1 P a g e Emerging Markets and Mounting Tension: Doing Business in the Face of Potential Conflict in the Indo-Pacific Symposium held by the School of Public Policy, University of Calgary Constraints to Growth in Asia panel Calgary, March 11, 2014. Douglas Goold Director, National Conversation on Asia & Senior Editor Asia Pacific Foundation of Canada Introduction I am delighted to be here in Calgary. This, in fact, is the second of four times I will be in Alberta this month. Most of our recent work here emerges out of a task force report we published with the Munk School of Global Affairs at the University of Toronto on what we call Asian Competence. The task force was co-chaired by David Mulroney, Canada s former ambassador to China, and Janet De Silva, associate dean of the Ivey Business School in Hong Kong. Asia Competence refers to what Canada needs to do to ensure that the next generation is prepared for a more Asia-centric world, by learning Asian languages as well as more about Asian culture and history. We are planning a pan-canadian conference on Asia Competence in Calgary this October, in partnership with the Alberta Ministry of Education and CMEC, the
2 P a g e Council of Ministers of Education in Canada. We hope to bring together educators from across the country as well as provincial and federal officials. We hope you will join us, particularly given that our report shows that Alberta is leading the way in many of the areas under discussion. Most of my research has been on India, and I have been asked to talk specifically about challenges (in particular corruption) and opportunities of doing business in India. I would first like to acknowledge in the audience the real expert in the field, former High Commissioner to India Joseph Caron, who is also the co-chair of our Futures Group on Asia, which is part of our National Conversation on Asia, our multi-year outreach initiative at the Asia Pacific Foundation of Canada. India and Geopolitics Since this symposium focuses both on geopolitics/security and business, I would like to begin by making several observations about India and security. Many of you may be surprised by this, but India is the world s largest arms importer. Most of their arms have traditionally come from Russia, which has US$39 billion of military equipment on order from India, a third of Russia s arms exports. India has long tried -- and largely failed -- to make its own weaponry and to diversify its sources of arms. Israel has become an increasingly important source and the two countries have good relations. In fact, a senior Israel diplomat posted to New Delhi told me that that there has never been any anti-semitism in India, and hinted that there was a great deal of high-level, unofficial military cooperation between the two countries. Let me move on to Indian security in relation to Pakistan.
3 P a g e I was in Mumbai on the first anniversary of the terrorist attacks of November 26, 2008. There were sandbags and guard posts in front of the two hotels that had been attacked, the Taj Mahal and Oberoi, and several military vehicles parked nearby. More telling were the notes on bulletin boards that had been put up in public areas of the city. The overwhelming sentiment was that India had put up with enough, and that if there was another Pakistan-based or ISI - inspired (Inter- Services Intelligence) attack on Indian soil, India would have every right to launch an attack on its neighbour, with whom it had gone to war four times since 1947. That message was reinforced when I visited the Ministry of Foreign Affairs. I was told (off-the-record) that if Pakistan was clearly behind any further attacks, India would retaliate first by taking out Pakistani barracks and then if necessary by bombing the ports. That no escalation has taken place is a sign of the new normal both in the region and beyond terrorism is a global phenomenon. I subsequently wrote a substantial report for the Canadian International Council on the successes, failures and prospects of Canadian companies that do business in India. As part of that report, I asked executives whether or not they were thinking of leaving India because of the threat of terrorism (there are also internal threats, posed by the so-called Naxilites). To their credit, the executives unanimously said they were not thinking about leaving. The consensus was that terrorism had unfortunately become a global phenomenon and no one and no company was any safer in New York or London than in Delhi or Mumbai. To a person they also said they did not want to appear to buckle in the face of potential threats, thereby implicitly giving terrorism a sort of victory. As Ron Denom, then president of SNC-Lavalin International told me, I stayed at the Marriott in Islamabad two weeks before they bombed that, and the Taj Mahal
4 P a g e a week before the attacked that. It s part of international business reality these days. Let me turn now to the challenges and opportunities of doing business in India. Challenge: Corruption Let me turn to the problem of corruption, which is particularly timely because of the general elections which have just been scheduled to begin on April 7. India has a staggering 814 million eligible voters, 100 million more than in the last elections in 2009. It appears certain that Narendra Modi, the Chief Minister of Gujarat and member of the BJP the opposition Hindu nationalist party will win the most seats. The only question is whether the party can achieve a majority or cobble one together. The Congress party, led by Sonia Gandhi and her hapless son Rahul, appear headed for an historic collapse. One of the main reasons for this likely fate is that Prime Minister Manmohan s Singh s two coalition governments have been riven by one corruption scandal after another, to the extent that Singh s hitherto corruption-free personal reputation has largely disappeared. Modi, by comparison, is seen as corruption free, though he is haunted by his much criticized and disputed role in the anti-muslim riots in Gujarat in 2002. This focus on corruption has been building for a number of years. There has been a powerful populous movement, led by social activist Anna Hazare, to pass a Lokpal bill, which would create an anti-corruption ombudsman, with jurisdiction over legislators and officials. This has given rise to the creation of the Aam Aadmi or common man party, which is helping to set the election agenda through its campaigns for lower utility prices and against corruption. The party s symbol is a broom.
5 P a g e So how bad is corruption in India? The list of scandals under Singh s two terms is too long to itemize, but most people will remember the 2010 Commonwealth Games in New Delhi and the payoffs involved. Then there was the 2G spectrum auction the sale of telecom licences which is thought to have cost the government up to US$40 billion and which the Supreme Court overturned. Telecommunications minister A. Raja had to resign and went to prison though he is now out and running in the election! In 2011, TIME magazine named this scandal the second worse abuse of power ever, just behind Watergate. It was Coalgate, the allocation of coal deposit blocks, when Prime Minister Singh was responsible for the ministry that ended Singh s personal good reputation. Even the stately sport of cricket and the Indian Premier League has taken a hit, thanks to instances of spot fixing or bribing players to underperform. How does India compare to the rest of the BRICs, if we include South Africa as a fifth member of that elite group? In Transparency International s widely cited Corruption Perception Index, Brazil and South Africa are best in 72 nd position (out of 177); next is China at 80th; then India at 94th; followed distantly by Russia at 127 th. Any time I have talked about this subject and ask the audience who comes last, they always say Russia. Thanks, Vladimir. Corruption comes in two kinds: first, small scale corruption, such as denying someone something to which they are entitled, such as a birth certificate, unless a payment is made have a look at ipaidabribe.com, which is full of stories that are both funny and sad. What is remarkable is how small (at least to us) most of the amounts are. Then there is large scale corruption, which often involves major contracts, the electoral process or the granting of a licence. That s why companies in sectors such as construction, engineering or mining are particularly vulnerable.
6 P a g e In a 2011 Transparency International poll, 45% of Indians said they had paid a bribe in the past 12 months. The top three reasons given were: to speed things up; to avoid a problem with the authorities; or to receive a service they were entitled to. More than 80% of interviewees said that political parties were corrupt, just beating out the 3 out of 4 that said the police were corrupt. The cost to the Indian economy has been estimated at more than $18 billion (US) a year, or 1.25% of GDP. What did Canadian businesspeople tell me about their experience? Every single person (in on-the-record interviews) admitted they have had to deal with corruption but oddly, not a single person said they had ever paid a bribe. What did Canadian executives advise? They said: just say no. It is not only wrong to pay people off, but it can lead to greater problems. As one executive phrased it: We don t do it. It s a bit of a hamster wheel. They always come back for more. You give a guy a thousand rupees. A week later on he wants 5,000. A month after that, he wants 100,000. Hence the key to success is to run a company, and be known for running a company, that is fair-minded and will not play the game. Other challenges: India is a tough place to do business even tougher then China, despite India s better legal system and widespread use of English. India does not rank well on the World Bank s ease of doing business surveys. Of 189 countries measured, China is 96 th and India is 134th. Bureaucracy: India, which gave rise to the phrase red tape, is justly famous for its bureaucracy. As Ken Morison, president of Toronto-based R. V. Anderson, which has done environmental work in India since 1993, told me: Everything is slow. The British introduced bureaucracy to India and the Indians have perfected
7 P a g e it. There are so many people involved in every activity that it is a science and an art to move one piece of paper. FICCI (The Federation of India Chambers of Commerce and Industry) completed a survey that showed it took on average 3,500 person days for approvals to start a business. Price. The middle class has rising expectations, but their aspirations trail their resources, so price is critical. Rajiv Pancholy of Ottawa-based TenXc wireless: Price, price, price. They are brutally price sensitive. They want the latest and greatest at a price that will make your head spin. He advises that if you are not willing to adjust to the market reality, don t go to India. Demography. Demography was cited as a constraint to growth by our moderator. India, however, is radically different than aging countries like Japan. India offers a huge growth in its middle class and a very young demographic. The median age is only 26. That, however, is both good news and bad news. The good news is that a young population offers the potential for a vital, hungry, tech-savvy working force and a low dependency ratio. The bad news is that India has to find a million new jobs every month. That s hard to do at the best of times but even more difficult when you have a generally weak education system and inadequate skills training. Opportunities There has been a huge improvement in relations between Canada and India in recent years and that can only help any Canadian companies doing business India. The two countries have signed a Nuclear Cooperation Agreement, have completed (but not yet signed) a Foreign Investment Promotion and Protection Agreement and appear poised to complete a CEPA a Comprehensive Economic Partnership Agreement sometime this year. And certainly there have been some Canadian companies that have found success in India, including Sun Life Financial, McCain Foods, Lea Group (an engineering consultant), Bombardier and R. V. Anderson.
8 P a g e Last year a Conference Board study looked for ideal sectors in India those that have high growth potential, openness to Canadian business, and in which we have demonstrated expertise. Favoured sectors included energy; food; engineering and architectural services; machinery; auto parts; and computer services. International educational has also become a vibrant sector in the interchange between the two economies. Unfortunately, Canada and Canadian companies have been slow to take full advantage of India s potential. Trade and investment numbers are far below what they should be, even taking into account the fact that the official numbers are understated. While bilateral trade between the two countries is stalled around $6 billion (Canadian), a bit more than a third of the goal Ottawa wants to achieve by 2015, India-U.S. trade has just surpassed the $100 billion (US) level. My advice? As the U.S. market declines and becomes more difficult for Canada, the private sector needs to take greater risks and step up to the plate, not only in India but also in other emerging markets 30