A global slowdown?

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Policymakers will have to bust recessionary
fears with more than just monetary policy

 

Stock markets across the world had very little rea­ s turn of extreme volatility after many years, and on to celebrate in 2018. They witnessed the remost of them recorded their worst performance in a decade. Much of this gloom has to do with the rise in fears that global economic growth could come to a grinding halt in the near future. The economic expansion in the United States, which began after the 2008 recession, is now the second­longest in history. Many believe that a recession is overdue now. China is another major concern as the People’s Bank of China’s earlier moves to rein in a massive credit­fuelled bubble have been dampening momentum with a lagged effect. The country’s private manufacturing sector contracted in December for the first time in 19 months and the official manufacturing PMI (purchasing managers’ index) number dropped below 50 for the first time since mid­2016. Other major economies such as Europe and Japan have also shown signs of a potential slowdown in growth. Global stocks have been pricing in these very real risks, particularly with major central banks such as the U.S. Federal Reserve and the European Central Bank remaining on the path to normalise interest rates from near­historic lows. The steep fall in the price of oil is another indicator of faltering demand for commodities as the global economy cools down. The tightening of monetary policy has often been followed by a slowdown in economic growth, and this time may be no different. Going forward, a major worry for policymakers globally will be the lack of sufficient central bank firepower should the global economy move into a full­fledged recession in 2019. After years of adopting a monetary policy regime marked by near­zero interest rates, central banks like the Fed now have very little room to lower rates if they want to fight a recession. This is despite the gradual tightening of rates and unwinding of asset purchases in the last few years. The next recession may thus witness central banks adopting even more unconventional methods to stimulate their economies. Some hope that governments will ramp up spending to compensate for the lack of monetary policy leeway. But it is unlikely that any fiscal stimulus will fully compensate for the absence of an accommodative monetary policy, particularly when most governments are already deeply mired in debt. Further, the overuse of monetary policy will eventually lead to diminishing returns. A further escalation in the trade war between the U.S. and China is another imminent risk to global growth as additional tariffs could increase the overall tax burden on the economy. In order to tackle the next recession, policymakers will have to come up with reforms to boost economic productivity, instead of just relying on an ultra­easy monetary policy to boost their economies.

A global slowdown? 1

After the inevitable exit

India must be prepared for the potential consequences of withdrawal of American troops from Afghanistan Ds tespite the White House’s hat it has issued no orders pirited denial of reports for the pullout of U.S. troops, the course seems set for a thinning of American presence in Afghanistan. U.S. President Donald Trump had promised this during his campaign, and several advisers have said since then that he is keen to bring back most, if not all, troops before his re­election bid in 2020. If anything, Mr. Trump’s ill­judged remarks this week only underline his desire to leave: he suggested that regional players like Russia, India and Pakistan should be more involved in stabilising the situation, and mocked India for not doing enough. As a result, the U.S. war in Afghanistan, that began as revenge for the 9/11 attacks, evolved into a mission for ensuring democracy and prosperity in Afghanistan. In recent years, challenged by the resurgence of the Taliban, it has now become a mission mainly to ensure an honourable exit. This isn’t the first time the U.S. has sought to do this: President Barack Obama had faced similar challenges in 2010, just before he announced the big drawdown. As Mr. Trump now moves to cutting American presence to a few well­guarded military bases, India must consider the consequences closely. Shift in policy To begin with, it is time to recognise that the U.S.’s South Asia Strategy for Afghanistan, as announced by Mr. Trump in August 2017, has been discarded. Mr.Trump had defined the strategy with three features: that U.S. troops would remain involved in the country until “conditions”, not a timeline, mandated their return;  that the U.S. would put Pakistan on notice for its support to the Taliban and a political settlement with the Taliban would only follow

“after an effective military effort”; and that the policy would hinge on

further developing the strategic partnership with India Sixteen months later, it is easy to see that each element of the U.S.’s policy on the ground has shifted, if not been entirely reversed. The appointment of special envoy Zalmay Khalilzad in September to lead talks with the Taliban after a particularly brutal year shows that the U.S. is no longer waiting for military operations to take effect. According to the Special Inspector General for Afghanistan Reconstruction report to the U.S. Congress, casualties of Afghan National and Defence Security Forces in May­September 2018 were the “greatest it has ever been” compared to corresponding periods since 2001, and the United Nations Assistance Mission in Afghanistan “documented more civilian deaths in the first nine months of 2018 than they had during the same nine­month reporting period since 2014”. Mr. Khalilzad’s direct talks with the Taliban that cut out the National Unity government (NUG) in Kabul reportedly didn’t even have President Ashraf Ghani in the loop until after the first talks were held in Qatar — this reversed the previous U.S. position not to engage the Taliban until it engages the NUG. Far from the tough talk on Pakistan for support to the Taliban, Mr. Trump wrote a letter to Pakistan Prime Minister Imran Khan thanking him for his efforts. Afghanistan’s High Peace Council members also disclosed that Mr. Khalilzad was on a deadline: Mr. Trump has reportedly given him six months to show results with the talks process, failing which the pullout may be speeded up. The departure from the avowed U.S. position on an “Afghanowned, Afghan­led” process has clearly ruffled feathers in Kabul. In December, Mr. Ghani appointed two aides of former President Hamid Karzai known for their hardline position on the Taliban and Pakistan as his Defence and Interior Ministers. Putting the seal on the clear drift in the U.S. Afghanistan and South Asia policy from the past was the exit of Defence Secretary James Mattis, author of the South Asia policy. Mr. Mattis had pushed most strenuously to keep India in the Afghan game by swinging a waiver for India on Chabahar and Iran oil purchases. It remains to be seen whether Mr. Trump will continue those waivers past May this year. The internal situation in Afghanistan is aggravated now by the uncertainty of the democraticprocess. Parliamentary elections were held in October after being delayed by more than two years, but even their preliminary results haven’t yet been declared, casting doubt on the government’s ability to conduct elections. Presidential elections have been postponed till July, despite the constitutional clause that they were to be completed by April 22, 2019. Meanwhile, Mr. Ghani has been unable to keep his commitment to hold a Loya Jirga (grand council of representatives) to turn Chief Executive Abdullah Abdullah’s post in the NUG into an executive Prime Ministership. A pragmatic view For India, these developments may appear discouraging, but a more pragmatic view is necessary to deal with all possible outcomes. The U.S.’s eventual pullout as Afghanistan’s peacekeeper is inevitable, and it would make more sense to prepare for it than to deny it will happen. New Delhi was caught off guard in 2010 when Mr. Obama planned the drawdown and discouraged India from a stake in projects there in an effort to placate Pakistan. Mr. Trump’s administration has no doubt been much more welcoming of Indian investment in Afghanistan, but that itself is symptomatic of his desire to pare down “Pax Americana” in every part of the world. The removal or reduction of the U.S. presence from most theatres of action has created space for regional players: leaving Syria to Iran and its allies; Yemen to Saudi Arabia; Afghanistan to players like Russia, Pakistan and Iran; and Pakistan to China. Some other hard truths must be faced: India cannot replace Pakistan’s position geographically, nor can it ever offer the U.S. or any other force what Pakistan has offered in the past, including bases and permission for U.S. forces to bomb its own territory. The decision to abandon the SAARC in favour of groupings like BIMSTEC (Bay of Bengal Initiative for MultiSectoral Technical and Economic Cooperation), BBIN (Bangladesh, Bhutan, India, Nepal) and IORA (Indian Ocean Rim Association) may have provided some shortlived returns in “isolating Pakistan”, but it has had the effect of cutting Afghanistan loose from Indian leadership of South Asia as well. India’s best course with Afghanistan remains its own regional strategy, not becoming a part of any other country’s strategy. Close bilateral consultations like this week’s visit to Delhi of National Security Advisor Hamdullah Mohib may not always yield dramatic headlines, but are the basis of India’s ability to help Afghanistan according to its needs, not India’s ambitions, and the reason for the immense popularity and goodwill India continues to enjoy in Afghanistan. Finally, it is necessary to recognise the cyclical nature of interventions in Afghanistan, which has been called the “graveyard of empires” for forcing all world powers to retreat at some point or the other. The words of Rev. George Gleig, a soldier who survived the First Anglo­Afghan War (1839­ 42), are worth remembering: “A war begun for no wise purpose, carried on with a strange mixture of rashness and timidity, brought to a close after suffering and disaster, without much glory attached either to the government which directed, or the great body of troops which waged it.” Greig’s description of the British retreat could ring true for Soviet forces in the 1980s, and American forces post­9/11 as well

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