions. That is, habituating folks climbing up the income ladder in the disciplines of borrowing, investment, and repayment is certainly not a bad thing when it comes to administering credit. Certainly the Americans--its government, states, municipalities and citizens--do not have a firm grip on such fundamentals given the parlous state of their finances at virtually every level of society.

It's interesting times for Grameen,to say the least.

India Shining: Rupee Symbol Now in MS Windows

Always one to play the foil, let me say that contrary to conventional wisdom among the self-styled digerati, I see no reason to chuck Windows 7 for OS X. Not only is the range of programmes for the former vast, but a smidgen of diligence means you can avoid catching viruses and malware. Yes, you can run software that allows you to run Windows software on a Mac, but it makes little sense to pay extra to run stuff more slowly on a Mac. What is more, ever since Apple switched to Intel from Motorola (PowerPC) processors, the hardware used by both contending operating systems is virtually identical--but Apple charges you significantly more in most instances. Colour me sceptical, and give me Windows 7 over OS X any day. Heck, I run Vista on my four-year-old machine and have had no substantive complaints.

This introduction brings me to further proof that India has arrived on the world stage. Typically, developing markets are not prime Microsoft targets. Among the typical reasons you'll hear are...

• the market is too small;
• where there are Windows users, they typically use pirated software;
• this is because intellectual property laws are not strongly enforced

At one point or another, I am sure software vendors have used these reasons in describing the Indian market. But now it's a different picture altogether. You see, aside from offering software in Hindi, the latest iteration of Windows 7 contains the brand spanking new symbol for the Indian rupee. Currency watchers should be aware of a contest Indian authorities introduced two years ago to create a symbol for India's currency. Finalized just last year, Microsoft is now so confident of India's growing stature that the new character set for Windows worldwide will incorporate it. From Softpedia (!--for the first time ever):

Microsoft has released an update to all supported versions of Windows designed to introduce support for the new currency symbol that will be used from now on for the Indian Rupee. Customers can download variants of KB 2496898 and install the refresh in accordance with the operating system they’re running.

According to the software giant, following the installation of the update, the new currency symbol for the Indian Rupee (which can be seen in the image accompanying this article) will be available in Windows 7 SP1 and RTM, Windows Server 2008 R2 SP1 and RTM, as well as Windows Vista and Windows Server 2008...

Of course, the refresh is not limited at introducing the new symbol for the Rupee. The Redmond company revealed that “this update includes font support, locale changes, and keyboard support.” Before the new symbol was adopted by India for its currency, the Rupee was abbreviated as either Rs or Re, although Indian language alternatives also existed.

The Indian government announced a contest for a new currency symbol back in the first half of 2009, and over a year later the winning design was selected. The official Rupee symbol was created by Udaya Kumar Dharmalingam, who based the design on the Devanagari letter र, to which he added an extra horizontal line.

The new Rupee symbol is already a part of Unicode version 6.0, and it only makes sense for Microsoft to also integrate it into copies of the Windows operating system. Take a good long look at the Rupee symbol above, as it will be used to represent India’s currency just as the case for the US Dollar ($), the Japanese Yen (¥), or the Euro (€).

If the Redmond giant takes the Indian market seriously enough to issue a separate update, then I guess we should all take heed of its prospects. You may think it a minor development, but think of the wider ramifications of Microsoft's eagerness to please this particular market. Indian shining, indeed!

Moammar, Italy & BRICs: The Battle for Libyan Oil

A few days ago, we had former UNDP head Mark Malloch Brown talk impressively about global events, especially goings-on at the UN in relation to the Middle East/North Africa. One of the things he pointed out was that perhaps an even worse humanitarian disaster is occurring in Cote d'Ivoire. While this is sadly and undoubtedly true, I'll take the crude Marxist route of economic determinism and suggest the difference boils down to energy. Possessed of the finest grades of petroleum reserves--light, sweet crude that is easy to refine--Libya will remain a prize far greater than the Ivory Coast. Tis the way of the world: I am afraid and ashamed of in equal measure.

Arguably, two of the countries that have pressed hardest for a no-fly zone over Libya are those with the most commercial interests there. Perhaps it's a matter of saving face. Remember that prior to leading the current international effort to penalize the Gadhafi regime, Nicolas Sarkozy was telling everyone not too long ago that it was OK to sell arms to Libya. Given its imperial history, Italy has invested in Libya and has in turn attracted investment by Libyan powers-that-be. However, the head of Italy's largest petroleum company ENI (formerly Agip), has been thinking ahead about the future implications of sanctions should Gadhafi remain in control--or at least of the key oil-producing regions. From the WSJ:

The head of Italian oil giant Eni SpA called for Europe to drop sanctions against Libya, saying it was "shooting itself in the foot" and endangering its energy security by punishing the Gadhafi regime.

Eni Chief Executive Paolo Scaroni's comments come against a background of threats and warnings by Col. Moammar Gadhafi against foreign oil companies, especially those from countries that have backed the opposition rebels and called for a no-fly zone above Libya...Foreign companies such as Eni, which suspended production and evacuated staff when the violence erupted, are keen to resume operations in a country that holds the largest oil reserves in Africa and has long been considered one of the great unexplored frontiers of the global energy industry.

But they face a dilemma. Libya is likely to face an era of deep international isolation, with a new round of sanctions that could affect foreign oil companies. Those from states that called for Col. Gadhafi's ouster, like France and Italy, may be singled out for punishment by the leader and his inner circle.

And those that try to rekindle their relationship with a reviled regime face grave risk to their reputations in Western markets. "Companies that go grovelling back to Gadhafi are not going to look great in the eyes of Western public opinion," said Samuel Ciszuk, a North Africa energy expert at IHS Global Insight. "It's going to be a very uncertain environment for them."

Indeed, it's by no means certain that the West will not eventually forgive and forget as it has done in the past. ENI thinking is simple: if the West offends Gadhafi sufficiently but he is not dislodged from power, then there are others who would certainly welcome the opportunity to take its place:

In interviews published this week, Col. Gadhafi indicated that contracts with Western oil companies could come under review. He told the Italian daily Il Giornale he felt "betrayed" by Italian Prime Minister Silvio Berlusconi, who had previously courted the Libyan leader but called for him to step down after the uprising broke out...Italy has suspended its 2008 "friendship treaty" with Libya and frozen Libyan investments in the Italian economy, including large stakes in defense contractor Finmeccanica SpA and lender UniCredit SpA.

Asked whether Libya might reconsider its contracts with Eni, the Libyan strongman said he "believes and hopes" that the "Libyan people" would reconsider their economic, financial and security ties with the West. Speaking to Russia Today, the pro-Kremlin channel, Col. Gadhafi said Libya can "no longer trust the West...That is why we would like to invite companies from Russia, China and India to invest in our oil production and construction industries," he added.

Other officials in Libya have said they are eager to have Western companies back. Shokri Ghanem, head of Libya's National Oil Corp., or NOC, and the country's de facto oil minister, said last week that Libya would respect all contracts and wanted its current partners to return to work as soon as possible.

Speaking on the sidelines of a parliamentary hearing on Italy's energy ties to Libya, Mr. Scaroni said imposing sanctions was "shooting ourselves in the foot," because not taking Libyan gas would undermine Italy's energy security. Eni has been in Libya since 1955 and is the largest single foreign investor there; in 2007 it signed a $28 billion deal to extend its Libyan oil contracts to 2042. But sanctions have forced Eni to suspend shipments of the oil it produces there, which account for about a quarter of Italy's oil supply. It also shut down the Greenstream pipeline which supplies 10% of Italy's natural gas.

With Libya's political future still uncertain, Mr. Scaroni appeared to hedge on where Eni's allegiances lie. "Whatever political system there is in the future, it will have its own NOC, which will have contracts and relations with us," he said. "I don't see any reason that these ties should be compromised."

Now for more on the BRICS--all of which declined to cast their vote. Permanent security members China and Russia unsurprisingly did not vote on the resolution implementing the no-fly zone. While Russia being attracted to Libya's energy supplies is indeed like bringing coals to Newcastle as the saying goes, the Chinese would certainly welcome the opportunity to expand its access to such supplies. Are they currying favour just in case? In addition to abstaining, both countries now express "regret" over military action.

Meanwhile, non-permanent security council members Brazil and India did the same. (Remember, there are five permanent security council members and ten rotating ones--which Brazil and India happened to be at the time of the vote.) Brazil does not lack for energy resources, but India could certainly stand to gain in the aftermath if Gadhafi manages to cling to power. Gadhafi has already suggested as much.

Although I suspect these major emerging economies are more concerned with keeping the principle of non-interference intact, you cannot rule out the possibility of some--particularly China and India--hedging their energy bets. Energy realpolitik--if the Italians can't do without it, imagine how countries many time its size keep it in mind.

Ultimately, it hinges on whether Moammar Gadhafi remains in power or nor. Insofar as Western enforcers of the no-fly zone are reluctant to launch a ground effort lest another protracted counterinsurgency-type challenge appear (as Gadhafi warns), there are any number countries and companies jockeying for position in anticipation of ever after.

Shipbreaking, A Dirty But Necessary Industry

A Bangladeshi colleague pointed out to me that a report he prepared for the World Bank has now come out in print form. There are probably few tasks in this world that are as "3D" (dirty, difficult, and dangerous) as shipbreaking. It involves dismantling disused vessels for scrap--usually in Bangladesh, Pakistan, and India. The costs are generally well-known: environmental pollution, injury or even loss of life figure large in this largely unregulated trade. In 2009, the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships was adopted that confronted a number of relevant issues. While most stakeholders thought it was a move forward, some NGOs complained that it was actually a step backward from the preexisting 1989 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal. (Which the United States hasn't ratified, unsurprisingly.) Their main beef is that responsibility is placed on the flag carrier as opposed to shipping companies, allowing the loophole of reassigning ships on their final voyages to be placed under flags of convenience that are hard to call to account.

At any rate, this World Bank-commissioned report focusses more on the environmental considerations at hand in shipbreaking. Given that shipbreakers on the Indian subcontinent are not the most stable and organized of enterprises, there are considerable difficulties to surmount in identifying potentially toxic materials and hence enhance worker safety. What follows is the executive summary which offers a taster of what's in the report--certainly a must-read for those concerned with global environmental or trade and environment issues:
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The ship breaking and recycling industry (SBRI) converts end-of-life ships into steel and other recyclable items. Ship recycling offers the most environmentally sustainable way of disposing of old vessels, with virtually every part of the hull and machine complex being reused or recycled as scrap metal. Although the industry is beneficial from a life-cycle assessment point of view, over the years it has gravitated toward countries with low labor costs, weak regulations on occupational safety, and limited environmental enforcement. The “global shift” in the industry to countries with comparatively weaker regulatory systems is of particular concern as ships contain many hazards that can have significant detrimental effects on humans and the environment if not dealt with properly.

Currently, the global center of the ship breaking and recycling industry is located in South Asia, specifically Bangladesh, India, and Pakistan. These three countries account for 70–80 percent of the international market for ship breaking of ocean-going vessels, with China and Turkey accounting for most of the rest. Only about 5 percent of the global volume of such vessels is scrapped outside these five countries. This study focuses on the SBRI in Bangladesh and Pakistan to get a better understanding of the economics of the industry and the environmental impacts arising out of such activity and to explore possible ways in which such environmental effects may be mitigated.

The ship breaking and recycling industry plays a significant economic role in Bangladesh and Pakistan, supplying a substantial quantity of re-rollable scrap steel for the iron and steel industries. SBRI provides more than half of Bangladesh’s steel supply, for example, making it a strategic industry in that country. The industry also creates hundreds of thousands of direct and indirect jobs for some of the poorest and most marginalized segments of the population in those countries. The work force in each country varies with the volume of ship breaking but may range from 8,000–22,000 workers in the ship recycling yards to 200,000 in the supply chain, shops, and re-rolling mills—with dependents in extended families estimated to reach over 500,000 in Bangladesh, although fewer in Pakistan.

The SBRI also has a major social impact in that region. Most workers in the ship breaking yards are migrant workers from poorer regions of each country. The percentage of such migrant labor is higher in Bangladesh compared to Pakistan. A major reason for employment of migrant labor is the hazardous nature of the job as well as variations in employment levels depending on the extent of ship breaking work being done.

Working conditions have historically been poor for the majority of these workers, with limited use of personal protective equipment, frequent exposure to hazardous materials, and unsafe conditions. Accidents causing fatalities and injuries are frequently reported in the local media. A wealth of reports from nongovernmental organizations, academia, and other interested entities complement the limited monitoring data from the relevant authorities. Mechanization of some of the hazardous works may minimize such accidents. Among the three countries, Pakistan uses the highest degree of mechanization in the yards.

Environmental protection is limited in most yards and the sound management of asbestos, polychlorinated biphenyls (PCBs), ozone-depleting substances (ODS), and a range of heavy metals is virtually nonexistent. Of late, some efforts at minimizing the release of such pollutants in the environment are emerging in Bangladesh due to intervention by the courts. Similar interest in improving the industry’s performance is also developing in Pakistan.

Recognizing the need for coordinated action on the issue, the International Convention for the Safe and Environmentally Sound Recycling of Ships was adopted by a diplomatic conference under the auspices of the International Maritime Organization in Hong Kong, China, in May 2009. The Hong Kong Convention (HKC) is expected to enter into force in 2015.
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Despite the generally unpleasant nature of these tasks, it is understandable that the industry will not disappear anytime soon. Indeed, given the skyrocketing prices of raw materials in this day and age, buying up disposed vessels at bargain prices for scrap looks set to thrive. Developed countries that have more knowledge about safe practices tend to avoid this trade given its irregular nature, but perhaps knowledge can still be imparted. How do you regulate a loosely regulated trade run by loosely affiliated networks? It's an interesting global governance problematique to say the least that would benefit from coordination that's presently absent to a large degree

Climate Apartheid? The India-Bangladesh Superfence

My friend came to me, with sadness in his eyes
He told me that he wanted help
Before his country dies

And so begin the lyrics to "Bangla Desh" from George Harrison's Concert for Bangla Desh held on 1 August 1971 in Madison Square Garden. Well before we had Sir Bono and Sir Bob Geldof, Live Aid and Live 8, we had the late, great Beatle setting the template for all there was to follow. This forerunner of all benefit concerts was held to support the victims of the 12 November 1970 Bhola cyclone in which an estimated 300,000 lost their lives in the region then called East Pakistan--today's Bangladesh. Just as Pakistan emerged from India, so did Bangladesh in turn emerge from Pakistan, declaring independence on 26 March 1971. It was a very difficult time for Bangladesh to say the least as it faced both the aftermath of a devastating natural calamity and the teething woes of becoming a nation--hence the lyrics above.

Now, politics on the Indian subcontinent are usually as contentious as they are interesting. Back then, Pakistan tried hard to keep Bangladesh from becoming a country, and India offered support. Among other things, India opened its border with East Pakistan to help refugees from the disaster cope. Unfortunately, environmental pressures on Bangladesh have hardly ebbed in the intervening years. Obviously, it hasn't gained any elevation while global warming has taken further effect. What more if sea levels continue to rise? With a population of over 160 million, Bangladesh is far from a tiny country population-wise.

The Commonwealth Secretariat has a new publication called Global: the international briefing that looks at global policy issues from the perspective of member states in the British Commonwealth. I highly recommend Robin Cohen's essay on why migration is a boon to globalization, though there are obviously strong interests opposed to it. In particular, the border between Bangladesh and India has become more fractious. To those following migration issues, such episodes are unsurprising given that about half of migration is, contrary to popular perception, South-South or between developing countries. I was thus struck by Cohen's description of a massive fence India is putting up:

As for South–South migration, there remain many tensions and important fault lines. The data are disputed, but there are probably about 3.5 million people born in Bangladesh living in India, with 1 million born in India and living in Bangladesh. With the Ganges Delta prone to periodic flooding, further population movements from Bangladesh to India are likely, but are inhibited by an Indian-built fence, stretching for nearly 4,100 km.

2011 is 40 years after 1971, and let's just say that the Indians are no longer as welcoming of Bangladeshis pouring over their borders. Moreover, even the effects of a major cyclone are time-bound, while permanently higher sea levels aren't. It's a security issue, they say. Aside from preventing those affected by flooding to seek refuge in neighbouring India, Brad Adams of Human Rights Watch asserts that Indian border guards have been overzealous while this massive fenestration project has become underway:

Do good fences make good neighbours? Not along the India-Bangladesh border. Here, India has almost finished building a 2,000km fence. Where once people on both sides were part of a greater Bengal, now India has put up a "keep out" sign to stop illegal immigration, smuggling and infiltration by anti-government militants.

This might seem unexceptional in a world increasingly hostile to migration. But to police the border, India's Border Security Force (BSF), has carried out a shoot-to-kill policy – even on unarmed local villagers. The toll has been huge. Over the past 10 years Indian security forces have killed almost 1,000 people, mostly Bangladeshis, turning the border area into a south Asian killing fields. No one has been prosecuted for any of these killings, in spite of evidence in many cases that makes it clear the killings were in cold blood against unarmed and defenceless local residents.

Shockingly, some Indian officials endorse shooting people who attempt to cross the border illegally, even if they are unarmed. Almost as shocking is the lack of interest in these killings by foreign governments who claim to be concerned with human rights. A single killing by US law enforcement along the Mexican border makes headlines. The killing of large numbers of villagers by Indian forces has been almost entirely ignored.

It gives one reason to pause about the consequences of global warming if the threats identified are real. Not being a climate change denier (or a deficit denier for that matter; these paleolithic tendencies tend to run together), the prospect is scary indeed. It pits higher-lying areas against adjacent lower-lying ones in a manner that seems not to build on the goodwill evident in past times, like say 1971. While the Guardian op-ed may overstate shootings on the border, the likelihood of rising sea levels and the continuing construction of this fence do not bode well for relations on the Indian subcontinent concerning borders. Also consider the economic effects of artificial separation.

Since George Harrison is no longer with us, perhaps it's up to his forebears to draw attention to a worthy cause. Is it climate apartheid, then? If migration restrictions increase further, I doubt whether this instance will be an isolated one, sadly.

Max Interest Rate Microlenders Should Charge Is...

By now, I'm sure you've read all about the controversies over suicides attributed to microlending in Andra Pradesh state in India and government attempts to regulate such lending. Now, a bigwig has waded into the controversy, claiming that many commercial lenders there have not really been faithful to the original vision of microlending. Any number of issues have cropped up that negatively affect a microborrower's ability to pay:

• lenders offering more loans to microborrowers who already have existing ones with other lenders;
• microborrowers taking on a multiplicity of loans given fast growth in this area (or even from loan sharks);
• commercially-oriented borrowers charging "what the market will bear" as opposed to having any overt social mission that bears on setting interest rates.

Now Nobel Peace Prize Winner Muhammad Yunus, microfinance pioneer, identifies some guidelines that conscientious lenders should observe:

Yunus says he’s not against making a profit. But he denounces firms that seek windfalls and pervert the original intent of microfinance: helping the poor. The rule of thumb for a loan should be the cost of funds plus 10 percent, he says [my emphasis].

“Commercialization is the wrong direction,” Yunus says, speaking in a telephone interview from Bangladesh’s capital of Dhaka. “An initial public offering is the triggering point for making a lot of money personally as well as for the company and shareholders.”

There is a case to be made that Indian microlenders infringe on the Yunus rule, charging well over 10 percent over the cost of funding:

Indian microlenders themselves borrow from banks at 13 percent or more on average and extend credit to the poor. They charge interest rates that can rise to 36 percent, says Alok Prasad, chief executive officer of the Microfinance Institutions Network, which represents 44 microlenders. He says all 44 firms are registered with the Reserve Bank. SKS Microfinance gets funds at about 12 percent interest and lends at 24.52 percent in Andhra Pradesh, spokesman Atul Takle says.

In Bangladesh, Grameen Bank got a banking license in 1983, which allowed it to take deposits. It charges 5 percent for education loans and 8 percent for housing loans. Beggars can borrow for free, and interest on major loans is capped at 20 percent, Yunus says. “Microfinance has been abused and distorted,” he says. “I feel so sad because that’s not the microcredit I have created.”

Andra Pradesh will be a litmus test for microfinance in India. These are probably the three main issues to look at: MFIs overlending to those who already have many microloans; overextended borrowers who borrow from many sources to create "macroloans" if you will; and setting appropriate ceilings to borrowing costs.

MFIs need to take a closer look at their funding sources and how to rationalize their lending rates in light of growing corporate social responsibility questions. Grameen-style self-help groups were meant to be exclusive so that participants could focus on the activities of their peers (and help alleviate "moral hazard" in the process) instead of having multiple groups to deal with that are loosely affiliated as what is often happening now in Andra Pradesh when multiple loans are taken out.

Philippines, Not India is World's Call Centre Capital

Now this article kind of took me by surprise. While India is renowned as a global hub for business process outsourcing (BPO)--we even have popular entertainment glamorizing its services-led economic renaissance in Slumdog Millionaire--it seems another country has been away from the BPO limelight that has just stolen India's thunder. Alike India, the Philippines has been subject to the (English-speaking) white man's burden of enlightening us coloured people about the benefits of markets and democracy (well sort of). Also like India, then, the Philippines has a large English-speaking population which happens to be tertiary educated. And while India has its slumdog millionaires, the Philippines has its own emerging call centre subculture of those who work the night shift to synchronize with overseas markets like Western Europe and North America. (As a side note, I am very pleased with phenomenon since daytime traffic in Manila is horrendous.) Heck, stories of escapades by call centre workers are rife with alleged rises in HIV cases being attributed to them.

Anyway, back to the story. Earlier this year, I was struck by outgoing Philippine President Gloria Macapagal-Arroyo claiming in May that the Philippines was second only to India in BPO foreign exchange revenues. Pretty impressive for a country that's not been as widely stereotyped as a call centre destination, right? Well now comes news that, actually, the Philippines is set to end the year ahead of India in terms of call centre new hires and revenues for 2010. Of course, call centres are only a sliver of the BPO market--and not often very attractive ones unless you consider telemarketing and fielding customer service calls fun.

I am also not entirely sure if the head of the Commission on Information and Communications Technology (CICT)--an executive-level body in the Philippine government--has his numbers entirely right. But, as the Indians aren't contesting these figures, perhaps they're correct. From BusinessWorld:

The [Philippines] may have surpassed India in terms of call center employees and revenues, but it has yet to take a similar lead in other segments of outsourcing, an official said Tuesday. Commission on Information and Communications Technology Chairman Ivan John E. Uy told reporters at the sidelines of an electronics industry conference that the Philippines had exceeded India in the number of new employees, with 15,000 as of end-October. "India had 13,800 new hired [sic] employees for this year but we still have to wait until the year ends."

Mr. Uy said the Philippines had also surpassed India in call center revenues, with $5.5 billion as of end-October against the latter’s $5.3 billion. "We are projecting to reach $5.8 billion by the end of the year, while India projected $5.5 billion. These are significant accomplishments, but the entire [Philippine outsourcing] industry is still valued at $9 billion, while India is at $47 billion," he said.

On its Web site, IT services firm SourcingLine said the entire outsourcing industry goes beyond call centers, to include services that demand higher skills like software development, engineering design and investment research. Business Process Outsourcing Association of the Philippines chief executive officer Oscar R. Sañez said in a phone interview that the country’s annual offshore outsourcing revenues could more than double to $25 billion, equivalent to a 10% share of the global market, by 2016.

"The industry can grow from $9 billion in annual revenues and approximately 500,000 direct employees today to $20 billion and 900,000 employees by 2016 if current conditions are sustained and with a lot of hard work," he said.

The reasons given for this surprising factoid are many (and a few are likely self-serving): Filipinos have a more "neutral" accent (i.e., they can imitate talking like white people more easily--cue "Apu Nahasapeemapetilon"); Philippine workers are better equipped with relevant skills; etc -

"We won this war not because we're lower cost than India. To some extent, we are a little bit higher priced to operate a call center compared to India. We won this battle by virtue of Filipino quality. We grew faster than India because it's the Filipino talent, which is world class caliber," he said. He noted that Indian call centers are already migrating some of their operations to the country.

Jojo Uligan, CCAP corporate secretary and executive director, said the Philippines played up its strengths in the past 10 years by being a superior value destination for US companies. He said Filipinos have a better cultural affinity to Americans, and their accents are more neutral. "When you train a Filipino to speak English, you would never know it is a Filipino. I think Americans like to talk to a person they can understand," he said...

"We're not just focusing on the United States but other English-speaking countries like the UK, which we only service a little. Australia and New Zealand are also good potential for us. But again, if you can market in these areas where we service a smaller percentage of the business, then we will have a better chance of getting more jobs," he said...

But then comes the honest truth: call centres are atthe bottom end of the BPO totem pole. So, in reality, India may already be leaving such services behind in search of greener and more profitable pastures:

Call centers are generally positioned at the bottom of the BPO value chain since they provide lower profit margins compared to other BPO offerings. Non-voice BPO offerings, such as financial, medical, editorial, and engineering services, contribute higher profit margins, thus is preferred by more established BPO players, including those from India.

Local BPO firms have pursued call center services as part of a strategy. Call centers are considered as their entry point for a slice of the non-voice outsourced and/or offshored businesses of clients.

So perhaps it's Jai-Ho (You Are My Destiny) for the Philippines to rule the roost in call centre operations, but the challenge is to continue to move up the ladder like India in terms of the sophistication and profitability of services on offer such as CAD/CAM work, digital animation and so forth. In the meantime, Shakalaka Baby not to Bangalore but to Manila!

Already I'm thinking of preparing my screenplay for The Great Philippine Call Centre Movie to raise public awareness about the country's status as the world leader. In tawdry modern fashion, it will concern before or after work-hours recreational (procreational?) activities by call centre workers. Fielding calls by Yanks who don't know what a MAC address is, long-distance love triangles at Hewlett-Packard Philippines, an A.R. Rahman soundtrack, Danny Boyle for the director...it's a guaranteed hit, I tell you. I am yours forever; yes forever I will follow...

The Microfinance Backlash in India Over Rates

I thought this post would be a good follow-up to one I featured earlier regarding the debate on whether to cap interest rates on microloans. Generally, I believe that the standard of judging whether microloans are comparatively beneficial should be something sensible. For instance, in rural communities where commercial banking is scarce, a good basis of comparison would be with rates charged by local moneylenders (or worse, loan sharks). However, it now appears that microfinance is encountering more teething pains as mainstream financial concerns enter this area. Previous generation microfinance lenders were arguably more focused on social objectives and patterned themselves on Muhammad Yunus' Grameen Bank. Next generation microlenders, however, include more conventional financial services providers that want to explore the "fortune at the bottom of the pyramid" in the famous phrase of the late CK Prahalad.

It is here where we encounter difficulties. Setting aside the social mission, it is of course understandable why the cost of administering a bunch of smaller loans to borrowers in often more remote areas is higher than servicing larger loans to borrowers who come to your bank's branch. In other words, while attracting larger pools of funding may be beneficial in broadening the reach of microfinance, the higher cost of capital that commercial entities generally take into consideration translates into concomitantly higher rates of interest. So, we are back to the old issue of whether interest rates on microfinance loans should be capped. As a growing backlash in India suggests, it's certainly a topic for discussion:

The microlending movement that was supposed to help lift millions of people in India out of poverty has in recent weeks fallen into chaos. Urged on by local government officials and politicians, thousands of borrowers have simply stopped paying lenders, even though they have the money. The government has begun ratcheting up restrictions, fearing that borrowers are being buried by usurious interest rates. In some cases, officials have even arrested lending agents for allegedly harassing borrowers.

Local politicians, meanwhile, have blamed dozens of suicides on microlenders and are urging borrowers not to pay back what they owe. Though so far the backlash has been confined to a southern Indian state of Andhra Pradesh, what happens there is frequently a bellwether for microlending in India, and programs around the world. Hyderabad, the state capital, is home to some of the world's biggest microlenders, including SKS Microfinance Ltd., Spandana Sphoorty Financial, Basix & Share Microfin Ltd. The state accounts for about 30% of the loans for all of India, one of the world's biggest microfinance markets.

"This is potentially going to devastate lending to rural areas for a long time," said Vikram Akula, founder and chairman of SKS Microfinance, India's largest microlender by loan volume, which recently listed its shares in India. "We are confident that we will survive, but certainly this is going change how things could and should be done."

Microcredit is the lending of tiny amounts of money, usually less than $200, to entrepreneurs who use the loans to start or expand small businesses such as a vegetable stand or a bicycle repair shop. Most microcredit firms lend money through women's groups and reach out to borrowers who are either too far from or too poor to borrow from a bank. The repayment rate on the loans have tended to be better than that of richer borrowers. Interest rates, however, can be high, from 25% to 100% a year, mostly due to the cost of administering millions of tiny loans in remote areas...

Troubles emerge as international capital enters the picture:

As the microfinance industry has grown, it has attracted international capital that has greatly boosted the size of the industry, much as payday lending and subprime borrowing soared until two years ago in the U.S. In a significant move that showed international investors' interest in the industry, SKS recently sold $350 million of its shares on the Indian stock market.

But along with that has come concern among politicians, regulators—and indeed some in the industry—that unfettered expansion was leading to poor lending practices, multiple loans to the same borrowers, and fears of widespread repayment problems. While they have been much in demand wherever they have been introduced as they provide a kinder, cheaper alternative to the village loan shark, some economists are skeptical about whether the small loans actually help lift people out of poverty.

And in regions where there are more than one microlender competing for clients, some experts are concerned that the poor are being encouraged to take on more debt than they can bear. So far, the repayment rate across the microlending industry has remained extremely high. But Andhra Pradesh's payment strike could presage a turn—and put the capital that has flooded into the industry at risk. Mainstream Indian and international banks have backed the microlending industry in India with more than $4 billion of loans this year, with private-equity funds pouring more than $250 million into the industry in India last year alone.

The repayment strike is a rare black mark for an industry that has long been viewed as a social benefit. One of the industry's leaders, Muhammad Yunus of Grameen Bank in Bangladesh, won the Nobel Peace Prize in 2006 for pioneering the system. The industry has spread across emerging Asia, Africa and South America. India, with its giant population and hundreds of millions of people living in poverty, is one of the most important markets...

There is a hysteria fuelling restrictions in Andra Pradesh state about microfinance causing several defaulting to seek the suicide solution:

Andhra Pradesh slapped new restrictions on the industry that effectively shut it down last week. While a state court order put the restrictions on hold and allowed the lenders back in the field this week, close to half of all borrowers are continuing to avoid payments, microlenders say. State officials say they are trying to protect the poor from usurious interest rates and heavy-handed practices, which they say have triggered more than 70 suicides in the state. Microlending companies say that often where they have investigated suicides attributed to their lending, they have found that microloans were among the smallest of the many problems of the people that have killed themselves.

In Sankarampet village about 2½ hours from Hyderabad, Satyama Ayrene is still in mourning over the death of her son who hanged himself. While local police say they have been told to investigate whether microdebt caused the death, Ms. Ayrene says it was the $2,200 he owed loan sharks that was bothering him, not the $220 his wife owed to a microlender. "He did not commit suicide because of the [microloan] companies," said Ms. Ayrene, 55 years old. "He was burdened with loans from the local moneylenders and didn't know how to pay them back."

Microlenders say they are being punished for the success at reaching the poor and that if the resistance continues, many of them will go out of business. Many have been taking steps to create good will to try to avert the situation from worsening. The biggest lenders who account for the majority of borrowing say they will cap their rates at around 24% and form a fund to help troubled borrowers reschedule their loan payments. They say they are ready to comply with more government restrictions as long as they are given time to meet new requirements. But in the meantime, the industry has ground to a halt.

To alleviate this lending logjam, legislators in Andra Pradesh look set to go forward with laws aimed at regulating the industry by--get this--ensuring that microfinance institutions do not lend to the same groups over and over. The general thrust of this legislation is that these lenders are pushing loans that self-help groups keep taking due to the proliferation of lenders. Said end result? Overborrowing and a reduced capacity to pay:

Though the Bill is still being given the final touches, sources said the key elements of the ordinance will definitely be carried forward in the Bill. Registration will be mandatory for the MFIs keen to operate in the state will be mandatory and any MFI operating without such registration will face punitive action including punishment up to three years and Rs1 lakh fine. There is also a proposal for naming all the directors and the top management in case of violation of this rule, though the government is said to be seeking legal opinion on such a move.

With the preliminary information on the MFI activity in the state suggesting the borrowers are being pushed into a debt trap due to multiple lending by the companies, the government has decided to cap such lending.

The MFIs will be asked to apply to the registering authority before lending to a borrower or a self help group already covered by a bank. The authorities will then verify the repaying capacity of the borrowers. Only after ascertaining the repayment capacity will the MFIs be allowed to extend loans. Lending to SHGs with a bank linkage without seeking the prior approval of the authorities is also a punishable offence.

While coercion will be a crime of sorts, leading to a punishment of up to three years, the MFIs will also have to disclose the interest collected to the authorities on a monthly basis. The government will also set up fast track courts to try the violations of the MFIs. “The information available with the authorities so far indicates that the interest rates are higher than what is being claimed by the MFIs. The average rate is upwards of 30%. There is also proposal to make the MFIs start collecting the repayments on a monthly basis instead of weekly. There is no final decision on this yet,” the source said.

Industry officials fear the conditions being laid out by the government would have a significant negative impact on the MFI activity in the state initially, though the institutions will have to find ways to keep themselves afloat.

What to regulate? Multiple lenders chasing the same pool of customers--in which case shouldn't borrowers be made more cognizant of the troubles that could arise from overborrowing? Or, should interest rates be capped? There are also obvious costs in meeting all these new regulations that will be passed on to borrowers, possibly defeating the objective of lowering borrowing costs in the first place. It's interesting, and Andra Pradesh certainly is a litmus test for India--and after India, the world that has grown accustomed to microfinance.

The Indian Stylings of 'Strong Dollar' Geithner

Oh boy, this post sure brings back memories--not all of them I'm particularly fond of, though. In 1992, Ross Perot spoke of a giant sucking sound as American jobs headed to Mexico. While I didn't really care to hear that, in 2010 I certainly do hear Barack Obama and his Treasury Secretary Tim Geithner making a giant sucking up sound to India. (Alike with Mexico all those years ago, the fear among many Americans is that India will suck away jobs this time around.) It's odd how all this India lovey-dovey stuff is coming from a guy who once disparagingly wrote of his erstwhile opponent for the Democratic presidential nomination Hillary Clinton as representing (D-Punjab). I guess some of us have longer memories.

However, let's focus on his deputy in this post, Tim 'Strong Dollar' [yeah, right] Geithner. With three of the other BRICs ganging up on America over its money for nothing policies, the US is understandably keen on keeping India friendly. Accordingly, Geithner has penned a little-noticed editorial in the Hindustan Times heaping praise on India. In particular, he lauds its efforts on the external imbalances front. Which, of course, hearkens to his recent pleas to G-20 members to implement 4% limits on current account surpluses or deficits to deal with global economic imbalances. The curious thing for anyone familiar with the world economy is that India continually runs an external deficit of around -2%. Reading between the lines, we infer two things. First, in an ideal world, China would look more like India to the Americans. Second, "balanced growth" is more like "running a deficit" to US benefit if India is cited as an exemplar. Anyway, here's the key snippet from Geithner:

For growth to be sustainable, we must also work together to change its overall global pattern. Before the crisis, too many nations oriented their economies toward producing for export rather than consuming at home, counting on a few deficit nations to import many more goods and services than they sold abroad. The result was a global economy afflicted by an unstable array of external imbalances, both deficits and surpluses.

Together, we must build a framework for growth that prevents the re-emergence of such imbalances, maintaining external accounts at sustainable levels over time. Doing so will require contributions from every corner of the global economy. Surplus countries will have to boost internal demand through structural reforms, while deficit nations will need to increase their savings. Key emerging economies will also need to move toward market-determined exchange rates in line with economic fundamentals.

India is meeting this challenge, helping to demonstrate the dynamism that can accompany domestic demand-led growth combined with significant exchange-rate flexibility. India is succeeding in fostering greater domestic demand in part by directing economic policies and incentives toward the bottom of the income pyramid. In the coming years, India will also continue to make substantial investments in public infrastructure that will help to drive future growth. In short, India's focus on "inclusive growth", through targeted fiscal spending and investment, is contributing to greater support of Indian households and higher employment.

I have qualms with Geithner's characterizations of India. Certainly, inequality is still unfortunately widespread there even if its growth has been vigorous in recent years. Also, there's something to be said about its infrastructure de velopment when more folks have access to cell phones than toilets. While the US would certainly welcome a world where more of its trading partners had the external balance of India--who wouldn't?--the pointed message of wishing China looked more like India may not necessarily be developmentally superior, especially in infrastructure terms.

Obama, India and Making Outsourcing Acceptable

[NOTE: It's been a while since we've had a feature on Indian outsourcing, so it's about time we got back in the swing of things via President Obama's visit to the services powerhouse nation.] To many Americans, the Great White Collar Fear is outsourcing. And, nobody represents this phenomenon to many eyes than India. With its formidable array of business process outsourcing firms like Satyam, Tata, Wipro, and Infosys, the very mention of the country strikes fear into middle class hearts. Contrary to the suggestions of less perceptive individuals, the real determinant of whether American jobs are "shipped overseas" isn't skill level but the geographical transferability of the tasks performed. That is, America will still need hairdressers since you need a pair of hands and scissors at the end of the day, but it certainly might do away with computer programmers who can do these tasks more inexpensively in, say, India. Routed at home, Barack Obama thus journeyed to India to paint an image of the commander-in-chief drumming up business elsewhere. What's more, he wanted to get the point across that India's rise bodes well for the United States instead of the more conventional job-stealer stereotypes:

President Barack Obama used his first visit to India to herald the virtues of democracy and trade, telling business leaders that increased commerce was a “win- win” proposition that would create jobs in both countries. “I am here because I believe that in our interconnected world increased commerce between the U.S. and India can be and will be a win-win proposition for both nations,” Obama said in a speech to the U.S.-India Business Council in Mumbai yesterday.

Obama’s first day in Asia, at the beginning of a four- country, 10-day tour, was studded with meetings with CEOs and Indian entrepreneurs to emphasize the importance of job creation. He was greeted at the airport by Boeing Co. Chief Executive Officer Jim McNerney, who briefed the president on doing business in India as they flew by helicopter to central Mumbai aboard Marine One.

“The United States sees Asia, especially India, as a market of the future,” the president said. “We don’t simply welcome your rise as a nation and people, we ardently support it, we want to invest in it.” Obama announced that controls on exports of technology, imposed after India tested a nuclear device in 1998, will be relaxed.

Five days after his party lost control of the House of Representatives, Obama also warned against protectionism. He sought to dispel what he said were perceptions that trade leads to U.S. jobs being outsourced to India, though he acknowledged that as India’s economy continues to emerge, there will “undoubtedly” be competition between the world’s two largest democracies. The mutual benefits of trade “might not be readily apparent” to both Americans and Indians, Obama said. “There are many Americans whose only experience with trade and globalization is a shuttered factory or a job that was shipped overseas.”

In the U.S. there was a caricature of India as a land of call centers and back offices that cost Americans their jobs, he said. While in India, Obama said many see the arrival of American companies and products as a threat to the livelihood of small shop keepers. “These old stereotypes and old concerns ignore today’s reality,” Obama said. “Trade between our countries is not just a one-way street of American jobs and companies moving to India. It is a dynamic two-way relationship that is creating jobs, growth and higher standards in both our countries.”

The two countries’ ties are “not about job creation in just one place,” said Kris Gopalakrishnan, chief executive of Infosys Technologies Ltd. Obama “talked about keeping markets open for both products and services.”

All this lovey-dovey stuff had sentimental ol' me reaching for my hankie [sniff]. Such a sweet guy, that Barack Obama. Or maybe not. This dog-and-pony show aside, the truth of the matter is that Indian BPO firms are being squeezed by the US through costlier work visas for Indian workers and states banning the outsourcing of government IT projects altogether. Still, Indian firms are locating more operations Stateside and hiring Americans to hopefully dispel the notion that they're taking away work and jobs. Still, India's challenges diversifying away from the US--learning Mandarin or Nihongo is likely more difficult than learning English in this former British colony--mean that it cannot make a clean break altogether:

[Obama]'s sure to encounter some harsh words about the current U.S. backlash against Indian outsourcing firms. In August, Congress passed a law raising fees for work visas by $2,000 to about $4,300. The visas, used by foreign IT workers spending time in the U.S., could cost Indian companies up to $250 million a year, says Som Mittal, president of Nasscom, the Indian software industry's lobbying group.

Also in August, Ohio banned the outsourcing of government IT projects to offshore destinations such as India. "There's some level of concern," says P.R. Chandrasekar, chief executive of Mumbai-based Hexaware Technologies. "You don't want other states to do that..."

The worry is that protectionist measures in the U.S. could quickly change the outlook from robust to dreadful in a market that represents 61 percent of India's $50 billion in annual IT service exports. Two-thirds of Hexaware's $215 million in revenue last year came from the U.S. Bigger Indian companies rely on the American market, too. U.S. sales accounted for 57.5 percent of TCS's revenue for the year ended March 2010, and North America made up 66 percent at Bangalore-based rival Infosys Technologies, according to Bloomberg data.

Indian executives know they must diversify, yet they have had limited success generating new business in markets beyond North America and Western Europe. Their presence in Japan is insignificant, says Arno Franz, president of Asia Pacific for sourcing advisory firm TPI. Indian outsourcers have high hopes for China, where they are hiring engineers to work on projects for multinational and local customers. "They are placing most of their bets on China," says Franz. "But it takes years and years." India's major IT companies only employ around 5,000 people in China, according to a Goldman Sachs (GS) report, and generated sales of just $257 million.

That means India's IT companies have to keep building their business in the U.S. while their efforts elsewhere slowly take root. To defuse the outcry about companies shipping American jobs offshore, Indian firms are trying to build up local staffs.

Mahindra Satyam, a Hyderabad-based company that on Oct. 13 announced a contract to design a document-management system for the Kentucky state government's health and family services department, has so-called near-shore operations in 11 countries, including the U.S. It wants to be positioned in the U.S. and elsewhere to hire locally. "Firms are more comfortable with near-shore centers," says the firm's chief executive CP Gurnani. As a result, "dependence on U.S. visas is reducing." About 20 percent of employees are outside India, he says, up from zero in 2006.

The uncertainty surrounding visa rules and state outsourcing policies might accelerate the trend of Indian companies making acquisitions in the U.S. Indian outsourcers have already done $1.9 billion worth of technology acquisitions in North America over the past decade, according to Bloomberg data.

But then a next question comes on the last point: will Americans also discourage Indian acquisitions of US technology firms in the way it does Chinese ones over specious "security" grounds? While you contemplate that question, the White House also has a laundry list of projects the US is supposed to undertake together with India as well as a transcript of the Obamas speaking in Mumbai.

Why Aren't There Famous Chinese, Indian Brands?

A very fair criticism I do understand as an undergraduate and masters level business major is the non-emergence of internationally recognized Chinese and Indian brands. While there is no shortage of world-renowned German (think automakers) and Japanese (think automakers and consumer electronics) makes, there are no real Chinese brands with similar name recognition, let alone one amongst Interbrand's Best 100 Global Brands in terms of valuation. It is very odd, don't you think, that the world top merchandise exporter which surpassed Japan and Germany in fairly quick succession during the past couple of years has singularly failed to develop recognizable brands. To no small extent, the South Koreans have managed this feat with Samsung (#19--my favourite brand and that of the computer I'm pecking away at right now BTW) and Hyundai (#65). Taiwan is no slouch either. While not on the list just yet, the likes of Acer and Asus do ring a bell among the electronic hardware cognoscenti. While India's rise has not been as rapid as that of China, something it shares with the PRC is a lack of recognizable brands.

A reply I've used in the past is that it is very expensive and time-consuming to build brands. Hence, firms from both countries may have thought it better to buy established brands. So if you can't build 'em, buy 'em! A few years back now--my blog is becoming "venerable"--I discussed the phenomenon of "reverse colonization" wherein Indian concerns were buying up British marques at a rapid clip. Think of the Tata Group which I like to think of as "ICME": Indian Company Making Everything for those of you weaned on a steady diet of Road Runner cartoons. Especially for Anglophiles, don't the names Tetley Tea, Jaguar, and Land Rover ring a bell? The same holds for China to some extent with the example of Lenovo buying the rights to use the IBM name together with its ThinkPad line of laptops.

However, these examples should not obscure the broader fact that a lack of recognizable brands is truly a handicap with IPE implications. Most of the value-added in the global supply chain emanates from higher-level, intellectual property-heavy concepts such as branding. Indeed, many global corporations like Apple are little more than a logo stamped on products largely manufactured elsewhere to their spec. With labour and other manufacturing costs in China not bound to stay at a permanently low level forever, there is certainly pressure to move towards these value-added upper echelons of the supply chain instead of being stuck with the grunt work. Despite much criticism about China's efforts to promote national champions to the exclusion of foreign competitors, it remains true that the Chinese haven't managed the feat which Germany, Japan, and South Korea have. Ditto for India with a somewhat longer time frame in mind.

While perusing a recent Business Horizons issue in which I myself have a contribution (more on this later), I came upon an interesting article by marketing bigwig Jagdish Sheth and folks at Interbrand and the National University of Singapore discussing this very conundrum: How can we speak of the rise of China or India if they are still stuck in the second division at building recognized brands? Make no mistake; this erstwhile "marketing" issue may have important social and environmental consequences insofar as China may hold on too long to labour and environmental arbitrage when it's in its best interests to move up the value chain. Here is the abstract:

During the past quarter of a century, Asia has risen to become the world's factory. This trend has, however, coincided with the relative decline in value of manufacturing compared to other value adding activities, including R&D, design, and branding. This significant “value shift” has eroded the margins of manufacturing firms and sparked considerable interest among executives in Asia to design, brand, and market their own products. To date, though, this transition from being manufacturing oriented to becoming brand owners has largely only been accomplished by Japanese and Korean firms. In the rest of Asia—including in the rising giants of China and India—there are very few valuable brands. In fact, there is not a single Asian brand from a country other than Japan and Korea in Interbrand's 2008 valuation of the world's top 100 brands. Our article discusses, in depth, the challenges that Asian manufacturing firms encounter as they try to become “branders” and how these challenges can be overcome. Based on our collaboration spanning academia and consulting, we have been able to tap a wealth of information made available through research, case studies, and Interbrand's database of completed brand related assignments across Asia.

Why does branding matter more than manufacturing nowadays? Here's a brief history:

During the past few decades, we have seen a significant shift in value away from manufacturing toward design, marketing, and customer service. This is in sharp contrast to the Industrial Age, when manufacturing contributed the most to value creation of all activities undertaken by firms. The Industrial Revolution was largely a revolution in manufacturing that led to a mobilization of resources and an increase in productivity beyond anything previously achieved throughout millennia of human civilization. The industrialization recipe also proved highly replicable, spreading across countries in Europe and North America before arriving in Asia. In just a few decades, industrialization catapulted Japan from an isolated feudal state to a modern industrial nation capable of defeating Russia, a major European power, in war. Industrialization subsequently spread across Asia in what was often labeled the “flying geese” pattern during the 1980s. This initially transformed the “tiger economies” of Hong Kong, Singapore, South Korea, and Taiwan. Industrialization subsequently spread to other Asian countries including China, India, Malaysia, Thailand, and Vietnam.

However, during the past 25 years the rules of the game have changed significantly. In the post-industrial world, manufacturing is no longer the same engine of value creation that it was during the Industrial Age. As high quality products can now be produced anywhere, manufacturing has increasingly been re-located to emerging markets with low labor costs. As a result of these changes, manufacturing has largely become a commoditized capability characterized by substantial competition and declining margins. Those capturing the most value in the post-industrial economy now are firms which control critical capabilities relating to design, marketing, distribution, and service. The actual manufacturing of products is increasingly outsourced to manufacturing specialists. In this new world of outsourcing, companies no longer necessarily compete based on the manufacturing assets they own.

And here is what I believe is a key takeaway concerning the need for increased customer-centric focus as opposed to building "national champions" and similar nation-centric notions that have so far failed to achieve what they aimed for:

Defining the offering becomes the next key priority. This includes specifying the products and services that the company seeks to offer its target segments based on the key hooks identified in the market research. For many firms, this seems to be the end of the process to define the offering. We argue that it is equally important to look at the customer journey across all touch points; this includes marketing communications, sales, payment, installation, ongoing usage, and customer service. In short, it takes the perspective of the prospective customer, and follows how the customer will interact with the company at all stages. Only by aligning all touch points will the customer undergo a consistent brand experience. This means tilting the company away from traditional functional silos toward an end-to-end process thinking, with the customer at the center. Many firms we have worked with lack strong cross-functional teams that are empowered to operate transversally across the organization. Such teams are critical to conduct comprehensive feasibility studies and specifications of what it takes to deliver the offering. As previously discussed, it is important that the underlying quality and performance of a company's products and services are sufficiently high in order for the emerging brand to become successful. Achieving this usually requires a high degree of cross-functional collaboration.

It's a rite of passage that China has yet to make, but the authors do provide some thought-provoking ideas on how to get this task done. Needless to say, it's better accomplished through clever marketing than through protectionism. Proton, anyone?

And no, I will not spend good money on something called a "Chery Tiggo." More focus group work on naming products, pretty please.