India

By Eurasia Group analyst Seema Desai

After the Congress party received a strong mandate in May 2009, investors hoped that India's unfinished reform agenda would resume. Without the left parties, which held back many market-oriented reforms during its previous term, they thought that the Congress party would be able to power ahead without opposition. The new government fed the euphoria, promising to implement a wide range of policies that would cheer investors -- including disinvestment in state owned enterprises, tax reforms, banking, and insurance reforms, and a move toward market pricing of fuel. The party also planned to institute policies that would improve the condition of farmers, develop better infrastructure (e.g., roads, transport systems, and electricity), free up energy markets, promote job growth, and push forward judicial reforms.

But the government's first 100 days, completed in late August, have been disappointing. Much of the progress so far has been on tax and fiscal policies that are essential to narrow the fiscal deficit which, at more than 10 percent of GDP, has reached alarming proportions. In other areas, such as banking and financial reforms, the government is moving slowly in the wake of the global financial crisis. Moreover, there has been no movement on reforms in the agriculture and energy sectors largely because of the complex vested interests involved.

Since the early 1990s, India has had successful reformist episodes in which the government has been able to prevail over vested interests, but these periods have typically occurred after an economic or financial crisis, or because the top leadership believed in reforms and fought off internal political opposition to them. Now, however, the leadership's mantra of inclusive growth clearly indicates a focus on redistribution -- high taxes for high welfare spending, with a focus on programs to uplift the disempowered in rural and urban areas.

While the overall prognosis for economic reforms during the rest of the government's term is not particularly promising, there will be important progress in certain areas. A new fiscal responsibility law, implementation of tax reforms, and disinvestment in state owned enterprises will happen in 2010 and 2011. Incremental policy changes in the finance and banking sectors are also likely. Kamal Nath, the new minister of roads and highways, is trying to start transport infrastructure building, though he has been inexplicably slow in announcing changes to the public-private partnership framework. None of these are areas will face major political opposition.

In contrast, freeing up agricultural markets and allowing the private sector to trade directly with farmers would mean challenging powerful rural vested interests, which the Congress party is unlikely to do. Facilitating an organized retail sector presents the same obstacles, as does allowing foreign direct investment in the retail industry. Fuel subsidies have long been a drain on India's public finances, but this government is unlikely to be brave enough to remove them and sustain free market prices for any serious length of time.

The best period for reform is between now and 2011, after which the government's focus will shift to the next general election, as well as the upcoming leadership change from Prime Minister Manmohan Singh to Rahul Gandhi, son of party leader Sonia Gandhi. Important state assembly elections (particularly in the battleground state of Uttar Pradesh in 2012) will also make the Congress party even more risk averse than it is now.

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By Eurasia Group analyst Sean West

Earlier this month, the G8+5, the world's leading industrial states plus some other important developing states, committed to finishing the Doha Round of trade talks by the end of 2010. U.S. and Chinese officials paid lip service to finishing Doha this week during the inaugural bilateral "Strategic and Economic Dialogue." World Trade Organization chief Pascal Lamy will likely cite both announcements as cause for celebration. Healthy skepticism is in order.

Overblown fears of oncoming protectionism were all the rage just weeks ago. But as Ian Bremmer wrote in this space back in March, the financial crisis need not trigger as many new trade barriers as some feared. Still, the global liberalization envisioned by a completed Doha Round by the end of next year is likely a bridge too far.

Pledges aside, there's not much reason to be optimistic that a deal can be concluded in the near future. Personality conflicts may have receded, as both Susan Schwab and Kamal Nath -- who banged heads last year -- no longer represent the United States and India respectively. But domestic conditions in the wake of the financial crisis won't help much with trade liberalization. While there's ample reason to be skeptical that neither China nor the EU are any more ready conclude an agreement than in the past, all other countries can play wait-and-see unless and until the United States shows serious leadership.

Obama has yet to lay out a clear strategy for the Doha Round. U.S. Trade Representative Ron Kirk has said several times that the United States considers Doha completion as critical, but there's no evidence yet that he'll have the political support he needs to set policy and to bargain. Comments from Obama himself on Doha have been ambiguous at best, warning of an "imbalance" in potential trade-offs on the table in current negotiations. It's also not yet clear how much political capital Obama will put at risk at a moment when he needs the support of organized labor for a host of other domestic priorities. And in a nod to agricultural interests, he allowed his budget proposal to cut farm subsidies -- a critical sticking point in the Doha negotiations -- to die on arrival.

Real movement on trade policy remains on hold until the president explains publicly how trade policy fits into his administration's broader agenda -- a speech he might give in advance of the September G20 meeting in Pittsburgh. But he'll have to use that speech to persuade an anxious American public -- and many trade skeptical US lawmakers -- that trade deals can spur growth without killing jobs. Obama has an advantage. His history suggests that he believes in the benefits of trade, and in a Nixon-goes-to-China way, he can spend political capital earned on the campaign trail to bring trade-wary Democrats along with his initiatives. But he has so far provided no indication that he's ready to accept the political risks that come with the push needed to get Doha done within 18 months.

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By Ian Bremmer

Moisés Naím wisely warns us in his latest FP column that transnational problems are pressing just at a moment when multinational consensus on solutions has become nearly impossible to achieve. If 20 countries produce 85 percent of global GDP, 20 countries generate three-quarters of global greenhouse gasses, just 21 are directly concerned with nuclear non-proliferation, and 19 account for almost two-thirds of AIDS deaths, limiting negotiations over collective action to the smaller number of states needed for workable solutions makes good sense. But in today's geopolitical environment, 20 is still a very big number.

The ongoing economic meltdown has accelerated the inevitable transition from a G7 to a G20 world. Gone are the days when the United States, UK, France, Germany, Italy, Japan, and Canada could credibly claim global political and economic leadership. Today, no institution that excludes China, India, Russia, Brazil, and a few other emerging heavyweights can fully address the biggest international challenges.

But it's not simply that it's tougher to forge compromises with 20 negotiators at the table than with seven. It's that some of the new players have fundamental disagreements with the established powers on some very big questions -- like what role government should play in an economy. Agreements on managing transnational health crises, nuclear proliferation, regional security, or greenhouse gasses and global warming will involve complex policy solutions with direct impact on domestic economies.

Second, the new governments at the table are preoccupied with problems much closer to home-issues that can be addressed on a (relatively) more modest and manageable scale. China's political leadership, an increasingly indispensable player on several transnational problems, is far more concerned with domestic than with international challenges. Much of its foreign policy is intended to fuel the continuation of explosive domestic economic growth-and the millions of jobs it creates. Its rhetoric may be global, but its focus is more often regional. The governments of India, Russia, and Brazil are likewise intent on managing the impact of the global recession on their domestic economies and advancing their political interests within their immediate neighborhoods. That's why much of the forward movement on transnational issues will come from regional groupings like the European Union, the Gulf Cooperation Council (GCC), and the Association of Southeast Asian Nations (ASEAN).

Some respected observers of international politics have called for a G2, a meeting of US and Chinese minds for the ultimate in minilateralist institutions. There are many reasons why this won't happen anytime soon-if ever. The Chinese leadership may enjoy such talk, but its most seasoned policymakers know well that China cannot yet afford to shoulder such burdens. Nor are Washington and Beijing likely to agree on how to solve many of these problems. And to reduce international consensus to two countries is to ignore the growing importance of many others.

In other words, Moisés is correct that 20 is a much more manageable magic number than 200. But these 20 are unlikely to accomplish big things for the foreseeable future.

by Ian Bremmer

Globalization has created unprecedented opportunities for new investment in education within dozens of emerging and frontier-market countries -- by providing new generations of students with the information and resources they need to compete in the global economy.

As with everything else related to globalization, there's a downside. Upwardly mobile elites in volatile developing states often choose to apply what they've learned in the more lucrative job markets of the West. In many countries, this chronic problem discourages state spending on education: Why commit substantial capital for a long-term investment in people who may simply take their gifts elsewhere -- especially when near-term results can be achieved by spending on something more tangible? Yet, failure to invest in education lowers the arc of a country's development.

For a glimpse of the future of a state's economic growth and its political stability, a look at its education system can provide useful insights.

Commitment to global standards, particularly in higher education, is becoming one of the biggest advantages for Persian Gulf states. Governments throughout the region have devoted much more time and resources to it in recent years-Saudi Arabia, Dubai, and Abu Dhabi especially-both in terms of building infrastructure, attracting top talent, and leveraging partnerships with other institutions of higher learning. But the most important change comes in the form of new opportunities for young women, empowering a massive untapped resource. At the same time, we're likely to see a growing development gap within the United Arab Emirates as the less developed emirates-Ajman, Ras al-Khaimah, Sharjah, etc-are burdened with well-entrenched elites who fiercely resist the social liberalization that comes with radical improvements in education standards.

The Gulf stands in marked contrast with most of North Africa, where government policy reflects the preferences of an older generation that still sets the curriculum and rejects western-style training in favor of a focus on nationalist and, in some cases, socialist principles. Budgets are also a problem. That's a particular issue in Egypt, where younger urban lower and middle classes are increasingly frustrated with the quality of local schools. Growing emigration rates for the most talented young people create risks of increasingly brittle economic growth.

In sub-Saharan Africa, top students traditionally studied in public boarding schools. Strong economic growth has generated rising demand for better educational standards, but state governments haven't been able to keep up. To fill the vacuum, the private sector is stepping in to build private day-schools, which are located in neighborhoods that can afford them-unlike the boarding schools, which mix students from different class and tribal backgrounds. As a result, the private sector is giving a generation of Africans a much stronger sense of tribalism-with fewer opportunities to meet students from different cultural and socioeconomic backgrounds. These changes will help to heighten long-term risks of increased tribal and ethnic polarization.

India and Brazil have similar structural challenges and proposed solutions. To overcome lagging local education spending, they're bringing in the private sector and foreign direct investors to bridge the gap. Brazil is likely to have more success with this strategy, in part because the political system is more centralized and the country is less culturally diverse than India, where more than two dozen languages are each spoken by at least one million people. The most useful parts of a program that works in one area-like special schools sponsored by Embraer, an enormous Brazilian aircraft manufacturer, with advanced science and engineering-can be implemented in other regions of the country. In India, charter schools tend to function like special economic zones. They're effective, but their programs aren't easily transferable to another region of the country where different languages are spoken and cultural values respected.

In Russia, government has reinserted itself into school systems in a big way, both in terms of textbook content (in history and social sciences), as well as a broad effort to improve the quality of military training. Spending on culture and the hard sciences has lagged considerably. Combined with the extraordinary demographic crisis looming in Russia (with 0.5% negative population growth annually, Russian demographics are unmatched globally in any country not ravaged by war or famine), the longer-term trends look especially worrisome.

As with so many social developments, China's educational problems create competing internal pressures. The Chinese government has long been committed to vastly improved education standards for an enormous (and largely illiterate) rural population. It has succeeded. To maintain social order, Beijing must now create jobs for many more graduates than it did a few years ago. More than 20 percent of Chinese university graduates today are unemployed, while Chinese stimulus spending continues to focus mostly on energy-intensive (and not high-value, labor-intensive) industry. That's a problem that's likely to increase over time, in part because of the skepticism of Chinese leaders over more intangible non-industrial production, and in part because of the top-down, more rote nature of education in the Chinese system.

Then there's the leadership's strategy of nurturing nationalism in Chinese universities. The state has invested in the promotion of party loyalty within many institutions, including by creating so-called 50-cent gangs, students who receive small payments for each positive posting they write on behalf of the Communist Party on university web bulletin boards. A point of related tension: Increasing numbers of foreign students (including a growing number of Americans) are attending universities in China's fast-growing, increasingly prosperous eastern cities. Thus far, they've been relatively isolated from the general student population, but that's likely to spark conflict in coming years.

On the subject of education and nationalism, Western European schools have dramatically scaled back the teaching and promotion of national identity in recent years. But with growing immigration from Eastern Europe, the Muslim world, and elsewhere -- and a sharp economic downturn -- these governments are now struggling to cope with the rise of new ethnic, religious, and regional enclaves within their states. As a result, we're likely to see a serious backlash toward conservative state-sponsored promotion of national identities-some of which will be exclusionary, fueling intensified domestic social tensions.