A changing landscape
Mei Xinyu

The world economy took on a somewhat bleaker outlook this year after undergoing extraordinary growth in 2004 and 2005. There is evidence that it has passed the peak of the current business cycle.
Developed world
The U.S. economy grew less rapidly than before. The gross domestic product (GDP) of the United States grew by 5.6 percent, 2.6 percent and 1.6 percent respectively year on year in the first three quarters of the year (figures were adjusted for seasonal variation). The growth rate in the third quarter was at the lowest level since it hit 1.2 percent in the first quarter of 2003.
The chaotic real estate market was indicative of a further slowdown in the U.S. economy. It is estimated that the sluggish trend will last from the fourth quarter of this year to next year. The International Monetary Fund (IMF) estimated that the U.S. GDP would grow by 3.4 percent this year and 2.9 percent next year in the World Economic Outlook it released in September. At present, however, it is questionable whether the U.S. economy can live up to the IMF’s expectations this year.
Since the beginning of the new century, the euro zone and the European Union (EU) have been lacking the momentum for economic growth. Germany, which used to be the locomotive of the EU economy, was reduced to the ranks of “newly declining countries” along with Japan. The annual GDP growth rates of the euro zone and the EU were only 1.4 percent and 1.7 percent, respectively, last year. The European economy made a comeback early this year with its GDP growing 0.6 percent month on month and 1.9 percent year on year in the first quarter and 0.9 percent month on month and 2.6 percent year on year in the second quarter. In the third quarter, however, the growth in the euro zone slowed down. The monthly growth rate was 0.5 percent, lower than the expected 0.7 percent.
Recently released figures show that Japan’s GDP grew by 0.5 percent in real terms month on month in the third quarter of this year, or 2 percent year on year, exceeding expectations. However, industrial growth stagnated. In September, industrial output dropped by 0.7 percent from the previous month with the number of equipment orders falling dramatically. Given this trend, the Bank of Japan, the Japanese central bank, which had ended its zero interest rate policy, was extremely cautious about raising interest rates.
Developing world
Developing economies continued their strong growth this year. Emerging markets accounted for over half of the global economic output in 2005, during which they posted GDP growth of $1.6 trillion, in comparison with the $1.4 trillion of the developed countries. Their share of world exports has jumped from 20 percent in 1970 to 42 percent today. In the World Economic Outlook, the IMF projected the growth in emerging markets and developing countries at 7.3 percent this year, double the estimated 3.1 percent for developed countries. According to the IMF, emerging economies will grow at slightly less than 6 percent over the next five years, still double the growth rate of developed economies. If this trend is sustained, emerging economies will account for two thirds of the global economic output in two decades.
Of the developing countries, China and India registered the most robust economic growth. Their GDP grew by 10.9 percent and 9.3 percent, respectively, in the first half of this year. The countries’ respective annual GDP growth this year is expected to reach around 10 percent and 7.6 percent. The annual GDP growth for Asia as a whole was estimated at about 6.5 percent this year and that for the Association of Southeast Asian Nations at 5.5 percent.
Benefiting from the skyrocketing primary commodity demands of East Asia, especially China, and the growing demands of manufactured goods of the United States, Latin American countries underwent notable growth in 2006. Though not as strong as in Asian countries, their progress was still impressive given their economic performances in the previous years.
Russia stood out among the emerging markets in 2006. Owing to soaring oil prices, Russia has enjoyed rapid economic growth in recent years. As its fiscal revenue and capital reserves increased dramatically, it paid off its debts owed to the Paris Club of creditor nations this year in advance.
However, the fallout was that its currency kept gaining in value. In the first half of this year, it appreciated 9.7 percent against the dollar and 4.7 percent against the euro. As a result, the country’s manufacturers suffered. They not only had to confront the competition for investments and human resources with the formidable energy industry, but also were dealt a heavy blow by rising production costs and cheap foreign goods that poured in.
At the same time, against the backdrop of a general economic recovery, the appreciation of the ruble meant a potentially large profit margin for real estate speculators. Consequently, a large amount of foreign investment surged into Russia’s real estate market. In the first half of this year, Russia received $23.4 billion in foreign investment, up nearly 50 percent over the same period last year. Nobody can tell how much of this amount went into the real estate sector. The torrent of investment is set to expand Russia’s real estate bubble.
Foreign direct investment
International trade made strides this year and is likely to maintain rapid growth next year. The annual international trade growth was 7.4 percent in 2005 and is expected to exceed 8 percent this year. Despite the suspension of the Doha Round of global trade talks, the growth rate may still approach 8 percent next year.
The downward turn of primary commodity prices was the most prominent feature in international trade this year. Primary products have had a bull market in recent years, with crude oil prices hitting nearly $80 per barrel and the gold price passing the benchmark of $700 per ounce. However, the soaring prices did not last too long. In the most recent couple of months, oil prices have plummeted. After reaching the historical high of $78.40 per barrel on July 14, the unit price of Brent crude, Dubai crude and West Texas Intermediate fell to $57.92 per barrel, $55.90 per barrel and $61.18 per barrel, respectively, by September 26. Prices of other primary products are also showing signs of going down. The persistent bull market is bound to take a dive as the demand for primary commodities increases at a slower pace, given the slowdown in global GDP growth, while their supply keeps growing quickly.
The global foreign direct investment (FDI) inflow rose substantially from 2004 to 2005. According to the World Investment Report 2006 published by the UN Conference on Trade and Development, global FDI inflows amounted to $916 billion in 2005, up 29 percent from the previous year. Flows to developed countries rose 37 percent to $542 billion. Those to developing countries surged 22 percent in 2005 to reach a record $334 billion. In percentage terms, developed countries attracted 59 percent of global FDI, developing countries attracted 36 percent and southeastern Europe and the Commonwealth of Independent States accounted for the remaining 4 percent.
Notably, a number of developing and transition economies have recently surfaced as important home countries of FDI. Between 1990 and 2005, the number of such economies with outward stocks of FDI of more than $5 billion increased from six to 25. Last year, transnational corporations based in developing or transition economies, but excluding major offshore financial centers, generated FDI outflows of $120 billion, the highest level ever recorded. Asia accounted for almost 70 percent of these capital flows. The list of top developing-economy sources in 2005 was led by Hong Kong, Russia, Singapore, Taiwan, Brazil and the Chinese mainland.
However, this FDI rush may not be sustainable. The rapid growth of global FDI in 2005 was partly powered by the feeling of optimism over global economic growth at the time. Also, the interest rates in international financial markets were relatively low, keeping the costs of FDI flows at a low level. However, the costs now are tending to rise, given the less positive outlook for investment and worldwide interest rate hikes.
The downside of foreign investment has become evident in many countries. The conflict between foreign investors and the government and general public of the host country has escalated. The global FDI flow might decline in the coming years. Even if it keeps growing as further investments pour into the countries to finance follow-up projects, the growth rate will not be as high as before.

(The Daily Mail-Beijing Review Articles Exchange Item)


Kashmir — Demilitarization conundrum
Saman Malik

In his book In the Line of fire (pp.302-303), president Musharraf has envisioned self-rule in demilitarised regions of Kashmir. He stressed need for demilitarisation when he met India’s prime minister Manmohan Singh on the sidelines of the General-Assembly session in September 2006. In his interview with CNN-IBN, he even promised to do the Herculean job of ensuring, in cooperation with Kashmiris, peace in Srinagar, Baramulla, and Kupwara, if India demilatrised just these three cities. India rejected even the proposed barest-minimum demilitarisation (“India rejects Musharraf’s rider to Kashmir”, Express News Service January 8, 2006).
Unruffled by India’s refusal, Musharraf went ahead for reciprocal demilitarisation of Siachen glacier to mutually agreed positions lower than NJ9842 point.. Even this proposal was rejected by Indian defence minister A. K. Antony. He asserted that there would be no demilitarisation of Siachen glacier which had been under India’s control for 26 years (following India’s operation Meghdoot in 1984). India believes it would be a strategic blunder to vacate Siachen. India claims to be in control of over 12 tactically-important peaks on the glacier, besides self-conceited advantage in Nubra and Shyok valleys.
President Musharraf believes that demilitarisation would facilitate transborder traffic of people and goods between the occupied and free parts of Kashmir. And, over time, it would soften the tangled skein of the Kashmir knot and lead to a peaceful solution.
What Musharraf desires is in line with UN resolutions. The UN envisaged demilitarisation as a necessary prelude, a sine qua non, for holding the plebiscite. The UN aimed at creating an environment in which the Kashmiris could vote on the plebiscite questions without fear.
Interestingly, India’s attitude remained unchanged over the years. Several UN representatives tried their best to make India agree to demilitarisation. But, India refused all suggestions, no matter how reasonable, about number of troops that each country would retain in Kashmir.
The UN Security Council stipulated 30 days’ period for India and Pakistan to agree on demilitarisation. This deadline was incorporated in the Security Counil Resolution No 98 dated 23 December 1952. The resolution called upon India to reduce its troops in Kashmir to a range between 12,000-18,000. Pakistan was allowed to keep Azad Kashmir force of 3,000-6,000 for internal security.
In order to facilitate demilitarisation, the UN disbanded the United Nations’ Commission on India and Pakistan.. Several UN representatives were then sent to the region to expedite agreement between the two rival countries _ Sir Owen Dixon, Dr Frank P. Graham, and Gunnar P. Jarring. None of them was successful because of India’s obduracy _ India kept insisting upon keeping a minimum of 21,000 troops as against UN-specified limit of 18,000 troops. India currently has over seven lac regulars and security personnel in Kashmir.
India’s insistence upon keeping three thousand more troops caused the dispute to linger on for over five decades.
Josef Korbel , in his book Danger in Kashmir, again and again, expresses disgust on India’s non-cooperative attitude _ His observations: ‘Three proposals were suggested by the Australian Prime Minister, Robert Gordon Menzes; (1) to station Commonwealth troops in Kashmir; (2) to have a joint Indo-Pakistan force there; (3) to entitle the plebiscite administrator to raise local troops. Pakistan accepted any of the three propositions. India refused them all’ (pp. 176-177). ‘...Neither of these proposals was acceptable to India’ (p. 186). ‘The Government of Pakistan also had a number of objections to the Commission’s plan of demilitarising the country; nevertheless it agreed to accept the final judgment of an arbitrator’ (p. 159). ‘Pakistan accepted the resolution (General McNaughten’s proposal); India reiterated her strongly critical position...One is bound to state, at this juncture, that throughout the endless deliberations of the Security Council on the Kashmir issue, the majority of the Council was closer to the Pakistan point of view than to that of India. Not only were its permanent members...inclined to support a procedure acceptable to Pakistan rather than to India, but the elected members also...’ (p.168); ‘The Prime Minister of Pakistan agreed to take the first step to withdraw the Pakistan army’ (pp. 171-172). The demilitarisation would remain a dream unless India changes its attitude. And without demilitarisation, it would not be possible to provide a conducive environment for holding plebiscite in the region. Unless the dispute is resolved in keeping with aspirations of the Kashmiri people, the region is unlikely to see the light of peace and tranquility. Needless to say that this volatility in the region is the real cause of retarded economic uplift of the masses.

Pakistan not an epicenter of terrorism
Khalid Khokhar

The US policy is to defeat terrorism by military means. U.S. President George Bush declares, “We will not wait for terrorists to attack the US. Rather, we will attack terrorists in anticipation. The US will not hesitate to attack countries that support terrorism”. Pakistan, being the frontline state in the war on terror, is committed to weed out terrorism of all sorts from its soil and has adopted both short and long-term strategies to counter the menace. The immediate action needed was “military operation” and that had already been accomplished. Long-term strategy necessitates addressing the root causes of terrorism - denial of justice, non-fulfillment of grievances, inequitable distribution of wealth etc, etc. all contribute to flourish extremism. The President of Pakistan Pervez Musharraf is right in saying “The military might is not the ultimate answer — you can kill people, (but) you are not going to achieve anything”. The capturing or killing the two al Qaeda leaders (Osama bin Laden and Zawahiri) will still leave the real issues unaddressed. These two high value targets mean nothing. This shift in the strategy of military operation with a “political process” in Waziristan, orchestrated by NWFP Governor Lt-Gen (Rtd) Ali Mohammad Jan Arakzai, is paying dividends and the situation in the Waziristan area has shown marked improvement. The Government is aiming to alienate and take out al Qaeda elements and ensure that no one crosses into Afghanistan. The peace pacts in North and South Waziristan have stopped infiltration.
The ‘peace deal’ with the so-called pro-Taliban militants in the Waziristan intended to curb militant activity, is seen with lot of suspicion by Western officials. The Westerners worry the truce may provide al-Qaeda leaders, a safe haven and effective amnesty. U.S. intelligence officials report that the al-Qaeda presence in the Northwest Frontier Province has increased since the signing of the Waziristan Accord. And the Taliban are pushing a recruitment programme as well. Lt Gen David Richards, the British general and NATO’s force commander in Afghanistan, has urged the Pakistani military “to do more” to reign in the Taliban. Mr Karzai has long insisted that the Taliban sanctuaries and logistics bases are in Pakistan while Gen James Jones, the Supreme Commander of NATO, told the US Congress in September that the Taliban leadership is headquartered in the Pakistani city of Quetta. Pakistan want to have peace, harmony and progress, and trust with each other, therefore, Afghanistan must stop blaming Pakistan for the Taliban-led insurgency. The disturbance in Afghanistan is not sponsored by Pakistan and they are not behind anything happening in Afghanistan. President Musharraf called for an end to the ‘blame game’ as it is severely undermining relations between the two countries. Pakistan is doing its best within its resources to help Afghanistan in its rebuilding efforts. It is pertinent to mention here that the peace treaty between the Government and the “tribal elders” (not Taliban militants) in Waziristan was not meant to support the Taliban. The media reports had misinterpreted the deal. The agreement is not at all with the Taliban, it is against the Taliban and it is with the tribal elders. The tribal deal was intended to reject the Talibanization of the people and that there won’t be a Taliban and there won’t be Al- Qaeda in Pakistan.
Pakistan is confronted with the phenomenon of Talibanization which is a very alarming threat before the trouble spills over into the settled areas. If the objectives are achieved through political process, then it is more economical method to do it. If succeeded it is very good, and if not who is to deter us from returning to a military strategy.