Vajpayee Musharraf Summit
Men, Matters, Memories

By M L Kotru

With the Vajpayee-Musharraf summit set for next month the ''experts'' and the ''trackwallahs'' are busier than ever before. Some have tended to write off the summit a non-starter, or, alternatively, even chosen to set out in detail the likely solutions. Soften the LoC, open up the Srinagar-Muzaffarabad road, give more autonomy to the divided halves of the State, ease travel restrictions and hope for the best. There is another set, the Pakistani fundamentalists including the Jamaat-e-Islami and Lashkar-e-Toiba, who believe the summit is foredoomed; that Gen Musharraf does not have the mandate to seal a deal of any kind with India. Musharraf, for his part, believes that he is about to make history together with Vajpayee. Thankfully, the General does not speak of changing goegraphy although Kashmir, as he told Pakistani mediamen and others at a televised two hour meeting, continues to be his top priority. The reference to Kashmir as the core issue, in the given circumstances, is mandatory for any Pakistani leader about to engage in talks with the Indians. Musharraf's task is doubly difficult given the dire economic straits of his country and the last-minute challenge thrown to his authority not only by the political hardcore (Benazir's being the case in point) and the fundamentalists.

Benazir, who until only the other day, was trying to plan a visit of her own to this country, before Musharraf's, has been the most strident political critic of the visit. Her worry is understandable. For don't we remember how in spite of a popular mandate she did not honour even the basic confidence building measures accepted by her during her talks with Rajiv Gandhi when the latter visited Islamabad for a SAARC meeting in 1989-90. I was present at their joint Press conference at the Aiwan-e-Sadr in Islamabad when the two Prime Ministers made all of those promises rosy for the most part. For that matter, Benazir's father, Zulfiqar Ali Bhutto blitherly reneged on the solemn, though verbal, assurances he gave to Indira Gandhi while persuading her to release the 90,000 Pakistani PoWs and return all the occupied land. That was at Simla in the aftermath of the 1971 war. It took Bhutto no less than the flight home to forget all the peaceable noises he had made in Simla.

The problem with any Indo-Pak dialogue historically has been the state of grave mistrust that exists between the two nations- in the ruling elite in India as much as in the politico-military leadership in Pakistan. Add to this for good measure the vested interest which the ruling elite, the bureaucracy and the military in the case of Pakistan, and the bureaucracy in India, has developed in the continuing discord between the two neighbours. I remember a well regarded international bureaucrat telling me some three decades ago how he dreaded to have Indian and Pakistani officials sitting together on any of the committees headed by him. It was ridiculous, he despairingly recalled, to see the Indian and Pakistani bureaucrats straining their last ounce of energy, quibbling over the use of a particular phrase and, even more ridiculously, over the placement of punctuation marks. There always was a victor and a loser in all such ''combats'', he amusedly recalled. And I have known from personal experience during the long years I covered the Indian Foreign Office, which involved extensive travel covering many international conferences as well as frequent visits to Pakistan in the 70s and the 80s, how silly the Indo-Pak posturing looked the moment you chose to distance yourself from their wranglings. I have seen and I have heard the endless streams of venom, the vitriolic prose which diplomats from the two countries- some of them rising to high political office later- would routinely hurl at one another.

The backdrop of the month's Musharraf-Vajpayee talks is very bleak indeed, made bleaker this time over by religious bigotry which, by the look of it, has become a part and parcel of the Indo-Pak dialogue now. Not that the religious factor could ever be absent in a dialogue between two countries which (at least the Pakistani part of it) were separated at birth by the monster called the two-nation theory. I recall an exasperated Zulfiqar Ali Bhutto, then Ayub Khan's Foreign Minister, throwing up his hands in despair saying ''I don't understand what this man has been trying to tell at our last four meetings''. The ''this man'' in question was Swaran Singh, then Railway Minister. Some years later Aziz Ahmed, then Minister of State in the Pakistan Foreign Ministry, while being guided to the conference room at South Block by External Affairs Minister Swaran Singh from his office room, saw the tall Sardar putting his arm over Aziz's shoulder and telling him ''Your Excellence, the ceiling (South Block corridors) are so high; the British obviously knew how to combat the summer heat''. Aziz Ahmed smilingly turned back to remind Swaran Singh that he had begun his career in South Block as an ICS officer. Pleasantries aside, there was this other product of the ICS, Agha Shahi, then Foreign Secretary of Pakistan, who later briefly the Foreign Minister of his country, who told me how difficult it was to sort out the Indo-Pak mess. He never trusted any Indian diplomat, a compliment which was reciprocated in full measure. In trying to mention these seemingly trivial incidents I am only seeking to pinpoint the deep-rooted mistrust between the ruling classes of the two countries. It will require a superhuman effort by the two principals when they finally meet next month. The success or failure of the upcoming dialogue will depend on how far the two leaders are prepared to go in their common search for an agreed solution to the outstanding issues. While Kashmir would naturally come at the top of Musharraf's agenda even he would concede that there can be no ready-made solution to a problem that has bedevilled their relations for half a century. He will have to seriously consider Indian concerns about Kashmir and the consequences of Vajpayee appearing to be endorsing the two-nation theory by accepting the principle that Kashmir (or the Valley) being a Muslim majority State must be a part of Pakistan.

Much as Pakistan would like to, Gen Musharraf must understand that the Kashmir problem cannot be considered in isolation. That does not mean that it should be put on the backburner. But Kashmir also happens to have become a symptom of a deeper malaise afflicting not just India and Pakistan but the South Asian region as a whole. The Taliban phenomenon, the rise of Jihadi groups in Pakistan, the induction of Afghan and Pakistani fidayeen groups into the valley have given a new twist to the tale. And this aspect will have to be gone into in depth.

Dollarisation: When ....and not if

By Sisir Basu

I wonder when they will begin to talk about it. Not if. When. Because dollarisation, admittedly in a very loose sense of the term, has already overtaken the economy. If you have any doubts at all on this score, ask the erstwhile BJP President, the lugubrious Mr Bangaru Laxamn, whose uncharacteristically exuberant endorsement of the US dollar is on tape in living colour for all posterity. Or the people at Enron. They are laughing all the way to the bank, having successfully denominated their revenues from the Dabhol power project in dollars, presumably in anticipation of the steady southward march of the rupee.

Dollarisation can be broken up into three categories : Unofficial, semi-official and official. A country can be said to have gone in for unofficial dollarisation when some of its people take to holding a portion of their wealth in foreign currency and assets even though foreign currency may not be legal tender and the holding of foreign assets may be illegal. Foreign bonds, for instance, Or –that old favourtie of our political and business leaders - foreign currency deposits abroad. Or even dollars stashed away under the mattress.

Unofficial dollarisation usually starts when the residents of a country lose faith in their national currency as a store of value and decide to go in for asset substitution which is a polite way of saying that they switch to bonds, foreign currency deposits and so on abroad as value stores.

In India as also other developing countries – and certain transition economies (Russia, for instance) – this asset substitution has taken place not exclusively because of a loss of confidence in the local currency. This loss of confidence, after all, is widespread but not everybody gets to maintaining clandestine assets abroad. It has taken place also because of the need of a few corrupt political, bureaucratic and business heavyweights to conceal bribes, kickbacks, the earnings from crime and so on.

Empirical studies establish that unofficially and semi-officially, dollarised economies fare poorly, which is not very surprising considering that their domestic currencies tend to be degraded, retarding development through inflation. The jury is still out on the general performance of dollarised economies… though there are studies, very general in scope, that suggest they fare somewhat better than unofficially or semi-officially dolarised economies. This, again, is not very surprising as an officially dollariesed country basically imports the US’ monetary policy. It, thereby, creates what could be called a unified currency zone, thereby minimising arbitrage potential.

Parenthetically, it must be stressed here that the benefits of dollarisation will accrue only if the country concerned achieves financial integration with the US.

For instance, an officially dollarised country must allow American financial institutions to set up branches, accept deposits, issue loans, buy local institutions and transfer funds freely in and out. The adoption of the US currency, by itself, does not confer very exciting benefits on the officially dollarised country.

There are other benefits too. For instance, it has been found that officially dollarised economies experience a reduction in the costs involved in exchanging one currency into another – at least when they are dealing with other countries in a unified currency zone. And then again, their banks are able to bring down their reserves, thereby cutting down their cost of doing business. Finally, such economies are able to lower inflation and, consequently, maintain a degree of stability in maintaining low interest rates. Interest in official dollarisation has grown in recent times with the introduction of the euro in 11 western counties, which would not have been possible if it were not for the fact that national sovereignty is giving way to regional identities and priorities.

As for India, it qualifies, purely theoretically, as a country that, at some point of time or the other, will look at dollarisation as a potential option.

Consider the facts. The country has a dismally poor record in the management of its monetary system which has eroded the credibility of its currency. And then again, the people of India have become distinctly sceptical about the significance of the rupee as a component of the country’s basic identity. And finally, the concept of globalisation has fired the imagination of the middle class (because it stands to gain immensely from the process) and it will, eventually, make the connection between globalisation and official dollarisation. National sovereignty will be replaced by consumer’s sovereignty. And, the way things are going, this shift will not make a lot of difference….

But what is in it for the US if India, for instance, decides to dollarise its economy officially? Quite a few things, as it turns out, which will, in aggregate, outweigh the downside.

Take seigniorage, by way of illustration. Seigniorage is the revenue a country earns by issuing currency. And net seigniorage is the difference involved in the cost of putting money into circulation and the value of the things that the money can buy. Let us say it costs the Reserve Bank of India Rs 5 to print a Rs 500 note. But the note can be used to buy goods worth Rs 500. If the note can be used indefinitely, the net seigniorage will work out to Rs 495. In the real world, however, the net seigniorage is less because notes wear out and need to be replaced. Be that as it may, the central bank of a country can use currency, which does not bear interest, to buy interest-bearing assets. These seigniorage revenues will be booked as the central bank’s profits and will eventually be transferred to the government.

In any event, the US government gets a net seigniorage in excess of Rs 2,500 crore a year. This will obviously go up if more foreigners (that is, non-US citizens) hold the dollar or if more countries go in for official dollarisation.

And then again, the US will stand to gain if other countries dollariese officially as the risk of currency devaluation or revaluation will become minimal. Further, tight financial coupling with the US will enhance the demand for American goods and, thereby, boost its economy.

Finally, dollarisation by many countries will help the dollar retain its status as the world’s leading currency and keep the euro at bay. But a pretty convincing case can be made against dollarisation, purely from the point of view of the US. Mr George F. Furstenberge, writing in has done just that.

He argues: "Once led on the path of monetary rectitude, why pay royalties to the US dollar forever for a lesson well learned? Is it unrealistic to think that the likes of Brazil, Argentina and Chile will accept and then stay with US dollarisation for much of the current century, no matter how ‘American’ it will be. Even Mexico, which is showing ever less determination to keep down the dollar position of its money supply, could eventually come to resent dollarisation, which would tax it more than $1 billion per year, off the bat, and then more each year as its economy and monetary base keep growing, compared with enjoying the flow of seigniorage from all the currency used inside the country.

"Once a superior alternative has been worked out among the Latin-American and Caribbean countries or with an established multilateral union, they will dollarise jointly. They will stop paying rent for the use of foreign currency and will turn it in for income-yielding investments and also for US goods and services down the road." INAV