Ubanisation - 5 Concerns.

For centuries, the move towards urban settlements has been driven by the logic of progress. The move to cities and towns is associated with higher productivity gains, access to civic amenities and overall social security and profit making. This however, does not mean that cities develop in a pre-destined fashion. For a growing number of modern cities, the intersection between technology, globalisation and policy create forces that shape them. These forces can be strong or weak depending on the governance structures in place and the focus on urban development, planning and infrastructure and services.

Urbanisation in the context of developing countries with large populations such as India is a key area of study and is often not given due recognition or attention. The failure by successive governments to ensure basic infrastructure and support systems in the urban agglomerations in this country; has been well documented and need not be repeated here. With the global population reaching 7 billion just last week, and developing countries being the primary drivers of that population growth the role that cities play in a country’s socio economic transformation is significant. At the same time the rapid influx of people is causing very visible strains on already fragile ecosystems that exist in urban areas.

This pace of movement to cities in India is unprecedented, and is on a scale, that outside of China has not been witnessed by any other part of the world. In India, about 30% of the population lives in cities, and this number is estimated to grow considerably over the next two decades. What is also often termed to be a demographic dividend – with an estimated 180 million job seekers to enter the workforce over the next two decades, could potentially turn into a mismanagement nightmare. Despite the fact that urbanization is not a new phenomenon for policymakers to grapple with, India has not been able to engage coherently with the reality of its urban future.

In order to highlight the challenges and solutions to the problems that are at hand, both in India and in other countries that try to ensure sustainable socio-economic growth I will address five key concerns here. These themes cover a broad spectrum of urbanisation issues that delve into the very core of the overarching human security narrative that will define the development and growth trajectories for developing countries over the next few decades.

The first concern – urban governance and participation, deals with the response mechanisms in place to address the challenges of urbanisation in developed countries. While highlighting the challenges and imperatives for governance, the focus on innovation – both within governance structures and outside should be constant. This should include assessing the role of civil society and the private sector as part of inclusive governance mechanisms.

The second concern is energy consumption and urban emissions - the imperatives for developing alternate patterns for energy use, and appropriate response mechanisms. With climate change and resource scarcity being the central drivers of diversification away from traditional sources of energy and existing energy use patterns,  the questions that emerge are how alternative energy options are going to be created, facilitated and maintained, while ensuring equitable distribution and usage.

Urban design is the third concern, and is perhaps the most consistently ignored theme in the context of urban planning and development in India.  The concept of efficient allocation of space simply does not exist in many of the urban agglomerations here, whereas it is an essential prerequisite while considering the sheer number of people that are living and migrating to these centres. While the efficient distribution and allocation of living space in maintaining a harmonious and stable support system in the form of infrastructure and services is a challenge in itself, addressing equity concerns and ensuring that areas and communities within cities are not marginalized is an important prerogative especially in developing countries.

An equitable, sustainable city cannot be talked about sensibly without considering urban transport and mobility – the fourth concern. Increasing populations in cities and towns, require access and mobility to realize any productivity gains that arise from living in urban areas. With the proliferation of roads and highways, and an existing pre-dominant focus on urban transport by road, governments especially in large cities in developing countries are confronted with complex challenges of improving mobility while ensuring low carbon growth and overall sustainability. Integrated transport models, and innovative technological solutions are necessary for sustaining the phenomenal pressures on urban spaces, resources and environments.

The final concern is urban exclusion – the perceived “rights” to cities and towns. In essence this last concern is distinctly visible in all of the other concerns discussed here. Exploring inclusive policy options and governance mechanisms, to ensure a democratic allocation of public infrastructure, services and support mechanisms is crucial in this regard.

Urban centres in India are veritable microcosms of the entire country – with a diverse mix of communities, cultures and income classes ranging from the marginalized classes to the expanding middle class which is the primary driver of consumption and economic growth. The way that the various sections of society interact with each other, and perceive each other’s spaces and priorities, would be an essential ingredient in India’s growth story and I am sure this would be mirrored across other developing nations across the world. Therefore the creation, facilitation and management of different areas and sections of society are immediate areas of concern and policymakers will need to recognize this through proactive governance and a renewed focus on overall urban development.

As civilizations expand, and average lifespan increases, the threats to human security also increase and diversify. While cities in the developing world are projected to become key drivers of global economic growth going forward, the transformation potential cannot be realised without sustained efforts by all stakeholders involved – governments, private sector, civil society and even at the level of the individual (where responsibility is rarely taken in countries like India).We are all part of the urban ecosystem, and the solutions to the myriad problems that confront us, will eventually be found only when we realise our inherent potential to contribute and respond to the best of our capacities. Responding to the challenges of urbanisation is a shared concern and a collective responsibility.

BRICS and eurozone crisis November 2, 2011 Samir Saran, Vivan Sharan

http://indrus.in/articles/2011/11/02/brics_and_eurozone_crisis_13192.html

With their growing financial and diplomatic clout, the BRICS countries should enhance their coordination to leverage the eurozone crisis to deepen global financial integration.

The rise of the BRICS nations as new epicentres of economic activity in the rapidly evolving world order has been simultaneously accompanied by a steady decline in the relative economic strength of many of the member countries of the eurozone.

The single currency union has become essentially a two-faced beast. A North–South divide in economic fortunes is clearly visible within Europe (and the irony of this is probably lost on most Europeans). It is time for the leaders of this grouping to recognise the fact that the major rebalancing and recalibrating actions that are urgently needed within the economic and monetary union must also address the concerns of external creditor nations such as those within the BRICS grouping.

After much introspection and procrastination, the European leaders managed to pass a controversial but necessary deal on Greek debt. The deal, which calls for a “voluntary” cut on a nominal 50 percent of private sector investments of over 450 financial firms to reduce total debt burden in the economy by 100 billion euros, is a desperate attempt by policymakers to stymie the relentless bouts of selling pressures on Greek debt.  Although given the circumstances, it was extremely important for the eurozone to signal some form of cohesive multi-stakeholder action to the financial markets, the deal is built upon ambiguous foundations.

The private sector has voluntarily decided to take these ‘haircuts’ and at the same time banks have agreed to increase capital reserves to 9% to shield against an imminent market collapse in Greece. This translates into tremendous pressures on banking institutions, without much positive effect on the bond markets, with Greek bonds still yielding unprecedented rates of interest. It is clear that the projected reduction of Greek debt to GDP ratio from 160% now to 120% in 2020 is not impressing bond traders.

The European leaders have announced that they seek to increase the size of the European Financial Stability Fund (EFSF) from its current capacity of 440 billion euros to over a trillion euros.  It is not clear how they intend to do this, and whether a trillion euros (approx.) is the amount they consider to be sufficient to counter the effects of possible contagious sovereign debt defaults and banking crises in member countries. While these leaders attempt to keep kicking the can down the road with respect to how they manage the myriad financial crises that are evolving in southern Europe, it has become increasingly clear that the problem is too big to be handled without outside help.

The Chief Financial Officer of the EFSF recently told a Brazilian newspaper that his colleagues are “pleased” to see BRICS countries starting to invest in the EFSF. The composition of the investments into the EFSF is not public, and therefore there is no real way of knowing how much each of the BRICS nations have contributed to the fund so far. The EFSF was originally set up to raise money for the Portuguese and Irish bailout packages through the disbursal of loans. Although the Fund has nearly risk-free credit ratings by all the major rating agencies (AAA by Standards and Poor’s and Fitch, and Aaa by Moody’s), it can be argued that investing in Greece’s sovereign debt is a far riskier proposition for creditors to the Fund.

Many of the BRICS nations are already heavily invested in the euro. The central banks of China and India hold approximately 25% and 20% in eurozone bonds respectively and are therefore not likely to spend much more of their international reserves buying into a now suspect currency. However, much like Brazil, which is allegedly considering investing into euro debt via its Sovereign Wealth Fund (which allows greater risk taking) rather than purchasing debt through its international reserves, the economies of China, India and Russia could soon follow suit.

Given the volumes of trade between the euro zone members and each of the aforementioned nations (China surpassed the U.S as E.U’s largest trade partner in July) along with hefty direct investment flowing both ways, it is certainly not in the interest of any of the stakeholders – to let the euro collapse. The involvement of countries like China, with immense amounts of liquidity, does not fail to inspire market confidence as was seen last year in July, when China announced that it would purchase a billion euros in Spanish debt. The bond auction was oversubscribed and lead to a turnaround in market confidence in Spanish debt even though China only committed 400 million euros.

Keeping in mind their leveraged bargaining position in current circumstances, the BRICS nations should coordinate their positions and assert themselves while negotiating investments in eurozone debt. Although the BRICS nations have a diverse set of agendas and priorities, it is not hard to see a future where there is greater coordination within the nations in the grouping, especially between geographical neighbours Russia, China and India, in order to deepen global financial integration and reverse the Western narratives that have dominated the larger economic realm for the past century.

At the Sanya BRICS summit in April, the leaders put on record that the “international financial crisis has exposed the inadequacies and deficiencies of the existing monetary and financial system” and that the BRICS nations support “the reform and improvement” of this system. In order to support the troubled European economies, the BRICS countries need to devise a formal set of pre-conditions for granting bilateral loans and investing in various bailout funds. Perhaps these could be centred on some basic premises such as further trade liberalization, increased access to intellectual property and perhaps they can even be self-righteous enough to demand more friendly immigration laws.

The Europeans will no doubt be faced with some hard choices. They have to be careful to juggle two contradictory imperatives – that of enlarging existing regulatory capacities in order to strengthen and deepen European fiscal, monetary and political integration, while at the same time accepting the inevitable growing interdependence with external nations.

If the evolving debt crisis in the eurozone is viewed through a deterministic prism, it becomes immediately apparent that panaceas such as debt write downs only offer short term relief to the markets as long as structural imbalances persist. In light of this, the Europeans will be hard pressed to look for a multipronged approach to dealing with the existing problems of their southern peripheral nations.

The glory days of Western credit and forced fiscal reforms in Asia and other ‘south’ countries are far behind us, with hegemonic Bretton Woods era relics such as the International Monetary Fund struggling to find its ‘traditional’ relevance within the new political and economic realities. Although it is in no way certain that the balance of power will completely shift towards the emerging or recently emerged nations such as those in the BRICS, as they are grappling with internal problems of their own, one can be relatively certain that the growing degrees of independence – both from Western policies and from Western demand --  will provide the perfect platform for increasing economic leverage through investments in equity and debt as well as direct investments. Europe has few options left but to align economic expectations with those of the BRICS. The question that still looms large is whether there is enough political unity and substance in the grouping (BRICS and other emerging nations) to make the right kind of bargains.

Oil Supply Routes in the Asia Pacific: China's Strategic Calculations

http://orfonline.com/cms/sites/orfonline/modules/occasionalpaper/attachments/OP24_1316237026710.pdf

A Speech in Moscow

Re-thinking the New Monetary Consensus - Sharing Lessons from History

Good Afternoon. It is a privilege for me to be addressing an eminent panel such as this.

The financial crisis has caused a significant amount of confusion in the minds of policymakers. The highly integrated financial system dictates that policy experiments made in one country have rippling effects in others. And therefore, the theme of this discussion – “the possibility of coordinating positions” is extremely important in today’s context.

Given the current state of the US economy – with no job growth last month, the local positive impact of the two rounds monetary easing is in serious doubt. At the same time, there is no denying that QE1 and QE2 have had a profound global impact and the extra liquidity has still not been absorbed by the global financial system. The world as I see it now is cleanly divided into two parts. Western economies like the US, and EU are monetizing their debt and yet not experiencing any signs of inflation (and desperately clutching at straws!) while BRIC and other middle income and emerging economies are facing stubborn inflationary trends.

At the outset of course, it is not an unusual phenomenon for advanced economies to experience low inflation rates. The stabilization of output volatility with low inflation; over the past two decades before the recent crisis, had been termed “the great moderation” for precisely these attributes. A fair amount of credit had been given to central bankers – and the evolution of central banking for moderating the volatilities associated with economic cycles and trends. In fact since the 1980s, average inflation worldwide declined from 14 percent in the early 1980s to 4 percent in the early 2000s. Industrial economies achieved a reduction in inflation from 9 to 2 percent, while developing economies brought inflation down from 31 to 6 percent.

Central banking has indeed come a long way from the “stop and go” mechanisms that were used to manage cyclical price trends. With the adoption of tools like inflation targeting – central banks in advanced economies, at the outset, seemed to have done a good job of managing inflation. As a result, most of the world achieved a working consensus on the core principles of monetary policy and how this policy can be used to manage inflation expectations. This general agreement amongst economists by the latter half of the 1990s – has been termed the “New Monetary Consensus”.

It can be argued that the genesis of the consensus was in the 1970s – with Milton Friedman’s assertion that “inflation is always and everywhere, a monetary phenomenon”. The first bit of evidence they gathered to prove this was that across the world long term sustained inflation is always associated with excessive money growth. Thereafter they showed that control on money supply is both necessary and sufficient to control inflation trends.

Even though the monetarists did a good job of accumulating evidence and building credible theoretical foundations – the actual basis for the Monetary Consensus, and the way monetary policy is conducted in many countries today, was achieved because of Paul Volcker – the Chairman of the Federal Reserve in the turbulent 1980s. Volcker was dogged in his pursuit to tame inflation – and was willing to forgo creation of jobs and economic growth to achieve his cause - by associating himself closely with the key monetarist idea – that inflation could be controlled without imposing price or wage controls. He let the short-term interest rates rise dramatically and the US economy immediately went into recession. Public support for inflation control and the political support from the incoming Reagan administration were key elements that let Volcker continue his experiment with the US economy. By 1984 he was able to control inflation with causing a dramatic drop in economic output.

It can be argued that the stubbornness and sacrifices made by the US government, the Federal Reserve and the American society as a whole – together contributed to the successful anchoring of inflation expectations in the country. It is also important to remember that this happened within the context of an already developed economy with efficient policy transmission mechanisms. Alan Greenspan took Volcker’s inflation sensitive policymaking trends forward into the 1990s and beyond – and simultaneously the world came to achieve the New Monetary Consensus which emphasised the control of inflation at all costs.

A result of this renewed focus on inflation has been the introduction of “inflation targets” by countries around the world. Starting with New Zealand in 1990 and Canada the year after, countries around the globe started declaring explicit inflation targets in a hope to anchor people’s inflation expectations. The European Central Bank is one of the bigger monetary authorities which declares inflation targets these days – but this phenomenon has also caught on in smaller emerging market economies.

The Central Bank of Russia has also published many documents over the last couple of years that have indicated an imminent switch towards an inflation targeting strategy. In its most recently published Guidelines for Single State Monetary Policy, the CBR has explicitly and repeatedly stated that both inflation targeting - and less interventions in the foreign exchange market are on the immediate agenda.

I quote from the CBR’s document: “The exchange rate policy to be pursued by the Bank of Russia in 2010-2012 will aim to cushion sharp fluctuations of the rouble exchange rate against the major world currencies. The Bank of Russia will seek in this period to create conditions for the implementation of the monetary policy model based on inflation targeting by gradually scaling down its interventions in the rate-setting process.”

I do not think that a completely free floating exchange rate is a viable or credible strategy for Russia as long as oil remains a dollar denominated resource; but the switch to inflation targeting is definitely on the cards given that there seems to be little by way of opposition to the idea in Russia. Furthermore, there seems to be a distinct attempt by the CBR to try to present its monetary policy as a modern one to foreign investors.

On some contextual analysis of inflation targeting and the idea behind central banks being solely responsible for managing inflation, there are many issues that I feel the CBR should find worth considering and indeed, many of these have been faced by the central bank of India – the RBI. Hence I would like to share our concerns in this regard.

According to monetary policy theory, central bank independence – both operational and organizational is a prerequisite for inflation targeting. That is independence is a prerequisite for establishing credibility. In India, in the earlier part of the last decade, the RBI was considering switching to an inflation targeting regime. As is usual in countries like ours, a few good men from the International Monetary Fund were trying to drive this shift in policy.

However, due to the dovish pro investment policy followed by Alan Greenspan under George Bush, the RBI struggled to sterilize capital inflows. As a result the exchange rate for the rupee came under immediate threat - and the government faced protests from the exporting sector. (By the way – one of our biggest exporting sectors – the textile sector, employs the 2^nd highest number of workers after the agriculture sector)

The policymakers in the RBI realized that there was an inherent contradiction in wanting to project independence and using government guaranteed bonds to sterilize the inflows to control the Rupee’s sharp appreciation. Consequently the RBI abandoned aspirations of switching to inflation targeting. Given that Russia faces similar problems managing capital inflows, in my view it makes little sense to switch from discretionary policy to explicit inflation targeting.

The second major challenge that advanced economies in the developed world are experiencing with regard to inflation targeting is the failure of such policy to overcome deflation. After all, it was only recently that the Federal Reserve went about injecting liquidity into the American economy in a frenzied fashion due to deflationary scares. Even after almost 3 trillion dollars were indirectly injected into the American economy – inflation is still very low. There is even talk of the US becoming more and more like Japan everyday – inadvertently caught in a long term liquidity trap.

Another problem is that countries like Russia and India are structurally prone to more inflation than Western counterparts – and it is the volatility of inflation that is to be more seriously countered rather than overall inflation. It is significant to note that inflation targets in various advanced economies are rather arbitrarily declared at low levels – between 1.5 to 2.5 percent in nominal terms. The structural set up in Russia and India dictate that the optimal levels of inflation lie between 4 and 7 percent. 

In countries like ours, policy transmission mechanisms are not as efficient as in advanced economies in the West. The ECB has estimated that there is about a 4 quarter lag between policy change in the form of interest rate movement and expected outcome in the euro zone. It would be overly presumptuous to think that the transmission lag in Russia would be any less than in the euro zone.

Furthermore, much like India, Russia is a country where the existence of asymmetric and imperfect information in the financial markets is a well known problem – therefore invalidating, the efficient market theories on the assumption of which the New Monetary Consensus style of central banking has evolved. This clearly causes more contradictions for inflation targeting regimes.

One of the projected advantages of inflation targeting is increased accountability of the central bank. However, on careful observation of Western models, it is certainly not obvious that accountability has increased. The recent market interventions in the sovereign bond markets by the ECB or the complete disregard by the Federal Reserve of accepted regulatory and supervisory roles in the mortgage markets - leading to the collapse of the financial markets, certainly do not inspire confidence in such theoretical models.

For Western central banks, these turbulent times contrast sharply against the extraordinarily smooth period they enjoyed in the years before the crisis. With inflation low and real economic growth strong and stable, and risk spreads in financial market increasingly compressed, managing monetary policy had become an unexpectedly easy task. As we are all aware the situation in the West has now reversed. As Mr. Nikonov pointed out in his opening statements yesterday – the three most unstable zones in the world today include the US and the euro zone!

Central Bankers in the West face similar challenges to those that were experienced by less developed financial systems in the past – that is they are not longer finding it easy to separate monetary and fiscal prerogatives. The precarious economic situation in the US and euro zone dictate that the Federal Reserve and the ECB are increasingly forced to make fiscal decisions. This is ironic given that the central tenets of the New Monetary Consensus demand that monetary and fiscal management of economies be conducted separately. 

It is clear to me that monetary policy has reached a crossroads. The question now is whether the inherent hypocrisy of central banking policy of the West is recognized and the New Monetary Consensus re-evaluated by the relevant stakeholders; or whether Western models of monetary policy will continue to be projected as a panacea for inflation throughout the globe – much like following the Washington Consensus was projected for decades by institutions like the IMF and World Bank as the only way for policymakers in the developing world - to ensure positive and sustainable economic growth trajectories in their respective countries.

In the end I would like to say that it is time for Russian policymakers to ask themselves some hard questions:

Is the signalling value of projecting a consistent and conservative monetary regime to their countrymen and perhaps more relevantly, to the international investing community - truly worth sacrificing logical and optimal adaptive policy for? Do Russian policymakers believe that the discretionary learning by doing policy responses to supply and demand scenarios followed in both our countries for many years now, need to be reversed? And do they believe that explicit policy rules should be followed without paying attention to history or to the observable changes in the global financial and economic architecture?

The problems faced by monetary policymakers are paralleled in the other areas of economic and financial policy making. And therefore I feel that it is the right time for us to think seriously about alternative policy making strategies to those advocated for the last few decades by various Western stakeholders. In this regard – I feel that there is enormous scope for India and Russia to coordinate positions and adopt reasonable and practical monetary and fiscal stances rather than subscribe to theoretical and rigid policies promoted by the US, EU and various inherently interventionist international organizations.

Ladies and gentleman, I thank you once again for giving me an opportunity to express my personal views, and the view from India, to this very important forum.

Whose Debt is it Anyway?

On Tuesday, the United States Senate passed the budget deal, averting what could have been, the first debt default in its history. The debt bill has now become a law, with the Senate voting 74-26 in favour raising the nation’s debt ceiling by almost 2.5 trillion dollars. This is the largest increase in the debt ceiling ever. Indecision on increasing the limit by 2^nd August would have created an apocalyptic scenario for the financial markets, and therefore the signing of the deal by President Obama, was largely anticipated.

Although the successful signing of the deal has lead to widespread relief in the country, the looming question of how the close to 15 trillion dollars in accumulated debt is ever going to be repaid still remains unanswered. The accumulated debt now adds up to approximately 50,000 dollars per person – and the markets have not failed to take notice of the unsustainable trajectory that the economy has been propelled into. The S&P 500 index plunged over the last two days, recording negative gains for the year on Tuesday. The plunge of over 100 points from the year highs is indicative of the shift in market sentiment. 

Until a week back, it was uncertain whether the financial markets were in fact in a slow summer phase – much like last year, where gains were hard to come by. Many market bulls dismissed the whole double dip debate pointing towards the strong performance by equities, especially blue chip stocks. However, with the major indices, all turning their backs on these eternal optimists over the last few days, exacerbated by the flimsy nature of the debt deal, few would have the courage to call the anaemic 1.3% growth rate in the second quarter signs of a recovery. This is ironic given that at the beginning of the year, the situation was assessed to be complete opposite – few would dare to call a bear market in 2011!

The total agreed upon cuts in discretionary spending add up to around 917 billion dollars over the next 10 years. This is unequivocally seen to be a token amount, considering that the country is going to spend 817 billion dollars in discretionary spending over the same period of time. Continuing along this trajectory, social security programmes will be bankrupt by 2036. If interest rates go up, the day is not far, when the United States Government will have to pay a trillion dollars a year, just to repay its debt obligations. This will exceed entitlement payments, as well as defence spending.

Over the past year, Obama has been constantly emphasising that economic growth is America’s ticket out of the current gloom, and justifying discretionary spending to create momentum. Having spent the allocated money for the second round of quantitative easing, it is not clear what the drivers of this envisioned growth are going to be (a third round of easing perhaps?). Manufacturing data released on Monday indicated that the economy is slowing considerably, with numbers being lowest since mid 2009 levels. The job market is not picking up pace either, and with marked slowdowns in consumer spending, it is not clear either, where the consumption demand is going to be generated from.

Although the Republicans technically control one half of one third of the government, they have leveraged their bargaining positions due to the ongoing faltering recovery and the constant dithering amongst the Democrats. Obama cannot possibly expect to leave any mark he can call his own, in the rest of his days as President. He has already expressed that he feels like he has been “left at the altar”, and it is certain that his decision making going forward, is going to be conservative and bipartisan, that is – not his own.  However, it should be conceded that the pendulum swings in his position on the economy are hardly his own fault – this is a complicated situation that even his team of economic advisors have not been able to crack.

 Obama’s top economic advisor, Austan Goolsbee, resigned in June this year to go back to his teaching post at University of Chicago. It is debatable whether his decision was spurred by the university’s handbook of rules, which state that leaves of absences should not exceed one year, or whether he decided to abandon a sinking ship at the opportune time – before the situation got palpably worse. What is clear is that nobody in Washington is ready to own up to the debt, and at a time when the country most requires a real sustainable economic game plan, there is none.

The Market for Energy Efficiency in India - No PATS on the Back Yet

India ratified the Kyoto Protocol (linked to the United Nations Framework Convention on Climate Change) on 26 August, 2002 as a Non Annex 1 Party. This implied that being a developing country, it did not have to commit to an emissions reduction target (assigned amount) for the first commitment period - 2008 to 2012. Given the continuing financial squeeze in the post crisis developed world, it is unlikely that a second commitment period would be agreed upon in December 2012. This would in turn imply that locally adopted reduction targets would become the norm.

India has chosen to focus on energy efficiency rather than emissions reduction – a subtle but important distinction for an economy in transition. The positive correlation between energy use and economic development is well documented, and in recognition of this, India has bargained accordingly in international forums.  In the Convention of Parties meeting held in Copenhagen in 2009, India made a voluntary commitment to reduce its emissions per GDP to 20-25 percent from 2005 levels by 2020.  This commitment does not specify that the country will change patterns of fuel use or submit to mandatory emissions reduction targets – therefore allowing the growing economy room to manoeuvre.

The country’s tryst with energy efficiency effectively began in March 2002, with the setting up of the Bureau of Energy Efficiency under the provisions of the Energy Conservation Act (2001). The explicit mission of the Bureau is to institutionalize energy efficiency in the country. The Act mandated the setting up of specific energy consumption targets for 15 large energy intensive industries. The Indian government has in principal recognized - that along with the recent shift in emphasis from services driven growth to manufacturing driven growth, it is important to promote efficient energy use to simultaneously address resource scarcity and climate change. 

The National Action Plan on Climate Change (NAPCC), released by the Prime Minister’s Council on Climate Change in June 2008 mandated the setting up of 8 missions to address climate change – wherein the National Mission on Enhanced Energy Efficiency (NMEEE) was explicitly set up to give the Bureau of Energy Efficiency some teeth.  The Union Cabinet approved the NMEEE on June 24, 2010 with the explicit goal of saving 23 million tonnes oil equivalent of fuel. The flagship scheme of the Mission – the Perform Achieve and Trade scheme (PAT) is being instituted in order to execute the NAPCC mandate of creating “a market based mechanism to enhance cost effectiveness of improvements in energy efficiency in energy intensive large industries and facilities, through certification of energy savings that could be traded”.

Out of the 15 large industries that are identified by the Energy Conservation Act (2001), nine are covered under the PAT scheme (Aluminium, Chlor-Alkali, Pulp and Paper, Cement, Fertilizers, Thermal Power Plants, Steel, textiles and Railways). The industries identified as “Designated Consumers” by the Ministry of Power (notices served in March 2007) account for approximately 45% of the commercial energy consumed in the country and account for about 25% of the GDP. Further, in the first cycle of the PAT scheme (2011-12 to 2013-14) eight sectors are required to participate (railways has been excluded in first cycle) with an overall target reduction of approximately 10 million tonnes oil equivalent.

Having identified the base year as 2010, the Bureau of Energy Efficiency in consultation with the Ministry of Power is currently struggling to set specific energy consumption targets as mandated by section 14 of the Energy Conservation Act (2001) for the Designated Consumers (the original launch date for the scheme was set for April 2011).  Designated consumers that are able to meet their specific targets, within the stipulated time period would be entitled to receive Energy Saving Certificates (ESCerts) from the Bureau of Energy Efficiency which could then be traded bilaterally (on two power exchanges – IEX and PXIL) with other consumers that are not able to meet their targets.

Under the PAT scheme, the market based mechanism that is being created for achieving energy efficiency in the country seems to be inherently flawed. While according to government estimates, the market for energy efficiency is about 74,000 crores, it is unlikely that this potential can be tapped by the mechanism envisioned. At the outset, the pricing of the ESCerts is vague and not purely determined by market forces. Rather the pricing is going to be “based on crude oil price” according to the consultation document for the scheme. It can be argued that this makes the market mechanism highly vulnerable to existing global financial instabilities which should not ideally dictate the performance of the underlying sectors.

Unlike international cap and trade schemes, the PAT scheme focuses on energy efficiency targets rather than overall emissions targets. This means that the scheme will remain unique and isolated from the global “carbon markets”, and will not attract any interest (or money) from outside India. Further, there is no emphasis on fuel use – which is in harmony with the Government of India’s growth plans (and not necessarily bad for the country), but this does create a moral dilemma as there is no incentive mechanism for switching from dirty fuels like coal to cleaner fuels like natural gas. 

The Bureau for Energy Efficiency envisions that eventually ESCerts will be mutually substitutable with Renewable Energy Certificates (RECs) – that are traded in power exchanges between renewable energy generators and electricity consumers (voluntary market and distribution companies). It is unclear if this is ever going to be achievable, since RECs are partly priced according to average power purchase costs - where the prices for the underlying fuel sets (for electricity generation) have little to do with the global price of oil.

The punishment for Designated Consumers that are not able to meet their specific targets (through efficiency improvements or by buying ESCerts) is minimal. Defaulters have to make an upfront payment of Rs. 1 lakh along with paying what they would normally pay to buy the requisite certificates to meet their targets. This is clearly not incentive enough for large industries to push themselves too hard for meeting their specific efficiency goals.

Finally, market based mechanisms meant to promote energy efficiency and mitigate climate change, need to be inherently inclusive. Inclusion must extend to both the global and domestic investment community and to enterprises of every scale (not just large industries). While the country necessarily needs to rely on conventional fuels for increasing energy intensive production capacities while it plays catch up with the developed world, it also needs to draw out a truly sustainable roadmap. International experience suggests that market based schemes financed by discretionary government spending, and lacking credible incentive structures, are in the long term, likely to fizzle out without palpable impact. 

A Short Speech

The rise of India as a significant economic powerhouse on the world stage is unquestionable. The drivers of this rise have been diverse- ranging from a burgeoning middle class with increased buying powers, to a growing services sector with impressive innovation and vision. More recently niche successes in manufacturing have added to the momentum.

There are few who doubt that India will continue to grow at rates that would be envied by economies in the West for the near foreseeable future. However, it is also clear that India stands at a crossroads, where policymakers will have to separate theory from practice. It is certainly comfortable for us to assume for instance, that the inflationary trends prevalent in the economy can be curbed by monetary tightening alone or that the discrepancies and inconsistencies in our macro economic data do not have direct bearing upon the effectiveness of policy.

Friends, these would be dangerous assumptions to make – and would parallel the unfounded assumptions that are made with regard to our prospering financial markets - which have shrugged off the demons of the global financial crisis, and become veritable havens for capital inflows. Looking at the ground realities today, it becomes increasingly clear that capital inflows are as fickle as they come, and we severely lack serious capital control measures which could ensure that the money flowing in is here to stay, rather than return in haste with quick gains.  

Our economy needs to offer a secure environment for investments – that are sustainable and long term. To do this it is important to engage the investors and regulators, government and business in an inclusive dialogue. This dialogue must capture the subtle differences in perceptions - of the existing economic environment, and seek to align views and streamline solutions. The evolving trajectory of India’s economic growth will be determined by policymakers and the business community alike. This is the reason we have gathered here today, to discuss and debate some of the critical components of India’s economy.

The nature of debate and discourse on economic policymaking amongst the academic and policymaking community in the country more often than not tends to be a conversation that few others are included in. Given that India is looking towards the markets for growth, it is imperative that all the relevant stakeholders are included in such interactions. The practical insights and cumulative experiences of the business community in the country must be tapped, as a valuable and non substitutable resource. 

The Impossible Recovery

Over the last few years, there have been many ways to look at the post financial crisis United States economy– and not all perspectives suggest a continuing recessionary environment. This has especially been true given the sovereign debt crisis in Europe, which has in recent times, taken attention away from the epicentre of the financial markets. However, it can now be argued that all perspectives are closer to converging.

On Friday, U.S unemployment numbers for the month of June were released, and indicated that a very dismal 18000 jobs were created, and unemployment climbed to 9.2%. While the private sector added 57,000 jobs, government workers dropped by 39,000. On analysing the way the recovery has shaped up so far, there seems to be a deeply entrenched duality in the way the American economy has responded to repeated fiscal stimuli.

The American Recovery and Reinvestment Act which was formulated as a response to the financial crisis - was signed into law on February 2009. Obama’s optimistic team of economists, lead by Christina Romer produced a report which suggested that without the envisioned $288 billion in Federal tax cuts and $499 billion in Federal government spending, unemployment would approach 9%, whereas with the stimulus, it would not exceed 8%. Since economics is not an exact science, the authors of the report can be forgiven for making incorrect forecasts. However at the same time, the right questions must be asked about where the money went.

In a recent study by eminent economists Timothy Conley and Bill Dupor, benchmark point estimates suggest that the aforementioned Act added/saved approximately 450,000 state and local government jobs, simultaneously destroying close to one million private sector jobs. Since funds from the Act were primarily used to offset state revenue shortfalls and increasing Medicaid entitlements, there was little in the way of encouragement or actual fiscal support for the private sector. Upon receipt of funds from the Act, states could legitimately use the money to offset expenditure and therefore use the funds as revenue – making the two mutually substitutable. In the study it is also argued that without the Act, government employees would have been forced to look for private sector jobs.

The White House had suggested that the Act has created 3 million jobs, and this works out to $266,000 per job. Whether or not it has been “worth it” is a subjective call, but it is clear that the debt incurred from job creation of this sort, cannot possibly be repaid. Borrowing heavily from the private sector to create jobs, at the outset seems counterintuitive and un-American. Given the size and contribution of the private sector to the U.S economy, especially from smaller businesses, the Obama administration seems to be playing a dangerous and unsustainable game. If there is to be a palpable recovery, there is almost unanimous consensus amongst economists and commentators, that it has to be driven by the private sector.

The Bureau of Labour Statistics claims that the number of unemployed persons is touching 14.1 million, while the total labour force of 153.4 million has remained closed to unchanged over the month of June. The most worrying statistic hidden below all the headline numbers is the number of long term unemployed – those who have not found jobs for over 27 weeks, accounted for 44.4% of the total unemployed. Any arguments about “just in time” employment patterns are discredited because of this number. It no doubt follows, that the number of people falling out of the workforce, due to complete discouragement from not being able to find a job is going to exacerbate the entire employment situation in the country.

The problems in the job market are herculean, and there seems to be no Hercules in the current administration who has the gumption to publically admit that all solutions devised so far are merely just playing for time.  The pervasive duality behind the ever increasing fiscal burdens in the real economy, while easy credit is fuelling pre-crisis level price to equity ratios (23.75 last) in the stock markets, is creating the perfect storm. The S&P 500 index, which lists the top 500 companies (by market cap) closed at 1344 last week, at levels similar to those before the unravelling of the full effects of the crisis. Equities are expensive and money is cheap.

If ever there were a case for a double dip recession after the financial crisis, it is now. It can be argued that summer is usually a bad time for the job market or that a higher rate of structural unemployment is the new normal – but there is no hiding from the fact that things have panned out quite contrary to the originally outlined recovery plan. Given that filibustering in the U.S Congress is going to continue unabated until the elections next year, unemployed workers have little in the form of real hope.

In the President’s Budget this year, it was assumed that the U.S economy would grow at 3.1% this year and 4% next year whereas evidence so far suggests that there is no reason to expect a growth rate above 2% this year. Now more than ever the disconnect between the political economy and the real economy is going to be highlighted. The incoherence in policy making, and the complete disregard of long term timelines, makes the entire situation seem similar to that of the climate change debate. It seems like the stakeholders in the U.S economic debate are tired with all the “economic pornography” – with all the apocalyptic warnings about debt ceilings, trade deficits, faltering housing recoveries and stubborn unemployment, and are waiting for externally created solutions.  

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China's Monetary Dilemma - The case for Revaluation of the Renminbi  

Migration in the 21st Century

Introduction:

An interesting dilemma confronts the human civilization in the current postmodern age. From the dawn of time, human beings have constantly been moving from place to place (the earliest man wandered out of Eastern Africa well over 100,000 years back). However, human civilization now stands at a crossroads. Policymakers (especially in the West) have to relook at immigration policies, and decide whether increased global migratory movements should be promoted or contained.

Mobility across regions and geographies allows us to search for greener pastures. The “search for something better” still remains the fundamental cause for most people to move from place to place. This migration, which can be both within State boundaries or from State to State, is as embedded in human civilizations as any other natural social phenomenon has been.

In our analysis, we focus on the voluntary migration of people. This entails the deliberate omitting of the migratory trends in forced labour. We do this because of two reasons – the first being the fact that ever since the forced African migration to provide labour in America, there have been no significant movements on a large scale in a short period of time. Secondly we want to abstract away from moral concerns behind migratory patterns both on account of the sending and the receiving country, because this is a subject for a different set of analyses altogether.

Today, we find ourselves at the dawn of a new global era, with nations facing non- traditional human security issues such as those associated with energy, food, demographics and environment. How we respond to such challenges – is ultimately going to shape our future. In this paper, we discuss the reasons and patterns of migration. We also analyze the traditional and non-traditional concerns that migrants, employers and States have while dealing with the issue of geographic mobility, and present our opinions on solutions for the new century.

To pre-empt our conclusions, we think that human mobility has a much more important role to play in this globalized world than policy makers acknowledge. To confront the aforementioned non- traditional security threats; global policy needs to shift, in order to allow freer movements across boundaries; in a sort of human arbitrage to mimic modern day financial markets. This in turn will create efficiencies of human capital – a much needed medicine for current global imbalances.

Why Move:

In our view, there are essentially three reasons why people move; philosophical – psychological factors, socio – economic factors, and political factors. These together form a complicated matrix of influences that determine why migratory flows are the way they are today.

Philosophical-psychological factors are relevant today because people are increasingly moving from place to place because of personal preferences. These preferences are formed as the result of both exogenous and endogenous factors. The common consensus in ‘migration psychology’ is that the decision making process is of primary importance in the voluntary movement of people[i]. This may seem obvious at the outset, but is crucial and should not be omitted from such an analysis.

The decision making process relies upon both external and internal constraints, and might not always lead to a maximization of utility. For instance according to behavioral theory the relative ‘instability of intentions’ in comparison to attitudes has often resulted in direct attitudinal influences on behavior (Liska, 1984)   Thus migration cannot be looked at as a purely utility driven process. And indeed we do find that there has been a moderation in migratory patterns over the past few decades. Increasingly humans have made themselves comfortable wherever they are; and labour market conditions are perhaps as significant as lifestyle conditions.

The second important factor influencing movement – socio-economic factors, are widely studied by labour economists. The oldest school of thought suggests that people move from place to place in search of better incomes[ii]. Sir John Hicks argued that “differences in net economic advantages, chiefly differences in wages are the main causes of migration”.  That is, wage differentials form the basis for the related decision making process. We feel that this is a narrow and incomplete insight on human preferences related to migration. Although migration today is sometimes driven by relative wage differentials, we do not believe that it is a necessary condition. The rapid urbanization in the developing world in countries like India, China and Brazil is testament to this desire to exploit wage differentials between urban and rural areas (albeit many times migrating rural workers find that they would have gained higher utility  by not moving at all, and instability of intention leads to less than optimal utility gains). 

A newer stream of thought suggests that relative economic disparity is the main driver of migration[iii]. That is, members of a relatively more deprived group might prefer to move to a relatively less deprived group even if this means that absolute income is lower in the shift to the new group. This theory is also complementary to the behavioral aspects of migration. It accounts for dynamics within the family in a unique way, suggesting that migration is not necessarily an assertion of independence by the younger generations in a family, but rather, is a form of resource optimization[1].

Another new tendency that is creating an additional dimension to this discussion is the ‘new media’ and web 2.0. It has been argued that a characteristic of mass communication as we know it today has extended the availability of information across space and time[iv]. That is, through the use of modern technology, new technical media is able to bring information to masses that are possibly far removed in both the dimensions (in space due to physical distance from the point of origin, and in time due to time lag between production and dissemination of the information from the point of origin). Eminent media scholar John Thompson has written that “By enabling individuals to communicate across extended stretches of space and time, the use of technical media enables individuals to transcend the spatial and temporal boundaries characteristic of face to face interaction. At the same time, it enables individuals to reorder the spatial and temporal features of social organization, and to use these reordered features as a means of pursuing their objectives”.

The decoupling of space and time has led to interesting consequences for related decision making. Human beings no longer look at their immediate neighbours to compare existing relative disparities. The concept of “despatialized simultaneity” is an impulse that must lead to a paradigm shift in the way man perceives the world through the lens of space and time (Nowotny 1994). That is, the concept of ‘now’ has been delineated from the point of origin or locale, giving us an objective view of time and histories rather than a subjective one. Thus there is a sort of “mediated rationality” in the decision making process.   

The third and perhaps most controversial reason for movement of peoples across regions and countries is political environment. Of course whether or not political asylum seekers claim legitimate political concerns every-time is another matter (and one that causes great concern in many countries, especially in Europe, which are used to receiving many asylum seekers). An oppressive political environment can take various forms. Brutal oppression can be brought about by political uncertainties and feudalistic institutions. Through the course of man’s history, human rights violations by government/government controlled institutions have repeatedly found their counterpoint in the form of dissident groups who choose to use aggressive tactics to overthrow the oppressors. Civil war scenarios that result from this are perhaps the greatest movers of people across borders in large masses within a short period of time apart from a direct war between two or more States.

Whether to term conflict induced movements as voluntary or not is a mere technicality. What is important is that the decision to move is part of a behavioral process of decision making, whereby relevant constraints dictate that movement is beneficial in some way. Analyzing all the existing theories that explain why people move, this behavioral undercurrent in all of them is hard to ignore. And indeed it is the case in most Marxist or world systems, that behavioral analysis has been ignored all together.

Who Moves:

Perhaps the most prominent pattern of movement is that people tend to move from areas of lower development to relatively better developed areas. That is, people tend to move to places with better living standards than the place of origin and hence the difference between human development at destination and at origin tends to be significant (three quarter of international movers move to countries which are higher on the Human Development Index than the country of origin)[v]. This coincides with what we termed “in search for something better” in the previous section.

The second major pattern of movement is that most of it happens within states rather than internationally. Recent UNDP figures estimate that there are about 740 million internal migrants in the world, compared to 214 million international migrants. The reasons for this are twofold; firstly it is clear that it is more expensive to travel internationally than within State boundaries, and secondly existing policy restrictions are stringent. A behavioral reason could also be contributing to this pattern - people are less keen to make a decision to move to a completely different socio-cultural environment from the place of origin if the incentive is not strong enough.

The third and perhaps the most intuitive pattern is the veritable normal distribution[vi] of the probability of migration plotted against per capita income. According to the Human Development Report (2009), people with the least per capita income are also the least mobile. This is ironic since the people who have the most to gain from moving to a more developed region are highly immobile, and are condemned to make a living in less than optimal environments. This is a welfare reducing phenomenon in the context of the global economy and one which needs closer examination by policy makers. As per capita income increases, so does mobility, up until a point and thereafter it decreases again. The probability of migration peaks at per capita incomes of close to $15,000 (according to World Bank indicators, no African country has a per capita income above this – and the Human Development Report states that only 3% of Africans live in a country that is different from where they originate).

This last pattern of the profile of people who move is helpful to understand why there is such a policy bias internationally towards highly skilled labour (in terms or the receiving country). The H1-B visa issued by the United States is a good example of this prevailing policy bias towards highly skilled immigrants. Regulations require that applicants should only apply for “specialist occupations”, that require a high degree of skill - both theoretical and practical. Receiving countries clearly do not want an influx of poor unskilled migrants, and this marks a big policy shift from pre-1970s policy, whereby United States and Western Europe opened their borders to a considerable amount of low-skilled labour migrants. The changing dynamics of global trade and sharp jumps in commodity prices (especially energy) lead to the change of policies across the developed world after a highly liberalized framework post World War 2[vii]. We discuss the implications of this in the context of the globalized world in the next section.

Globalization, Business Cycles and the Migrant:

One of the founding fathers of development economics, Simon Kuznets, proposed that all countries follow a predestined inequity cycle in the process of economic growth. The cycle begins with high economic inequality in society, when physical capital is the main mechanism of growth, and those that save and invest in this are better off than the rest. As the development cycle continues and economic growth increases, there is then a trickle down effect, due to investment in the economy by those that have benefited in the initial phase of the cycle. As a result economic inequality decreases steadily and this whole cycle which leads to transformation from developing to developed economy, is in the shape of an inverted U. This is known as the Kuznet’s curve, and in the case of the American economy, Kuznets noted that the peak of economic inequality was reached in 1890, and thereafter started to decline and stabilized after 1920.

However, Kuznet’s conclusions on the American economy have failed to hold true after the OPEC oil supply shocks of the 1970s. This period of time, when the famous ‘Nixon Shocks’ led to the discontinuation of gold backed currency, also was a period when the American economy was battling with inflation led by a spike in energy prices and unemployment at the same time. This ‘stagflation’ lead to the reversal of the Kuznet’s curve as inequality once again started increasing. This has also been termed the “great U turn” by economists[viii], and many of the erstwhile OECD countries also followed this trajectory in terms of increasing economic inequality. A 2009 UNDP report highlights that the United States is ranked third in terms of the largest inequalities. The poorest 10% of the American population have 1.9% of the share of total income and expenditure while the richest 10% have close to 30% share[ix].

For policy makers in the West, it is increasingly difficult to justify this increasing inequity between the rich and the poor in their countries. This has resulted in finger pointing at the usual suspect – immigration. Although in terms of percentage of the world population, international migration has been stable at close to 3% over the past few decades[x]; the overall volume of immigration has been increasing due to the population explosion that the world has undergone during the same time. USA has been the recipient of the largest number of immigrants for many years now, and in between 1990 and 2000, it received about a third of the world’s immigrants[xi]. A large proportion of the immigrants are from Mexico, and most immigrate illegally by crossing over the border into the Southern states like California and Texas (and then further diffusing to other parts). Studies have suggested that undocumented immigrant’s financial resources, capacity to obtain formal jobs and access to healthcare are all predictably lesser than legal immigrants[xii].

At the outset, it is not counterintuitive to assume that hoards of unskilled immigrants can cause a skew in income inequality though there is no empirical way to establish causality. A recent study has suggested that in the case of low skilled Mexicans immigrating to USA, the extra supply of labour is absorbed by changes in skill intensity within narrow industries, without significant impact on the overall wages (except in the case of the existing uneducated/drop out workforce)[xiii].  Furthermore, since the strict policy regimes in place in most of the developed world have clearly favoured highly skilled immigrants for over four decades[xiv] ; the argument can be reversed as the turn in the inequity curve has occurred simultaneously (while it should have further stabilized due to implementation of biased policies towards letting in the highly skilled). In the current world scenario, dominated by free market neo liberal ideologies, globalization has made nations truly interdependent (and the countries that are not sufficiently integrated in the globalized market framework of shared risk and increased trade are left on the periphery). There is constant political rhetoric about increased cooperation, free trade etc and at the same time a reversal of the post World War 2 liberalization agenda for migration is followed by the developed world.

Joseph Schumpeter coined the phrase “creative destruction” back in 1942, referring to the destruction of old technologies by new, better technologies, thereby promoting human progress and innovation[xv]. The actualization of this process has brought human civilization to the point that it is at right now. It has predicted the way companies and industries operate within the new paradigm of globalization, where they have to be at the competitive edge in order to survive. The consequence of this has been the rapid introduction of technologies in formerly labour intensive processes such as manufacturing. This in turn has resulted in a veritable sectoral shift in the demand side for labour intensive jobs and immigrants (from manufacturing to services). Countries in the West no longer require low skilled workers in droves in order to work in factories and mills, and the emphasis for employment growth has now shifted to the service sector. This has further incentivized policy makers in the West to adopt stringent policies that favour only the highly skilled worker.

Another product of creative destruction has been the increasing emphasis on productivity. For example, the 2007-2008 global financial crises demanded a lot of changes in the productivity and efficiency with which private sector companies in the Western world operate. The companies which were able to make the appropriate changes have survived and are probably much more efficient, closer to operating according to an optimal utility framework than before.  This emphasis on productivity has meant that the workers that are not absolutely essential are without jobs in the West. In such a situation, migration of workers across borders, were it to be barrier free, would mean that workers would move from low productivity areas to high productivity areas in a form of labour arbitrage. This would improve labour productivity and overall efficiency in the global economy[xvi].

As for the question of whether only the receiving countries would gain or whether there would be mutual gains between the sending and receiving countries, it would be useful to remember that most of the gains from migration would largely be caught by the migrants themselves, which would be shared with their families in the form of remittances. There would be no clear winners or losers, as the welfare gains would be observed in a global context rather than a regional context.

Migration and Non Traditional Threats:

Demographic threats are one of the more pronounced non traditional threats to global welfare. While the threat represents itself as overpopulation (putting a strain on resources) in the developing world, it is the lack of population growth that is a threat to advanced developed countries. According to a recent study, the median age of the population of the world is projected to increase from 26.6 years in 2000 to 37.3 years on 2050[xvii]. This “acceleration” in ageing is set to affect the developed world in an adverse way. The remarkable gains in the life expectancy (from about 70 years to 78 years in the United States and close to double that in Japan over the past half century according to World Bank indicators) and declining natality in the developed world have resulted in unforeseen consequences for social welfare.

In countries like Germany and Japan, peak populations have already been reached, as the decline in births have more than offset the increases in life longevity[xviii]. Without a growing workforce, there is a real need for immigrant workers. Germany has already benefited from liberalized immigration policies in the sixties (due to shortage of labour during the German “economic miracle”) and this in fact justifies the European Union migration policy towards member states[xix]. Most of the migration to Germany has taken place from countries within Europe such as Turkey and Poland and not from countries which are relatively much worse off in the human development index.

Figure: The cumulative probabilities of reaching a proportion 60+ of one third or more for the world and selected world regions by calendar year:

Source: Lutz et al., “The Coming Acceleration of Global Population Ageing”

The second big non traditional threat is in the form of environmental challenges. It is no secret that climate change has lead to a rise in the global surface temperature and global mean sea level. Although there is a lack of evidence to support the claim that climate change has already lead to a shift in migratory patterns (Salehyan, 2005:2), this is can be put down to the fact that the effects of climate change have not been very severe up till now, and may not be for another decade. The Stern Review Report on Climate Change predicts (in its conservative estimate) that there is a very real potential for additional mass migration of 150-200 million people by 2050 (Stern, 2007:77). The report observes that “climate change will lead to hundreds of millions more people without sufficient water or food to survive or threatened by dangerous floods and increased disease”. Furthermore severe draught and flood risks are already changing migratory patterns[xx]. Low lying flood prone high density areas like those in Bangladesh are especially under threat from rising sea levels.

Under this sort of scenario, both regional and international migration are surely going to be important and people will increasingly start to incorporate climate change and its consequences into their decision making process. The question of why move, will have an added – fourth dimension, and we are of the opinion that policy makers need to be suitably prepared for humanitarian interventions and the integration of ‘climate refugees’ in the future. Furthermore, resource shortages are additional concerns that are likely to effect the decision making process of individuals contemplating migration. The unabated rise in commodity and food prices seems to be a long term trend going forward, and fresh water shortages have already caused significant shifts in migratory patterns around the world[xxi].

Conclusion:

The meta-narrative of human evolution can be traced through the perspective of migration. From over a hundred and fifty thousand years ago when the earliest man started his journey out of erstwhile Ethiopia, to the migration from the Iberian peninsula to the colonies in the Americas, to the great African migration of slaves, the human journey and socio-economic transformations have greatly been influenced by the migratory phenomenon. It is only in the last few decades that the slow down of migration (in terms of percentage of the world population) has occurred, simultaneously with the spread of globalization.

A majority of international migration takes place between countries that are either linked geographically such as the US and Mexico (or are sufficiently close to each other), and between countries that share other established socio-political/economic linkages such as the member nations of the European Union. In both cases, labour tends to flow from relatively low productivity to high productivity areas, enhancing overall global welfare. However, migration can solve a lot more inefficiencies than it is today. With existing imbalances caused by structural mismatches wreaking havoc in the global economy, we feel that it is the perfect time for policymakers to reform immigration policies – especially in the developed world.

A lot goes on behind the decision to migrate. The human decision making process is pivotal to understanding the dynamics of where people move and why. We have argued that this cerebral process has been greatly influenced by the new media, and that people now make decisions with a “mediated rationality”. The implication of this is that migrants are increasingly aware of the prevailing environments in their point of origin and destination. Voluntary movements by people searching for “something better” are increasingly sieved through the perceptive realities of the migrant, which are in turn shaped by the new media.

Need based migration is sure to increase in the coming future, with the increasing lack of resources, impact of climate change and other non traditional threats. This is going to lead to unpredictable consequences, whereby certain nations are going to feel greater sustained immigration pressures than others. We wish to highlight the fact that this need based migration should be treated as a global burden rather than a local one to enhance global welfare. Countries should promote the process of multilateral dialogue on this issue and resolve themselves to sharing the burden when the time comes. The recent global financial crisis has provided a blueprint for the modalities of cooperation on financial/fiscal issues. Such multilateral cooperation and experience sharing can be mimicked, with emphasis on resolving issues of mass need based migrations to combat non-traditional threats and increase global labour efficiencies.

References:

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[1] One can consider the case of a typical student who travels away from family to get education and then goes on to seek jobs in a more opportune environment, and then returns some of his/her earnings in the form of remittances, thereby optimizing the utility gained by the family as a whole

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[i] See: Fawcett, J.T., “Migration Psychology: New Behavioral Models”, Population and Environment, Vol. 8, No. ½, Migration Intentions and Behavior: Third World Perspectives, 1984 – 1985.

[ii] See: Sjaastad, L.A., “The Costs and Returns of Human Migration”, the Journal of Political Economy, 1962.

[iii] See: Stark, Oded and Tayloy, E.J., “Relative Deprivation and International Migration”, Demography, Vol. 26, No. 1, 1989.

[iv] See: Thompson, John, “The Media and Modernity – A Social Theory of the Media”, Cambridge University Press, 1995.

[v] UNDP Human Development Report, 2009

[vi] The most common probability distribution in statistics

[vii] The United States instituted its ‘Bracero’ Programme in 1942 to accept 4.6 million Mexican farm labourers which ended in 1964, and Western European countries that heavily depended on cheap unskilled labour through their guest worker programmes, also ceased recruitment after the OPEC oil shocks in the early 1970s.

[viii] See: Alderson, Arthur S., and Nielson, Francois, “Globalization and the Great U Turn – Income Inequality trends in 16 OECD countries”, The American Journal of Sociology, Vol. 107, No. 5, 2002.

[ix] Source: “Business Week”, October 16, 2009

[x] UNDP, Human Development Report, 2009.

[xi] The Foreign –Born Population: 2000. Washington, DC: US Census Bureau; 2003.

[xii] See: Nandi et al., “Access to and Use of Health Services Among Undocumented Mexican Immigrants in a US Urban Area”, American Journal of Public Health, Vol. 98, No. 2, 2008.

[xiii] Card, David and Lewis, Ethan G., “The diffusion of Mexican Immigrants During the 1990s: Explanations and Impacts”, National Bureau of Economic Research, 2007.

[xiv] See: Castles, Stephen, “Migration and Community Formation under Conditions of Globalization”, International Migration Review, vol. 36, No. 4, 2002.

[xv] In his book titled “Capitalism, Socialism and Democracy”.

[xvi] See: Hanson, Gordon H., “The Economic Consequences of the International Migration of Labour”, UCSD and NBER, 2008/.

[xvii], Lutz, Wolfgang, Sanderson, Warren and Scherbov, Sergei, “The Coming Acceleration of Global Population Ageing”, Nature, Vol. 451, 2008.

[xviii] See: Cooper, Richard N., “Global Imbalances:  Globalization, Demography and Sustainability”, The Journal of Economic Perspectives, Vol. 22, No. 3, 2008.

[xix] European Union free movement of workers principles require that all Member State citizens have the right to solicit and obtain work in Germany free from discrimination on the basis of citizenship according to the Treaty on European Union Article 39.

[xx] Black, R., Coppard, D.,  Kniveton, D., Murata, A., and Skeldon, R., “Demographics and Climate Change: Future Trends And their Policy Implications for Migration”, Working Paper (T-27), Development Research Centre on Migration, Globalization and Poverty, University of Sussex, 2008.

[xxi] See: Widgren, J., “International Migration and Regional Stability”, International Affairs (Royal Institute of International Affairs), 1990.