India Should Learn to Deal with Declining Empires

R. Vaidyanathan Professor of Finance Indian Institute of Management Bangalore In every seminar --worth its coffee break-- the question asked is regarding the recovery and when it is going to be? It is not the recovery of our economy but that of US economy. I maintain that for US economy to recover it will be at least forty quarters -that is ten years- and after that I am shunned like a swine flu. With a national debt of more than 10 trillion which is more than 80 percent of its national IncomeUSA is becoming like a banana republic. Not only that the budget deficit is sky rocketing and it is expected to reach more than 10 percent soon. Last year 2008-the US financial regulatory agencies came up with plans of financial support worth USD 6.8 trillionconsisting of temporary loans, liability guarantees and asset guarantees by the3 end of first quarter of 2009 the financial support programmes reached USD 13.9 trillion. The federal deficit as percentage of GDP is expected to reach more than 10 percent. There will be furious printing of more treasury bills and notes. The expected inflation is going to rip apart the society and the largest selling item in the last quarter was hand guns and Rifles. Already intriguing reports have come about attempt to smuggle more than USD134 billion in treasury bonds by two Japanese citizens through the Italian border into Switzerland. It could be a ploy by CIA or really a dare devil act by some foreign Government to destabilize global financial system. I am waiting for the Credit rating agencies like S&P to down grade US economy like other developing countries and prove their independence from the sole super power. High hopes. Angus Maddison in his pioneering work for OECD on the global GDP share for the last two thousand years has brought out an interesting fact pertaining to India and China. As early as the 1820s China, India and other Asia had a share of more than 55 percent in the global GDP. [China 33% India 16 and other Asia 7%]. By late twentieth century it has declined to 29 percent [China12 %, India 5 %; and other Asia 13 %]. In the next twenty years India should plan to have a share of at least 30 percent of the global GDP. These imply that India should be racing ahead. If India grows at 8 to 9 percent in the coming decade then it can become third or fourth or so big power.

But it also imply that the West mainly Europe and to some extent USA should decline in terms of their importance in the share of global GDP and world affairs. Since the total is 100 percent unlike for Musharaff who always used to talk of 400 percentany increased share for India and China would automatically reduce that of Europe and USA. Unlike the depression of the twenties the current crisis for the West is not just an economic crisis It is demographic plus the ongoing war with radical Islam. Demographic because Europe is slowly fading away from the global map. It used to have more than 20 percent of the global population during the First World War and now it has nearly 11 percent and expected to shrink to 3 percent in another three decades. The re-productive rate in many European countries is less than 1.5 whereas the stable one is 2.1.In the case of US the crisis is more severe due to its declining savings rate and a long term tendency to nationalize families and privatize Government. Social security and Medicare system in US is classic case of nationalizing families. Individuals are to be cared for by the state not by their spouses or children or grand children. The family is broke, credit cards are the new gods and the state is also broke. Such a declining Empire is dangerous to deal with. To start with it does not want to accept the fact that it is a declining Empire Plus it wants to retain its sole power status when it realizes that its writ does not any more hold good. It tries to bribe for peace like with good Taliban namely the terrorist state of Pakistan as opposed to bad Taliban namely those who are plotting against USA from the same terrorist state of Pakistan. It tries to bully India. Normally William Burns under secretary of State for Political affairs--- that lowly creature in the food chain in the Washington Beltway-- would not have got audience with Manmohan Singh but for the subterfuge of delivering a letter from Obama. Whenever a US official visits India the beards in J & K become more active. Remember Robin Raphael of the nineties vintage who propped up the Hurriet conference. India recalls with anger the role Robin Raphael,--who was some assistant under deputy second grade secretary in hierarchy -played during the Presidency of Bill Clinton in encouraging the formation of Hurriet Conference the umbrella organization of moderate terrorists and terrorized moderates. Her only name to fame was she studied together with Clinton.

Mark my words. When Hillary come to India the level of violence in J&k will increase exponentially. I wish someone in foreign office in India plots the correlation between visits of US officials and mob frenzy in the downtown Srinagar. The declining empire has following characteristics. It realizes that its elbow room is becoming lesser and lesser with the Pakistan army which owns and controls a country. Pakistan always has a peculiar way of coming to discussion on any issue. They keep a gun on their own head and argue with others. That is, they always threaten others with catastrophe if money is not given to them. This is the most sophisticated begging anywhere you can see in international relations. Bribing them wont stop the plotters against the US Satan. The next thing the declining empire does is to cringe and appease. The speech by Obama in Cairo is of that variety. He ascribed every human scientific endeavor to Islamic civilization. Forget the Hindus who invented zero forget Ptolemy and forget Copernicus. Just re-write history. It is like the good old days when every invention in the world was done by the great Pavlov in a Moscow laboratory. The third thing a declining power does is to pressurize others to sacrifice on its behalf to buy peace with bullies. It cannot deal with radical Islam and if the ISI [that is what is critical not the ten percent Zardar] needs to be appeased with a piece of J &K then US will try to arm twist India. Herein come our ability to understand declining powers. We must internalize that US is a declining power and our bureaucrats must chant it hundred eight times on a daily basis. We should also remember that USA is very uncomfortable in dealing with democracies. Its natural ally is always a dictatorship since they can be use and throw friendships. Dealing with democracies is messy since they talk about a domestic constituency etc and behave similar to USA.A mirror image of itself is unacceptable to sole super power. As India continue to grow at more than 8 percent --and simply due to the power of compounding emerges as a major power-- the desperation of the declining power will be more since our terrorist neighbor who has a the largest begging bowel and higest per capita AK 47s will blackmail the declining power to appease him to keep peace.

What is in Indian interest is the continuation of civil war in Pakistan for say another ten to twenty years ambient conflict--sort of auto cannibalism which will be a -dynamic disequilibria-situation. Other option is to have at least three or so States created out of that entity. The concept of stable Pakistan is pass and a mirage and that should be unequivocally communicated to the declining empire. Remember the last century. The declining British Empire now it is the sick child of Europe but still with a grand illusion of influencing Indian sub-continent---created havoc by partitioning the land. The current declining empire may be tempted to do something rash to protect itself. And therein lays the challenge for our political leadership and mandarins. Dealing with a declining empire is more difficult than dealing with a stable empire. ___________________ The author is Professor of Finance, Indian Institute of Management-Bangalore, and can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his organization.