Whither the Dollar
Ding Ying

THE depreciation of the U.S. dollar is not big news, but its new low record is. In December, the greenback fell to its lowest rate in the last 30 years against other major currencies. The dollar slumped to 7.3589 per the Chinese yuan on December 14, the lowest point since it started depreciating in 2002. The Chinese Government had pegged the value of the yuan to the U.S. dollar until July 2005, when it adopted a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. With the value of the U.S. dollar dropping 24 percent during the last five years, economic experts said they expect the greenback to continue to weaken. The dollar’s depreciation has already influenced the world’s largest economies, including China. As the biggest developing country whose export volume is a major driver of its economy growth, China may be one of the major victims of the fall of the U.S. dollar, the experts said.
It isn’t easy being green
The fall of the U.S. dollar has affected economic zones from west to east. “It has destabilized economies throughout the world,” said Zhen Bingxi, a senior research fellow at the World Economy Division of the China Institute of International Studies (CIIS). The eurozone has taken the biggest hit. Since 2002, the euro has risen 40 percent against the U.S. dollar. The euro’s appreciation has caused a decrease in the EU’s exports, although the eurozone’s economy has not been affected to a great degree, Zhen said. The EU has softened the blow by adjusting the structure of its industry system and encouraging its citizens to consume more products instead of exporting them. The domestic demand inside the EU has partially replaced the bloc’s reliance on foreign trade.
“On some level, the adjustments had made up for the disadvantages caused by the U.S. dollar’s depreciation,” Zhen said. The EU’s domestic demand for goods has expanded in recent years, giving its economies a boost. According to the International Monetary Fund, the EU’s economic growth rate is expected to reach 2.5 percent this year. That would be the highest growth rate among the EU, Japan and the United States. The Organization of the Petroleum Exporting Countries (OPEC), which settles its accounts for oil exports mainly with U.S. dollars, is in a quandary. When the U.S. dollar depreciates, OPEC members raise the price of oil to lessen the losses brought by the currency’s depreciation, Zhen said. But when world oil prices rise dramatically, they see bigger losses due to the depreciation of the U.S. dollar. This prompts importers to pay much more for their oil purchases, a move that also slows down world economic growth.
The U.S. dollar’s depreciation also has triggered disagreements inside OPEC. To reduce their risk, some OPEC members started converting the U.S. dollars they received from oil exports into euros. Other OPEC members opposed abandoning the U.S. currency, arguing that it would aggravate their dollar depreciation risk and create an even worse situation. Changing some of their U.S. dollars into euros is one way to lessen the risk, Zhen said, but he added that underselling the U.S. dollar would be a wise move to avoid a bounce-back of an unstable dollar exchange rate. Overall, the greenback is not a very popular currency at this stage, he added. For Asian countries like China, whose economic growth relies heavily on exports, the greenback’s fall has come as a blow. The Japanese yen and South Korean won also have been appreciating steadily in recent years.
The Chinese yuan has appreciated 12 percent to the U.S. dollar since July 21, 2005. The change has a negative impact on both China’s export volume and its economic growth, said Zhen. Zhou Shijian, Standing Councilor of the China Association of American Studies, said China’s export volume has decreased annually since 2004 due to the U.S. currency’s depreciation, because export transactions are settled in U.S. dollars. China’s overall export growth rate was 35.4 percent in 2004, 28.4 percent in 2005, and 27.2 percent in 2006. It is expected that China’s export growth rate will reach 25 percent this year, Zhou said.
“It is obvious that the U.S. dollar’s depreciation has bashed China’s economic growth,” he said. China’s small and medium-sized enterprises are feeling the most pain from this situation. Their overall costs and salaries for employees are rising, but their profits are narrowing, Zhou said. Unlike big companies, they are not strong enough to resist the storm. In Guangdong Province, for example, more than 1,000 shoe factories that depend mainly on exports have already gone bankrupt. Companies and enterprises with overseas businesses, especially those in coastal areas, have been hit even harder, he said.
Deep in the red
Both experts believe that the U.S. dollar’s depreciation will not end very soon and that it actually benefits the U.S. economy. Since the greenback’s value started dropping in 2002, the United States has kept increasing its exports, while its employment rate has been rising. “In this regard, the United States hopes that currencies in other regions continue to appreciate, and the U.S. dollar is the only currency to depreciate,” Zhou said. Zhen from the CIIS cited another reason. He pointed out that according to the Peterson Institute for International Economics in Washington, the U.S. dollar’s value rose about 40 percent between 1995 and 2001, and that the increase has been one of the causes of the U.S. trade deficit during the past years.
Zhen also said the U.S. “double deficit”-the trade deficit and the budget deficit-triggered the dollar’s depreciation. He predicted that a further currency slump could ensue, because the current depreciation rate is only 24 percent of what it was in 2002. The U.S. dollar’s decline will continue for at least two more years, he added. The falling U.S. dollar will not drag down the economy of the EU, the biggest economic community in the world, Zhen said. After the EU adjusts the structure of its industry system, it will see a relatively steady increase in its economic growth, he said.
In the meantime, the gross domestic product (GDP) of the United States, which accounts for a quarter of global GDP, is rising. The country’s economic growth can almost counteract the negative influences of decreased exports to other economic communities due to the U.S. dollar’s depreciation, Zhen said. Given such circumstances, China must consider some ways to stabilize its own economy, he added. China expects its GDP to grow 9 percent in 2008, Zhen said. “Foreign trade, investment and domestic demand are the troika that can drive a country’s economy ahead,” he said. He also noted that since foreign trade and investment can be affected by the U.S. dollar’s depreciation, the best way to keep China’s economy buoyant for now would be for the government to further adjust its economic structure and develop knowledge-based industries instead of labor-intensive ones. Moreover, the country needs to encourage its people to consume more products. To decrease its risk in the meantime, China could change some of its U.S. dollar reserves into other foreign currencies, Zhen said.
Both the United States and the EU have been pushing China to allow the yuan to appreciate. Because the U.S. dollar’s depreciation has caused many countries and regions to switch their foreign exchange reserves to euros, the EU should make more efforts to maintain the euro as a stable hard currency. The EU must find another currency to do the job together, and it would appear that the yuan is the most suitable, Zhen said. In this regard, the EU has prompted China to quicken the pace of the yuan appreciation, Zhen said.
Yet, international economic experts believe a fast yuan appreciation would not bode well for China. “The appreciation should be carried out step by step to avoid possible turbulence, because China’s financing system is not perfect enough now,” Zhen said.
But currency appreciation is natural for a country whose economy has grown very fast. When considering the country’s long-term economic developments, the appreciation of the yuan will be more flexible and mature, Zhen said. It also will let China adjust its currency exchange rate according to its needs, he added.
The dim future for exports could also prompt Chinese enterprises to improve their technological levels and adjust their export structures by selling more knowledge-based products to other countries, thereby benefiting China’s future development, Zhen said. For example, China has enacted regulations that remove tax rebates on products made with higher energy consumption or pollution elements.
In this way, China can also realize its sustainable development goals. The current imbalance of trade between China and the United States could also be improved, Zhen said, because a huge trade surplus is not good for China. The trade volume between China and the United States was $262.68 billion in 2006, and China’s trade surplus was $144.26 billion, according to the country’s Administration of Customs.
If the Chinese Government lets the yuan appreciate, it will maintain its rate within a controllable range, said Zhou of the China Association of American Studies. If a boost in the yuan’s value started dragging down the country’s economic development with, for example, China’s export volume dropping to an unbearable point next year, then the government would definitely curb the rate of appreciation, he said.

(The Daily Mail-Beijing Review Articles Exchange Item)

 

Indian Armed Forces’ fault lines
Neha Ahmad

THE Indian army is under a tremendous debate over the controversial proposal to shift Lt. General Panag, who has less than one year service left, from the Udhampur-based Northern Command to the Lucknow-based Central Command. The sources said that this transfer was done as a result of Gen. Panag’s persistent probe into the procurement irregularities in the command when it was commanded by the present day Army Chief, Gen. Deepak Kapoor. In normal course, the transfer would have gone unnoticed, but in this case however, it is being linked to Panag’s probes into the purchases scandals that occurred in the Northern Command when General Kapoor headed it. Panag has protested claiming that his removal will lead to a cover-up of Army corruption that he exposed in Jammu and Kashmir. He has marked the misuse of special financial powers delegated to the army commanders. “The system”, he suggests, “is not clean, it is being used”. The Northern Command has of late been in the news for all the wrong reasons. From tent scam to egg scandal to Siachen rice scam, increased incidents of suicide among the soldiers and the rise in the number of fratricide cases has rocked the Northern Command in the recent past.
Discipline is the spine of an army and if the emerging negative indicators are any guide, it is already on the ropes. Interestingly, there have been more than 600 court-martials since 2001 and more than 10,000 complaints against the suppression in various ranks, bringing the disciplinary and ethical status of the army into light. The court-martials have been commenced on the account of rapes, murders, violation of human rights, sexual abuse, indulgence in scams and corruption and other civil offences. Naming just the few, recently, the CBI has alleged the ex-Naval chief, Admiral Nanda, of receiving more than Rs. 400 crore in defense system deals. Further, administrative actions are said to be taken against a Lt. General and several others for alleged irregularities in the procurement of frozen meat meant for the troops posted in Ladakh. More, seven years after the Kargil war, the CBI has nailed some senior army officers and the company that sent the coffin boxes for dead soldiers at an exorbitant rate of $2500 (approximately Rs. 1.20 lac) per casket and $ 85 per body bag. This “Coffin Scam” set alarm bells ringing at the Army headquarters. That apart, the Ministry of Defense is inquiring into allegations of kickbacks in seven major deals relating to the acquisition of sub-systems worth thousands of crore in 2007. Another fraud that has been reported is related to army convoy which goes from Srinagar to Leh, for stocking the winter rations, ammunitions and other stores. It has now been revealed that the fuel is sold to civilians on the way. Actually the problem lies within the Indian military culture. The prevailing custom of fake encounters in the army has depreciated the overall effectiveness of the organization. The fact is that head-count has become an indicator of efficiency and promotion in the Indian army therefore, it is considered a norm to be practiced and benefited from.
Corruption in the Indian army is mounting due to deteriorating level of its collective moral. The high level corruption is affecting the lower levels as well. Having lost its shine to such corrupt culture, the Indian army is finding it hard to recruit young officers. The army is short of 24 percent and air-force and navy with 12-15 percent of officers’ strength. Interestingly, the elite Indian Institutes of Management got 200,000 applications for 1,200 slots, where the Indian Military Academy got only 86 applications for 250 slots this year. Amusingly, those who are serving in the forces are looking for an early retirement. As in the year 2007, over 1,500 officers from the Indian army, navy and air-force applied for pre-mature release or retirement. These retirements are perhaps the outcome of over fatigued nature of duty the army has to cope with. The civilian role of the army, in the society, is increasing day by day. Today, more than 20 Indian states, out of 26, involve army intervention.
Probably the lack of moral in the Indian army has been brought about by it’s over extension in un-ending counter-insurgency operations. India is at war, with troops getting killed and injured in Jammu and Kashmir, the North-Eastern tribal areas and fighting against Maoist rebellion in the Central India. Serving in the combat zones is getting on the nerves of the troops. Army is doing all it can to soothe the nerves of its desperate soldiery. It has even taken help of the music therapy to de-stress soldiers engaged in the counter-insurgency operations. Moreover, army is training 400 JCO’s as psycho therapist to reduce stress among the soldiers working in hazardous conditions. Because of rising stress, the suicide rate in the Armed forces has increased gradually. The numbers of soldiers who commit suicide or are killed by their colleagues exceed those killed by enemy fire.
The Indian army is in a state of total chaos. It has no major external threat at the present times. The original threat faced by the army is internal. Fresh blood of the nation is reluctant to join the forces due to growing state of insurgency in the country. Owing to the booming and fast-growing economy and the over Rs. one crore per year sky-rocketing pay scales in the corporate sectors, the bug to get-rich-quick has affected the Indian armed forces as well, resulting in to a below par standard of leaderships, at all level of hierarchy of command. It seems that Indian army has actually started marching on her belly.






Mistimed American move
Khalid Khokhar

IN ORDER to seek reassurance from the new coalition Government regarding its resolve to fight terrorism through “predominately military means”, the timing and intent of the visit to Pakistan by Deputy Secretary of the State Mr. John Negroponte and Assistant Secretary of the State Mr. Richard Boucher has come under severe criticism by almost all analysts, intelligentsia and Pakistani community. These two senior US officials came at such a juncture when the new dispensation was immensely committed in rebuilding the democratic and social institutions. The world’s renowned think-tanks such as, Denix Kux, Dr. Harlan Ullman, Gen. Anthony Zinni, Marvin Weimbam, Ziad Allahad have openly criticized the American overture as unfortunate diplomatic blunder. This ill-timed and mis-directed attempt to pressurize the new Government, is perceived to tarnish the US image in Pakistan.
The new Prime Minister Yousaf Raza Gilani pledged to make the fight against terror his top priority, but he said peace and developmental aid could be more effective than weapons in fighting military in the tribal areas of Pakistan along the Afghan borders. The “aggressive” policy alone has led to unprecedented escalation of 76 suicide attacks since 2007 onwards, taking a toll of over 1000 innocent lives in the country. The reconciliatory approach demonstrated by the new Government has disturbed the Bush Administration. Negotiations with Taliban are projected as a second disaster, Orakzai Peace Agreement of September 2006 being the first one which led to the strengthening of al Qaeda sanctuaries in South Waziristan. Pakistan is deeply concerned over the possibility of al Qaeda regrouping within our bordering areas which extends more than 2000 KM with Afghanistan. Pakistan is combating the menace of terrorism in its own interest. But will not allow any direct military operation (in the shape of drone attacks) by either NATO or the US inside Pakistan’s territory. It will be considered as flagrant “aggression” on the sovereignty of Pakistan. Nobody has said don’t fight terrorism. We do not want to see bombs and missiles falling on our villages, we want our people to be safe from suicide blasts.
The appearance of Director CIA General Michael Hayden on NBC’s “meet the press” only 3 days after the envoy’s visit clearly reflects that Administration has serious reservations on political engagement or rapprochement with Talibans. The rhetoric of FATA being a safer haven for al Qaeda/Taliban, that the next attack on the US is likely to be hatched out of there, are the pretexts and rationalizations to carry out US interest by escalating unilateral strikes against al Qaeda members and fighters operating in Pakistan’s tribal areas. Therefore, sooner or later, the US will step-up pressure on Pakistan to resume the her efforts to pressurize Pakistan for use of military force alone. The overt pressure through the media is likely to precede the congressional pressure as always seen in the past. However, it will be perceived as an intrusion in the country’s internal affairs and an attempt to intimidate the new Government and accentuate impediments for the Government in continuing its cooperation in the US-led GWOT.