During his address at the U.S. Coast Guard Academy graduation this week, President Obama highlighted climate change as “a serious threat to global security, an immediate risk to (U.S.) national security.” Is President Obama right? Are the national security threats from climate change real?

When I listen to the “know-nothing” crowd and their front men in Congress who actively ignore ever-stronger scientific evidence about the pace of climate change, I want to quit my day job and organize civic action to close them down. The celebration of anti-knowledge, the denial of science, the treatment of advanced education as a mark of ignominy rather than the building block of American innovation and citizenship—these are as grave a threat to America’s future as any I can identify. So I’m sympathetic to the Obama administration’s desire to take a bludgeon to climate deniers. But is “national security” the right stick to move the naysayers forward? 

The Danger of Overstating for Effect

The White House’s report on the national security implications of climate change is actually pretty measured and largely avoids waving red flags, but it overstates for effect, as do the President’s remarks to the Coast Guard Academy. 

The report gets right the notion that climate change will hit hardest where governance is weakest and that this will exacerbate the challenge of weak states; but it’s a pre-existing challenge and almost all weak states are already embroiled in forms of internal war—climate change may exacerbate this problem, but it certainly won’t create it. The White House report also asserts a link to terrorist havens, and of course there are risks here—but it’s far from a 1:1 relationship, and there’s little evidence that the countries where climate will hit governance worst are the places where the terrorism problem is most serious. 

The report also highlights the Arctic as a region most dramatically effected by climate change, and that is true—but so far what we’re seeing in the Arctic is that receding ice is triggering commercial competition and governance cooperation; not conflict. The security challenge from the Arctic is modest: the climate challenge of melting ice caps and potential release of trapped greenhouse gases is potential very serious indeed. 

Then there are the domestic effects. The report highlights that the armed services may be drawn in more to dealing with coastal flooding and similar crises, and that’s a fair point—though it’s a National Guard point more than its an armed forces point. That is to say, it’s about the question of whether we have enough domestic disaster response capacity: an important question, not obviously a national security question. And it oddly passes over what’s likely to be the most important consequence of climate change in the United States, namely declining agricultural productivity in the American heartland. America’s farmers, not just its coastal cities, are in the front lines here. 

All of these are real issues and the U.S. government will have to plan for lots of them, including in the armed services; all fair. But is national security really the right way to frame this? Is linking it directly to the capacities needed for America’s armed services the right way to mobilize support for more serious action on climate change? 

Of course the term “security” has been evolving, and has long since extended beyond the limited purview of nuclear risks and great power conflict. Civil wars and weak governance and rising sea leaves are certainly a security issue to somebody, and we’re sure to be involved—whether it’s in dealing with refugee flows, or more acute crises where severe impacts overlay on pre-existing tensions. These are global security issues for someone, to be sure; I’m not sure they are “immediate risks to our national security.

Words Matter

Why does the rhetoric matter? Am I glad that we have a President who cares about climate change? Yes. Do I want the Obama administration to be focusing on mobilizing the American public on this? Yes. So why does it bother me if they use a national security lens? A national security framework implicitly does several things: it invokes a sense of direct threat, which I think distorts the nature of the challenge; it puts military responses front forward, which is the wrong emphasis; and although the report doesn’t get into this question, if the President highlights the immediate national security risk from climate, it displaces other security threats that we confront and truly require U.S. strategic planning, preparedness, and resources. None of this is totally wrong, but surely there are other ways to mobilize the American public to an erosion of our natural and agricultural environment than to invoke the security frame? 

Every piece of evidence I’ve seen about the state of temperature change; the real pathway we are on in terms of carbon-based fuels consumption (despite optimistic pledges in the lead up to the Paris climate conference); realistic projections of growth in renewable energies; and demand growth in the developing world (especially India) tells me that we’re rapidly blowing past the two degree target for limiting the rise in average global temperatures, and we’re well on our way to a four degree shift. 

We need urgently to pivot our scientific establishment away from the now well-trod field of predicting temperature shift to getting a much more granular understanding about the ways in which changing temperature will affect water sources, agricultural productivity, biodiversity, and dramatic weather events. And we need to treat those who willfully deny science—in climate and other areas—as a serious threat to our nation’s  future. I’m just not convinced that national security is the right or best way to frame the arguments and mobilize the America public’s will around this critically important issue.

President Obama should be congratulated for highlighting the growing links between U.S. national security and climate change in his address before the U.S. Coast Guard Academy’s graduation ceremony earlier this week. The president’s speech drew upon earlier administration documents (the Third National Climate Assessment, the White House’s 2015 National Security Strategy, the Department of Defense’s 2014 Quadrennial Defense Review, and the 2014 Department of Homeland Security’s Quadrennial Homeland Security Review) to highlight the numerous challenges posed to our nation and the world by climate change, including:

• Threats to the world’s coastal infrastructure
• Rising temperatures and extreme weather
• Creation of failed states
• Degradation to the marine environment and critical ecological regions around the globe
• Threats to our energy production and delivery systems
• The devastating impact on native Arctic inhabitants

While these issues are important and deserve attention, the president was singularly silent on how best to manage threats, posed to the Arctic and the global environment by the rush to develop or utilize its resources (including energy, minerals, fish, and tourism) as the region opens with the melting of sea ice. I raise none of these issues to disagree with the president’s policies, or to suggest we should not develop the region’s resources or allow enhanced international maritime trade through our waters. In fact, I have often called for the economic development of Alaska with high safety standards for oil and gas production. If we allow these activities to proceed, we must be willing to provide the resources for infrastructure of all kinds: pipelines, onshore and offshore, and including ports, airfields, housing, etc., in order to be prepared for all contingencies.

Additionally, the president did not make any mention of the financial demands posed to the country to even meet the challenges in our own Arctic region of Alaska, let alone the many commitments we have already made in the Arctic Council, vis-à-vis instituting a true search and rescue capability and an oil spill prevention and response mechanism. The sad reality is that for all intents and purposes the United States has one heavy icebreaker to patrol our entire Arctic region. With cruise ships now sailing into very dangerous areas without adequate sea mapping, the prospect of a disaster occurring at least 800 miles from our nearest port in the Aleutians looms large. Were a cruise ship to run into ice, there is no logistical infrastructure in Northwest Alaska even to off lift passengers to on shore by helicopter. With icebreakers likely to cost at least $800 million to $1.5 billion each and take many years to build, where is the president's clarion call to the Congress on the need for more revenue for our Coast Guard to deal with the challenges highlighted in his speech?

Likewise, with many Asian nations interested in the fish resources of the Arctic, where are the funds both to determine what fish exist in Arctic waters including fish migrating from the Pacific as well as their volumes and assessments of how to insure their sustainability? If the president is serious about the threat of climate change on America’s front door to the Arctic, where are the U.S. Coast Guard and the State of Alaska as well as the myriad of federal agencies responsible for various activities in Alaska going to get the requisite resources to carry out their mandates?

As a result of the administration’s commendable recent decision, Shell will be allowed to proceed with drilling several wells in the Chukchi Sea, allowing for development that benefits not only Alaskans but also the entire United States. While Shell will be subject to stringent regulatory oversight, Russia also plans to drill in its area of the Chukchi as well. What would happen if the Russians had an accident and the current brought oil into Alaskan waters? Would the United States, in concert with the Russians have the capability to contain it? Similarly, if there were a major maritime disaster in the Bering Strait where a South Korean ship literally disappeared several years ago, what response capability would we have if a ship containing hazardous cargo sank? While I applaud the decision of the administration to allow Shell to drill in the Chukchi, I am apprehensive of the U.S. commitment and ability to respond to any matter of national security in the Arctic, in part due to the severe lack of federal funds going to support this region.

Consequently, while recognizing that the American and broader Arctic is only a small part of the myriad of issues you identified in your Coast Guard address, I would urge that you begin to inform Congress and the American people of the large costs we may have to incur to protect ourselves against the forthcoming economic and social ravages of climate change.

As a first step to begin to prepare for the direct “existential” challenges posed to Alaska and our broader responsibilities as chair of the Arctic Council, I would recommend the following:

1. A request to Congress for $1.2 billion dollars a year for 10 years to build a new fleet of ice worthy ships to deal with various contingencies in the Arctic (as defined by the Coast Guard) financed by an overall increase in the gasoline tax of $0.20/gallon of which $0.02 would go for Arctic infrastructure development;
2. As an interim step before these ships can be built, the appropriation of funds for the leasing of two Arctic worthy vessels per year;
3. An increase in alcohol and tobacco taxes (or perhaps a tax alongside the legalization of marijuana at the federal level) totaling $500 million dollars a year for 10 years for ancillary infrastructure development of ports, airfields, roads, etc. in Alaska to improve our ability to responds to climate contingencies both in  Alaska and throughout the circumpolar north;
4. A surcharge of one percent on all adjusted federal taxable incomes in excess of $200,000 and two percent on incomes above $500,000.

While there will be hews and cries by climate deniers and other opponents of any tax increase if as the president says the changing climate poses graves threat to our own and other nations security, these are modest proposals (particularly in comparison to an outright price on carbon) and should be passed with the greatest urgency.

In the summer of 1978, my grandfather George Washington Timmons, my cousin George, and I took the train from the Midwest across Canada and the ferry up the Pacific coast to Alaska. There we met up with my brother Steve, who was living in Anchorage. It was the trip of a lifetime: hiking, and fishing for grayling, salmon and halibut in Denali park, on the Kenai peninsula, Glacier Bay, and above the Arctic Circle in a frontier town called Fort Yukon, camping everywhere, and cooking on the back gate of my brother’s pickup truck. 

That Gramps had a Teddy Roosevelt moustache and a gruff demeanor gave the adventure a “Rough Riders” flavor. Like Teddy, the almost-indomitable GWT had given me a view of how experiencing a majestic land was a crucial part of becoming a robust American man. When we got home, he was diagnosed with lung cancer and died just a few months later.

We project all kinds of cultural images and values on the green screen of the American landscape. Those endless late June sunsets in the Crazy Mountains and the sun on the ragged peaks of the Wrangell Mountains represent for me a sense of the vastness of the state of Alaska and the need to balance preservation there with the needs of its people for resources and income. Certainly there is enough space in Alaska to drill for oil and protect large swaths in wildlife refuges and national parks. As leaders of the Inupiat Eskimo corporation put it in a letter to Obama, “History has shown us that the responsible energy development, which is the lifeblood of our economy, can exist in tandem with and significantly enhance our traditional way of life.”

Unfortunately, this view is outdated: that was the case in Alaska, but there is a new, global problem that changes the calculus. As President Obama wraps up his historic visit to Alaska and meeting with the Arctic climate resilience summit (GLACIER Conference), he is walking a razor’s edge, delivering a delicately crafted missive for two audiences. Each view is coherent by itself, but together they create a contradictory message that reflects the cognitive dissonance of this administration on climate change.

For the majority of Alaska and for businesses and more conservative audiences, Obama is proclaiming that Alaskan resources are part of our energy future. With oil providing 90 percent of state government revenues, that’s the message many Alaskans most ardently want to hear.

For environmentalists and to the nations of the world, Obama is making another argument. His stops were chosen to provide compelling visual evidence now written across Alaska’s landscape that climate change is real, it is here, Alaskans are already suffering, and we must act aggressively to address it. “Climate change is no longer some far-off problem; it is happening here, it is happening now … We’re not acting fast enough.”

This is a razor’s edge to walk: the Obama administration is criticized by both sides for favoring the other. Those favoring development of “all of the above” energy sources say that Obama’s Clean Power Plan has restricted coal use in America and that future stages will make fossil fuel development even tougher in future years.  These critics believe Obama is driving up energy costs and hurting America’s economic development, even as oil prices drop to their lowest prices in years.

“Climate hawks” on the other hand worry that we are already venturing into perilous territory in dumping gigatons of carbon dioxide and other gases causing the greenhouse effect into the atmosphere. The scientific consensus has shown for a decade that raising global concentrations of CO2 over 450 parts per million would send us over 3.6 degrees F of warming (2 degrees C) and into “dangerous climate change.” The arctic is warming twice as fast as this global average, and though we are still below 1.8 degrees F of warming, many systems may be reaching tipping points already.

Already melting permafrost in Alaska releases the potent greenhouse gas methane, and wreaks havoc for communities adapted to that cold. Foundations collapse and roads can sink and crumble. The melting of offshore ice makes coastal communities more vulnerable to coastal erosion, and allows sunbeams to warm the darker water below, leading to further warming.

The difficulty is that we have a limit to how much greenhouse gases we can pump into the atmosphere before we surpass the “carbon budget” and push the system over 3.6 degrees F. Which fossil reserves can be exploited and how much of which ones must be kept in the ground if we are to stay within that budget? Realistic and credible plans have to be advanced to limit extraction and combustion of fossil fuels until we have legitimate means of capturing and sequestering all that surplus carbon somewhere safe. It is a dubious and risky proposition to say that we can continue to expand production here in America, and that only other countries and regions should cap their extraction.

Obama got elected partly due to his not rejecting natural gas and even coal development. He kept quiet about climate change during his entire first term and he and Mitt Romney had a virtual compact of silence on the issue during the 2012 campaign. But in his second term, Obama has become a global leader on the issue, seeking to inspire other countries to make and keep commitments to sharply reduce emissions. This work has yielded fruit, with major joint announcements with China last November, with Mexico in March, and a series of other nations coming in with pledges. The administration has been seeking to push the pledging process to keep our global total emissions below 3.6 degrees F.

However a just-released UNEP report shows that all the pledges so far—representing 60 percent of all global emissions—add up to 4-8 gigatons of carbon reduction in what would have been emitted. That’s progress, but the report goes on to show that we are still 14 gigatons short of where we need to be to stay under 3.6 degrees F. Indeed, Climateactiontracker.org reports that we are still headed to 5.5 degrees F of warming (3.1 C) with these pledges, down from 7 degrees without the pledges.

This puts the administration and U.N. officials in the position of having to decide which message to put out there—the hopeful message that emissions are being reduced, or the more frustrating one that they are not being reduced nearly enough. Environmentalists are in a similar position with Obama in Alaska—do they criticize him for allowing Shell to drill in the Arctic, or praise him for being generally constructive in this year’s effort to reach a meaningful treaty in Paris in December? Is it possible to kiss Obama on one cheek while slapping him on the other?

This is the delicate political moment in which we find ourselves. Fossil fuel projects continue to be built that will lock us in to carbon emissions for decades to come. They will certainly push us over the “carbon budget” we know exists and beyond which human civilization may be untenable on this planet. But these projects are advanced by extremely strong economic actors with mighty lobbying and public relations machines, and flatly opposing them is likely to lead to one’s portrayal as a Luddite seeking to send humanity back to the stone age. Clean energy alternatives exist, and they are increasingly affordable and reliable. Logically, we need to be spending the remaining carbon budget to make the transition to a net zero emissions economy, not to continuing the wasteful one we have now.

Players on both sides of this debate will seek to deploy Alaska’s majestic landscape to win their case. I’m fairly sure on which side my grandfather George Washington Timmons would have stood: he was a building contractor and would sometimes estimate the number of 2x4s one could harvest from a giant tree. But he didn’t know about the global carbon budget—he loved his children and grandchildren, and I think he would have supported living within our means if he was fully aware of this problem. The original Rough Rider Teddy Roosevelt himself went from avid hunter to devoted conservationist as he learned of the damage over-cutting was causing American forests. As Obama said in Alaska, “Let’s be honest; there’s always been an argument against taking action … We don’t want our lifestyles disrupted. The irony, of course, is that few things will disrupt our lives as profoundly as climate change.”

That is the political razor’s edge the president—and all of us—have to walk today, as we make the inevitable transition away from fossil fuel development.

This week, Royal Dutch Shell announced that it would postpone oil drilling in the Chukchi Sea and the broader American Arctic indefinitely. The decision came in the wake of disappointing output from its Burger field, the high costs associated with the project (already nearing $7 billion), the “challenging and unpredictable federal regulatory environment in offshore Alaska,” and a growing public relations problem with environmental groups opposed to Arctic drilling.

This decision is a momentous one—both for the future of the U.S. energy policy and the ability of the international oil industry to balance global oil supply and demand. The announcement came only days after Hillary Clinton spoke out against the Keystone Pipeline, not only because it would lead to the consumption of more fossil fuels but also because much of the oil might be exported. With broader opposition to lifting the ban on crude oil exports gaining momentum in the White House, it is clear that at least part of the nation’s political leadership is moving in a nationalistic direction. This means that the United States—with its vast resources—is unwilling to help meet the burgeoning energy needs of the world’s population: especially the 1.2 billion people who have no access to commercial energy.

Shell’s decision highlights four significant and diverse areas of concern for the future of energy globally and energy policy here in the United States.

Mapping supply and demand

Shell and much of the rest of the international petroleum industry had viewed the Chukchi Sea as one of the last great oil frontiers. The Chukchi and adjoining Beaufort Seas are vital for meeting the estimated 12 to 15 million barrels per day (mmbd) of additional oil demand projected by almost all oil forecasts (both inside and outside the industry) needed between 2035 and 2040. 

Without the U.S. Arctic, the other areas projected to make major contributions by this time are Iraq, Iran, Saudi Arabia, shale oil around the world (including North America), the Orinoco region of Venezuela, and the pre-salt offshore Brazil. Needless to say, given the political turmoil in Iraq, Iran, Venezuela, and Brazil—as well as concerns about the long term stability of Saudi Arabia—one has to wonder: Where will the world discover additional, reliable crude oil supplies without a major contribution from the Arctic?

Many in the environmental community argue that we will not need fossil fuels in the future, predicting a turn to renewables, enhanced energy efficiency, large scale battery storage, and electric vehicles. Unfortunately, this has no basis in fact. Clearly renewables will grow exponentially as their prices fall, new technologies will increase energy efficiency, large scale battery storage will commence, and many electric vehicles will hit the road. But there are currently more than 260 million gas and diesel vehicles running on U.S. roads alone, with less than 1 percent of these running on electricity. With transportation fuel demand mushrooming globally, it’s unlikely that oil consumption in the transportation sector will die or even decline significantly. 

Fossil fuels for development

Drilling in the Arctic poses unique environmental risks which must be managed through state-of–the-art technology and accompanied by the most stringent regulatory enforcement. A recent National Petroleum Council examination of all possible challenges involved in Arctic offshore drilling found that drilling can be done safely. Yet despite these findings, most major national environmental groups have opposed any drilling in the Arctic and have even asserted that Shell’s decision is a vindication of their position. But these groups don’t seem concerned or even thoughtful about the long-term implications of the U.S. energy industry’s abandonment of the Arctic.

With the world’s population forecast to rise by 1.6 billion people by 2035, do we really think global oil demand won’t continue to rise? While I recognize that we must do everything to limit the growing use of fossil fuels to attack climate change, do we really have no moral obligation to help countries emerge from poverty, which will almost certainly involve continued use of fossil fuels? 

During his recent visit to America, Pope Francis called for the world to make a renewed commitment to help the “poorest of the poor,” and the United Nations has also put forward new sustainable development goals that include an expansion of energy access to those who are either unserved or underserved. Focusing our policies exclusively on shutting down U.S. fossil fuel development, as some environmental groups advocate, takes away resources that can be used to improve global health, education, clean water, and women’s empowerment—all of which are all directly related to energy access. In looking at girl’s education, for example, increasing energy availability allows water to be pumped up from the river, obviating the need for arduous, tedious work for the women and girls that would otherwise have to carry this water by hand to their communities, limiting time for education. The availability of energy allows vaccines to be safely stored, crops to be refrigerated, and children to have the electricity available to study at night. 

All of these benefits—and many others—cannot happen without improving electricity access, which still involves fossil fuel. The United States can and should play a role in this effort.

Jostling for Arctic access

Shell is not the only company to experience setbacks in the Arctic. Italy’s ENI SpA and Norway’s Statoil ASA just yesterday had another regulatory setback due to delays in obtaining permission from Norway to commence production. In June, a consortium including Exxon and BP PLC suspended its Canadian Arctic exploration, noting insufficient time to begin test drilling before the expiration of its lease in 2020. In addition, Exxon had to curtail its plans to drill in the Russian Arctic after the United States imposed sanctions on Moscow and its energy industry following the annexation of Crimea. 

Russia, though, remains active in the Arctic, and it can be assumed that once sanctions are lifted, many oil companies will try to gain a toehold. China, Korea, India, and Singapore, among other countries, have expressed interest in gaining access to the region’s mineral, energy, and/or marine resources. In several cases, they are building ice-worthy vessels to give them the capability to do so. The Bering Strait is emerging as a significant new maritime route in desperate need of enhanced regulation.

In a report last year, my colleagues and I looked at key recommendations for offshore oil and gas governance as the United States assumed chairmanship of the Arctic Council. Beyond highlighting the resource potential of the region, our work looked at increasing needs for safety and security as a result of increasing transportation across the Arctic. Even as the United States stands to be less involved in Arctic energy development, it is our duty as chair of the Arctic Council to lead in region. 

Alaska is a state, not a park

The promise of the Arctic has inspired adventurers, explorers, geographers, scientists, and entrepreneurs for generations and will continue to do so in the future. The United States should be actively involved in helping to ensure that Arctic resources are developed and used prudently—rather than sit on the sidelines with myopic dreams of leaving the region a pristine wilderness. Arctic inhabitants—both natives and others—of course want to keep the Arctic safe, but they do not want to make it a museum. 

Development of the region’s resources accounts for nearly 95 percent of Alaska’s revenues. If we deny its development, are we prepared to make a line item in the federal budget to pay for Alaska to remain a park? 

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Japan’s presence in the Arctic is not new, but it has been limited mostly to scientific research. Japan has stepped up its engagement after it gained observer status to the Arctic Council and appointed its first Arctic ambassador in 2013. However, Japan has yet to flesh out a full-blown Arctic strategy that identifies the range of its national interests in the polar region and actionable strategies to achieve them. The Arctic offers Japan an opportunity to expand cooperation with the United States in an uncharted area, poses hard questions on how to interact with Russia in the post-Ukraine era, and creates the interesting proposition of whether China and Japan can cooperate in articulating the views of non-Arctic states.

On October 19, the Center for East Asia Policy Studies at Brookings hosted a panel of distinguished experts for a discussion on what components should be included in Japan’s Arctic strategy, ranging from resource development, environmental preservation, and scientific research, to securing access to expanding shipping lanes and managing a complex diplomatic chessboard. 

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• Charting Japan's Arctic strategy

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Can the United States and Russia actually cooperate in the Arctic? It might seem like wishful thinking, given that Russian Prime Minister Dmitry Medvedev asserted that there is in fact a “New Cold War” between the two countries in a speech at the Munich Security Conference. Many people—at that conference and elsewhere—see the idea as far-fetched. Sure, Russia is launching air strikes in what has become an all-out proxy war in Syria, continues to be aggressive against Ukraine, and has increased its military build-up in the High North. To many observers, the notion of cooperating with Russia in the Arctic was a non-starter as recently as the mid-2015. There have been, however, significant changes in Russia’s behavior in the last several months—so, maybe it is possible to bracket the Arctic out of the evolving confrontation.

These and other matters were the subject of discussion at a recent conference at the Harriman Institute of Columbia University in New York, in which we had the pleasure to partake last week.

Moscow learns its limitations

Russia steadily increased its military activities and deployments in the High North until autumn 2015, including by creating a new Arctic Joint Strategic Command. There have been, however, indirect but accumulating signs of a possible break from this trend. Instead of moving forward with building the Arctic brigades, Russian top brass now aim at reconstituting three divisions and a tank army headquarters at the “Western front” in Russia. News from the newly-reactivated airbases in Novaya Zemlya and other remote locations are primarily about workers’ protests due to non-payments and non-delivery of supplies. Snap exercises that used to be so worrisome for Finland and Norway are now conducted in the Southern military district, which faces acute security challenges. Russia’s new National Security Strategy approved by President Vladimir Putin on the last day of 2015 elaborates at length on the threat from NATO and the chaos of “color revolutions,” but says next to nothing about the Arctic.

The shift of attention away from the Arctic coincided with the launch of Russia’s military intervention in Syria, and was strengthened by the sharp conflict with Turkey. Deputy Prime Minister Dmitri Rogozin—who used to preside over the military build-up in the High North—is these days travelling to Baghdad, instead. Sustaining the Syrian intervention is a serious logistical challenge on its own—add low oil prices into the mix, which threw the Russian state budget and funding for major rearmament programs into disarray, and it’s clear that Russia is in trouble. 

The shift of attention away from the Arctic coincided with the launch of Russia’s military intervention in Syria, and was strengthened by the sharp conflict with Turkey.

The government is struggling with allocating painful cuts in cash flow, and many ambitious projects in the High North are apparently being curtailed. In the squabbles for dwindling resources, some in the Russian bureaucracy point to the high geopolitical stakes in the Arctic—but that argument has lost convincing power. The threats to Russian Arctic interests are in fact quite low, and its claim to expanding its control over the continental shelf (presented at the U.N. earlier this month) depends upon consent from its Arctic neighbors.

Let’s work together

Chances for cooperation in the Arctic are numerous, as we and our colleagues have described in previous studies. The current economic climate (i.e. falling oil prices, which makes additional energy resource extraction in most of the Arctic a distant-future scenario), geopolitical climate (sanctions on Russia targeting, amongst others, Arctic energy extraction), and budget constraints on both ends (Russia for obvious reasons, the United States because it chooses not to prioritize Arctic matters) urge us to prioritize realistically.

• Improving vessel emergency response mechanisms. Though many analysts like to focus on upcoming resource struggles in the Arctic, the chief concern of naval and coast guard forces there is actually increased tourism. Conditions are very harsh most of the year and can change dramatically and unexpectedly. Given the limited capacity of all Arctic states to navigate Arctic waters, a tourist vessel in distress is probably the main nightmare scenario for the short term. Increased cooperation to optimize search and rescue capabilities is one way to prepare as much as possible for such an undesirable event. 
• Additional research on climate change and methane leakage. Many questions remain regarding the changing climate, its effects on local flora and fauna, and long-term consequences for indigenous communities. Increasingly appreciated in the scientific community, an elephant in the room is trapped methane in permafrost layers. As the Arctic ice thaws, significant amounts of methane may be released into the atmosphere, further exacerbating global warming.
• Expanding oil emergency response preparedness. The current oil price slump likely put the brakes on most Arctic exploration in the short term. We also believe that, unless all long-term demand forecasts are false, an additional 15 million barrels of oil per day will be needed by 2035 or so—the Arctic is still viewed as one of the last frontiers where this precious resource may be found. At the moment, Arctic states are ill-prepared to deal with a future oil spill, and more has to be learned about, for instance, oil recovery on ice and in snow. The Agreement on Cooperation on Marine Oil Pollution Preparedness and Response in the Arctic was an important first step.
• Preparing Bering Strait for increased sea traffic. As the Arctic warms, increased sea traffic is only a matter of time. The Bering Strait, which is only 50 miles wide at its narrowest point, lacks basic communication infrastructure, sea lane designation, and other critical features. This marks another important and urgent area of cooperation between the United States and Russia, even if dialogue at the highest political level is constrained. 

Can the Arctic be siloed?

There is no doubt that the current cooled climate between Russia and the other Arctic states, in particular the United States, complicates an ongoing dialogue. It is even true that it may prohibit a meaningful conversation about certain issues that have already been discussed. 

Skeptics will argue that it is unrealistic to isolate the Arctic from the wider realm of international relations. Though we agree, we don’t think leaders should shy away from political dialogue altogether. To the contrary, in complicated political times, the stakes are even higher: Leaders should continue existing dialogues where possible and go the extra mile to preserve what can be preserved. Russia’s desire for expanding its control over the Arctic shelf is entirely legitimate—and opens promising opportunities for conversations on issues of concern for many states, including China, for that matter.

Realists in the United States prefer to focus on expanding American military capabilities, their prime argument being that Russia has significantly more capacity in the Arctic. While we would surely agree that America’s current Arctic capabilities are woefully poor, as our colleagues have described, an exclusive focus on that shortcoming may send the wrong signal. 

We would therefore argue in favor of a combined strategy: making additional investments in U.S. Arctic capabilities while doubling down on diplomatic efforts to preserve the U.S.-Russian dialogue in the Arctic. That may not be easy, but given the tremendous success of a constructive approach in the Arctic in recent years, this is something worth fighting for. Figuratively speaking, that is.

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On April 24, 2015, the United States assumed chairmanship of the Arctic Council for a two-year term. Over the course of the last year, the United States has outlined plans within three central priorities: improving economic and living conditions for Arctic communities; Arctic Ocean safety, security, and stewardship; and addressing the impacts of climate change. Working with partners on the Council, U.S. leaders have moved forward policies ranging from joint efforts to curb black carbon emissions to guidelines for unmanned aerial systems conducting scientific research. With half of its short chairmanship behind it, what has the United States accomplished over the last 12 months? What work remains to be done?

On April 25, the Energy Security and Climate Initiative (ESCI) at Brookings hosted U.S. Special Representative for the Arctic Admiral Robert J. Papp, Jr. for a keynote address on the state and future of U.S. leadership in the Arctic. ESCI Senior Fellow Charles Ebinger moderated the discussion and audience Q&A.

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• The halfway point of the U.S. Arctic Council chairmanship: Where do we go from here?

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• The halfway point of the U.S. Arctic Council chairmanship: Where do we go from here?

The city of Chicago is increasing retrofits by using stimulus dollars to expand the opportunity for energy efficient living to low-income residents of large multi-family rental buildings. To aid this target demographic, often left underserved by existing programs, the city’s new Multi-Family Energy Retrofit Program introduces an innovative model for retrofit delivery that relies on private sector financing and energy service companies.

Chicago’s new Multi-Family Energy Retrofit Program draws on multi-sector collaboration, with an emphasis on private sector involvement supported by public and nonprofit resources. Essentially, the program applies the model of private energy service companies (ESCOs), long-used in the public sector, to the affordable, multi-family housing market. In this framework, ESCOs conduct assessments of building energy performance, identify and oversee implementation of cost-effective retrofit measures, and guarantee energy savings to use as a source of loan repayment.

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Cities and suburbs occupy well-defined roles within the discussion of poverty, opportunity, and social welfare policy in metropolitan America. Research exploring issues of poverty typically has focused on central-city neighborhoods, where poverty and joblessness have been most concentrated. As a result, place-based U.S. antipoverty policies focus primarily on ameliorating concentrated poverty in inner-city (and, in some cases, rural) areas. Suburbs, by con­trast, are seen as destinations of opportunity for quality schools, safe neighborhoods, or good jobs.

Several recent trends have begun to upset this familiar urban-suburban narrative about poverty and opportunity in metropolitan America. In 1999, large U.S. cities and their suburbs had roughly equal numbers of poor residents, but by 2008 the number of suburban poor exceeded the poor in central cities by 1.5 million. Although poverty rates remain higher in central cities than in suburbs (18.2 per­cent versus 9.5 percent in 2008), poverty rates have increased at a quicker pace in suburban areas.

Watch video of co-author Scott Allard explaining the report's findings » (video courtesy of the University of Chicago)

This report examines data from the Census Bureau and the Internal Revenue Service (IRS), along with in-depth interviews and a new survey of social services providers in suburban communities surrounding Chicago, IL; Los Angeles, CA; and Washington, D.C. to assess the challenges that rising suburban poverty poses for local safety nets and community-based organizations. It finds that:

Suburban jurisdictions outside of Chicago, Los Angeles, and Washington, D.C. vary sig­nificantly in their levels of poverty, recent poverty trends, and racial/ethnic profiles, both among and within these metro areas. Several suburban counties outside of Chicago experi­enced more than 40 percent increases of poor residents from 2000 to 2008, as did portions of counties in suburban Maryland and northern Virginia. Yet poverty rates declined for subur­ban counties in metropolitan Los Angeles. While several suburban Los Angeles municipalities are majority Hispanic and a handful of Chicago suburbs have sizeable Hispanic populations, many Washington, D.C. suburbs have substantial black and Asian populations as well.

Suburban safety nets rely on relatively few social services organizations, and tend to stretch operations across much larger service delivery areas than their urban counter­parts. Thirty-four percent of nonprofits surveyed reported operating in more than one subur­ban county, and 60 percent offered services in more than one suburban municipality. The size and capacity of the nonprofit social service sector varies widely across suburbs, with 357 poor residents per nonprofit provider in Montgomery County, MD, to 1,627 in Riverside County, CA. Place of residence may greatly affect one’s access to certain types of help.

In the wake of the Great Recession, demand is up significantly for the typical suburban provider, and almost three-quarters (73 percent) of suburban nonprofits are seeing more clients with no previous connection to safety net programs. Needs have changed as well, with nearly 80 percent of suburban nonprofits surveyed seeing families with food needs more often than one year prior, and nearly 60 percent reporting more frequent requests for help with mortgage or rent payments.

Almost half of suburban nonprofits surveyed (47 percent) reported a loss in a key rev­enue source last year, with more funding cuts anticipated in the year to come. Due in large part to this bleak fiscal situation, more than one in five suburban nonprofits has reduced services available since the start of the recession and one in seven has actively cut caseloads. Nearly 30 percent of nonprofits have laid off full-time and part-time staff as a result of lost program grants or to reduce operating costs.

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As expected, the latest data from the Census Bureau’s 2009 American Community Survey (ACS) confirm that the worst U.S. economic downturn in decades exacerbated trends set in motion years before, by multiplying the ranks of America’s poor. Between 2007 and 2009, the national poverty rate rose from 13 percent to 14.3 percent, and the number of people below the poverty line jumped by 4.9 million. Yet because the economic impact of the Great Recession was highly uneven across the nation, the map of U.S. poverty shifted in important ways over the past couple of years, with implications for both national and local efforts to alleviate poverty.

An analysis of poverty in the nation’s 100 largest metro areas, based on recently released data from the 2009 American Community Survey, indicates that:

The number of poor people in large metro areas grew by 5.5 million from 1999 to 2009, and more than two-thirds of that growth occurred in suburbs.  By 2009, 1.6 million more poor lived in the suburbs of the nation’s largest metro areas compared to the cities.

Between 2007 and 2009, the poverty rate increased in 57 of the 100 largest metro areas, with the largest increases clustered in the Sun Belt.  Florida metro areas like Bradenton and Lakeland, and California metro areas like Bakersfield, Riverside-San Bernardino-Ontario, and Modesto, each experienced increases in their poverty rates of more than 3.5 percentage points.

Poverty increased by much greater margins in 2009 than 2008, with cities and suburbs experiencing comparable rates of growth in the recession’s second year.  Between 2008 and 2009, cities and suburbs gained 1.2 million poor people, together accounting for about two-thirds of the national increase in the poor population that year.

Several metro areas saw city poverty rates increase by more than 5 percentage points, while many suburban areas experienced increases of 2 to 4 percentage points between 2007 and 2009.  The city of Allentown, PA saw a 10.2 percentage-point increase in its poverty rate, followed by Chattanooga, TN with an increase of 8.0 percentage points.  Sun Belt metro areas were among those with the largest increases in suburban poverty, including Lakeland, FL and Riverside-San Bernardino-Ontario, CA.

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The growth of suburban poverty over the past two decades raises questions about the ability of nonprofit organizations to adapt to this relatively new geography of metropolitan poverty. These organizations play multiple roles, including providing basic safety net services, connecting residents to new opportunities, and serving as advocates (and sometimes as organizers) for low-income communities.

Although federal, state, and local governments are often the primary funders of nonprofits, governments do not often take the lead in creating new organizational capacities or in coordinating capacity across political jurisdictions. In many regions, the local philanthropic community has become aware of these gaps in services for the poor and has sought to assist the nonprofit community in building capacity and expanding activities. Local foundations are experimenting with various strategies to address the growing dispersion of poverty.

This analysis combines an original data set of foundation grants for social services with in-depth interviews to assess the role of foundations in supporting the suburban social safety net in the Atlanta, Chicago, Denver, and Detroit regions. It finds that:

Suburban community foundations in the four regions studied are newer and smaller than those in core cities, despite faster growth of suburban poor populations. In the regions studied, most suburban community foundations began operating in the 1990s, and have not accumulated significant asset bases. Some larger city-based foundations have taken a regional approach, but face restrictions on the extent to which they can address growing need in poor suburban communities.

The share of foundation dollars targeted to organizations serving low-income residents varies widely across regions, but relatively few of those dollars are devoted to building organizational capacity in the suburbs. Chicago saw the largest share of foundation grant dollars go to organizations serving low-income people (60 percent), while Atlanta posted the lowest share (19 percent). Detroit was the only region where total grants to suburban-based human service providers were relatively comparable to their city-based counterparts.

Suburbs with high rates of poverty have substantially fewer grantees and grant dollars per poor person than either central cities or lower-poverty suburbs. Though metropolitan Atlanta has the highest rate of suburban poverty among the regions studied, it has the lowest rate of suburban grant-making per poor person. Denver’s results are a mirror image of Atlanta’s, with the lowest poverty rate and highest suburban grant-making per poor person.

Four types of strategies to build and strengthen the capacity of the suburban safety net are showing promise in these regions. Each region is engaging in four types of capacity building strategies: supporting existing regional organizations, creating new regional organizations, supporting regional networks, and establishing new suburban community foundations.

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• Media Memo

Ninety-three years ago yesterday, the Boston police force went on strike, leaving the city unprotected while the state scrambled to find replacements. Governor Calvin Coolidge’s declaration of support for the city—he said that “There is no right to strike against the public safety, anywhere, anytime”—established his national reputation that ultimately led to the presidency.

Public outrage at labor actions that compromise public safety has historically been a bipartisan affair.  Coolidge was a Republican but his actions earned the respect of Democratic President Woodrow Wilson, who hailed his re-election as Massachusetts governor as “a victory for law and order.” Nearly 20 years later, President Franklin Roosevelt shared his view that a strike by public employees of any sort is “unthinkable and intolerable.”

The impacts of the Chicago teacher strike that began today may not be as immediately obvious as the looting and vandalism that descended on Boston in 1919, but they are just as serious. Research from a large, urban school district found that teacher absenteeism has a negative impact on student learning in math.

But a strike doesn't leave students with substitute teachers—it leaves them without any school at all. Research on summer learning loss shows that being out of school has a disproportionate effect on low-income students. One recent study found that “while all students lose some ground in mathematics over the summer, low-income students lose more ground in reading, while their higher-income peers may even gain.” In other words, the consequence of being out of school is to increase the already unacceptably large achievement gap between low-income students and their affluent peers.

The American labor movement has made important contributions in areas ranging from workplace safety to child labor to employment discrimination. There are good reasons to believe that the public ought to accept higher coal prices resulting from a strike to protect the lives of miners. But the public should not tolerate damage to the education of disadvantaged students resulting from a strike over disagreements about teachers’ salaries, benefits, job security, and method of evaluation.

The Chicago Teachers Union’s differences with the city over how the public schools ought to be run may well be legitimate. But those battles should be fought in the court of public opinion and ultimately at the ballot box, not through strikes that come largely at the expense of poor children.

The United States exported and imported $4.0 trillion worth of international goods in 2014, making it the world’s second-largest trader, after China. The responsibility for moving all those products falls to the country’s 400-plus seaports, airports, and border-crossing facilities, though a smaller group does most of the country’s heavy lifting. In fact, ports in just 10 metropolitan areas move 60 percent of all international goods by value.

This level of concentrated port activity creates a spatial mismatch in the country’s trade flows. While a few ports handle a majority of international trade, few of the goods leaving or entering those ports start or end their journey in that port’s local market: 96 percent actually move to or from other parts of the United States. As a result, problems within and outside certain port facilities—whether a labor dispute like the recent West Coast port strike or congestion near Philadelphia’s seaport or airport—quickly become logistical costs borne by the entire country.

The 10 largest metropolitan port complexes represent a wide range of U.S. geographies, modal specialties, and international connections. Total volumes for these port complexes, listed below, are based on an aggregation of imports and exports across all sea, air, truck, rail, and pipeline facilities in each region. All data are from 2010, and you can find more detailed metrics within the Metro Freight interactive.

10. Chicago-Joliet-Naperville, IL-IN-WI

Total Value: $92.8 billion
Local Share: 4.6 percent
Top Trade Region: Asia Pacific ($41.5 billion)

A traditional Midwest powerhouse of production, metropolitan Chicago is home to a variety of industries and infrastructure assets that connect it to the Midwest and global marketplace. The proximity of factories, warehouses, and rail lines to its major port facilities, particularly O'Hare International Airport, places Chicago at a strategic crossroads for goods distribution.

9. San Francisco-Oakland-Fremont, CA

Total Value: $103.9 billion
Local Share: 4.4 percent
Top Trade Region: Asia Pacific ($77.6 billion)

The San Francisco metro area—and the Bay Area as a whole—may be more well-known as a center for tech innovation, but it also contains some of the largest port facilities in the country. The Port of Oakland and the Port of San Francisco  account for the bulk of water traffic ($55.3 billion overall) moving through the area, while Oakland International Airport and San Francisco International Airport help transport nearly $48.6 billion in electronics, precision instruments, and other high-value goods.

8. Seattle-Tacoma-Bellevue, WA

Total Value: $116.9 billion
Local Share: 8.2 percent
Top Trade Region: Asia Pacific ($89.4 billion)

The Seattle metro area plays a critical role cycling goods throughout the Pacific Northwest and the rest of the country, largely owing to the key connections its port facilities have forged with China ($47.9 billion) and Japan ($22.0 billion). Valuable transportation equipment and electronics represent a large chunk of these port volumes ($52.7 billion), although sizable amounts of machinery, textiles, and agricultural products are also processed through area facilities. The Port of Seattle and the Port of Tacoma are especially important in this respect, as they look to partner more closely in years to come.

7. Miami-Fort Lauderdale-Pompano Beach, FL

Total Value: $123.7 billion
Local Share: 2.0 percent
Top Trade Region: Latin America ($97.2 billion)

Miami is the country’s primary gateway to Latin America, especially when excluding petroleum-related trade moving through Gulf Coast ports. And while the region and state have made impressive investments at the Port Miami seaport, it is actually Miami International Airport that generates the most regional trade ($74.8 billion). Miami’s facilities are a key component of Florida’s statewide strategy to use trade and logistics to grow local industries.

6. Laredo, TX

Total Value: $124.4 billion
Local Share: 0.0 percent
Top Trade Region: NAFTA ($121.0 billion)

Laredo may only house 250,000 people, but it might be the most important Texas metro area you’ve never heard of, considering that virtually every international good passing through it heads somewhere else in the U.S. The border town is the southernmost point of Interstate 35—the so-called NAFTA superhighway—and handles almost half of U.S./Mexican surface trade. With automotive and other supply chains continuing to stretch across the binational border, Laredo is poised to grow in importance over the coming years.

5. Anchorage, AK

Total Value: $137.4 billion
Local Share: 0.2 percent
Top Trade Region: Asia Pacific ($136.0 billion)

Anchorage may be thousands of miles from the closest U.S. market, but it has a long legacy as a major connector to the Pacific marketplace, resting less than 9.5 hours by air from 90 percent of the industrialized world. In particular, Ted Stevens International Airport was the cargo hub for Northwest Airlines Cargo, once the country’s largest carrier, and still has a vibrant freight business led by FedEx Express and UPS hubs. Continued growth in high-value, low-weight goods trade with Asia can only benefit Anchorage’s cargo business.

4. Houston-Sugar Land-Baytown, TX

Total Value: $168.1 billion
Local Share: 10.6 percent
Top Trade Region: Latin America ($48.3 billion)

As one of the world’s leading centers for energy and chemical production, the Houston metro area—along with other parts of the Gulf Coast region—depends on an enormous set of seaport facilities to transport these goods. Collectively, $100.6 billion of energy products and chemicals/plastics pass through these ports annually, accounting for about 60 percent of all their international goods. Stretching more than 25 miles in length and situated close to the Gulf of Mexico, the Port of Houston houses many of the area’s marine terminals.

3. Detroit-Warren-Livonia, MI

Total Value: $206.7 billion
Local Share: 4.9 percent
Top Trade Region: NAFTA ($186.6 billion)

Although the Detroit metro area contains a number of freight facilities, such as the Port of Detroit, that unite the Great Lakes region, its land border crossings to Canada make it one of the busiest sites of commerce in North America and beyond. Each year, nearly $175.8 billion in international goods travel by truck and rail between Detroit and Canada—relying almost exclusively on the aging Ambassador Bridge and the Michigan Central Railway Tunnel. The planned New International Trade Crossing (NITC), however, holds promise for expanding capacity at this crucial junction.

2. New York-Northern New Jersey-Long Island, NY-NJ-PA

Total Value: $349.2 billion
Local Share: 9.7 percent
Top Trade Region: Europe ($153.9 billion)

The Port of New York and New Jersey, which spans several marine facilities including the Port Newark-Elizabeth Marine Terminal, is one of the biggest freight assets in the country, cementing the New York metro area’s role as the chief East Coast seaport complex ($185.0 billion). Remarkably, almost the same value of goods ($162.7 billion) flows through the area’s expansive air cargo facilities, including John F. Kennedy International Airport and Newark Liberty International Airport. Combined with New York’s enormous amount of global corporate headquarters, New York is the country’s most globally fluent metro area.

1. Los Angeles-Long Beach-Santa Ana, CA

Total Value: $417.5 billion
Local Share: 6.0 percent
Top Trade Region: Asia Pacific ($362.2 billion)

The Los Angeles metropolitan area not only boasts two of the largest seaports in the Western Hemisphere—the Port of Los Angeles and the Port of Long Beach—but also has one of the busiest cargo airports nationally, Los Angeles International Airport (LAX). Together, these port facilities channel a wide range of international goods like electronics, machinery, and textiles across the country, many of which come from Asian trade partners like China ($211.3 billion) and Japan ($58.5 billion). Still, only a fraction of these goods actually start or end locally (6 percent), speaking to the port complex’s extensive geographic reach in the U.S.

Last month, a team from the Metropolitan Policy Program, along with a delegation from the city of Chicago, traveled to Mexico City as part of the Global Cities Economic Partnership (GCEP). Launched at a 2013 event sponsored by the Global Cities Initiative (GCI), this novel partnership aims to expand growth and job creation in both cities  by building on complementary economic assets and opportunities.

Together with representatives from World Business Chicago, the Illinois governor’s office, and members of Chicago’s tech startup scene (organized by TechBridge), the Brookings team arrived in Mexico City just as, after a 20 year debate, reforms to devolve greater autonomy and powers to the largest metropolitan area in the Western Hemisphere were finalized.  Central to that reform is Mexico City’s enhanced ability to plan and implement its own economic development policy, underscoring the growing importance of city-regions assuming roles once solely the province of state and national governments: fostering trade, investment, and economic growth.

Chicago and Mexico City illustrate this trend through the GCEP. Emerging from a GCI analysis that identified unique economic, demographic and and social connections between the cities, Chicago Mayor Rahm Emanuel and Mexico City Mayor Miguel Angel Mancera established a novel city-to-city collaboration. Since signing the agreement, government, business, and civic leaders in both cities have been experimenting with new approaches to jointly grow their economies.  They have tried to foster more trade and investment within shared industry clusters; link economic development support services; and leverage similar strengths in research, innovation, and human capital.

This trip to Mexico City focused on one of GCEP’s early outcomes, a formal partnership between Chicago tech business incubator 1871 and Mexico City incubator Startup Mexico (SUM) that facilitates the early internationalization of firms in both cities. Both organizations advanced the creation of a residency program that will enable entrepreneurs from both incubators to have a presence in each other’s markets.

The GCEP approach of city-to-city global engagement has inspired other GCI participants to try their own models, forming economic alliances to ease global navigation and engagement. San Antonio, Phoenix, and Los Angeles also crafted agreements with Mexico City, each focused on different opportunities built off their distinctive economic assets and relationships. Portland and Bristol have investigated how to leverage their comparable “green city” reputations in the U.S. and U.K., connecting mid-size firms in their unique sustainability clusters for collaboration on research and joint ventures. Similarly, San Diego and London are testing how to promote synergies among companies, academic centers, investors, and workers in their shared life sciences subsectors such as cell and gene therapy.

Home to half of the world’s population, cities generate about three quarters of the world’s GDP, and now serve as the hubs for the growth in global flows of trade, capital, visitors, and information. The future prosperity and vitality of city-regions demands finding new approaches that take full advantage of these global connections.  

The Global Cities Economic Partnership emerged from work supported by the Global Cities Initiative: A Joint Project of Brookings and JPMorgan Chase. Brookings recognizes that the value it provides is in its absolute commitment to quality, independence, and impact. Activities supported by its donors reflect this commitment and the analysis and recommendations are solely determined by the scholar

Image courtesy of Maura Gaughan

This inaugural issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, includes papers on the trade policies that would do the most to enhance India’s future growth prospects, analyses of recent developments in India’s balance of payments and an examination of the performance of the Indian banking system. The editors' summary appears below, and you can download a PDF version of the volume, purchase a printed copy, or access individual articles by clicking on the following links:

Download India Policy Forum 2004 - Volume 1 (PDF) »
Purchase a printed copy of India Policy Forum 2004 - Volume 1 »

Download individual articles:

• India's Trade Reform, by Arvind Panagariya
• Should a U.S.-India FTA Be Part of India's Trade Strategy, by Robert Z. Lawrence and Rajesh Chadha
• Foreign Inflows and Macroeconomic Policy in India, by Vijay Joshi and Sanjeev Sanyal
• India's Experience with a Pegged Exchange Rate, by Ila Patnaik
• Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms, by Kenneth Kletzer
• Banking Reform in India, by Abhijit Banerjee, Shawn Cole and Ester Duflo

The India Policy Forum (IPF) is a new journal, jointly promoted by the National Council of Applied Economic Research (NCAER), New Delhi, and the Brookings Institution, Washington, D.C., that aims to present high-quality empirical analysis on the major economic policy issues that confront contemporary India. The journal is based on papers commissioned by the editors and presented at an annual conference. The forum is supported by a distinguished advisory panel and a panel of active researchers who provide suggestions to the editors and participate in the review and discussion process. The need for such real-time quantitative analysis is particularly pressing for an economy like India’s, which is in the process of rapid growth, structural change, and increased involvement in the global economy. The founders of the IPF hope it will contribute to enhancing the quality of policy analysis in the country and stimulate empirically informed decisionmaking. The style of the papers, this editors’ summary, and the discussants’ comments and general discussions are all intended to make these debates accessible to a broad nonspecialist audience, inside and outside India, and to present diverse views on the issues. The IPF is also intended to help build a bridge between researchers inside India and researchers abroad, nurturing a global network of scholars interested in India’s economic transformation.

The first India Policy Forum conference took place at the NCAER in Delhi on March 26–27, 2004. In addition to the working sessions, the occasion was marked by a public address given by Stanley Fischer, vice chairman with Citigroup International and a member of the IPF advisory panel. This inaugural issue of the IPF includes the papers and discussions presented at that conference. The papers focus on several contemporary policy issues. The first two papers provide alternative perspectives on the trade policies that would do the most to enhance India’s future growth prospects in the context of ongoing developments in the global trading system. The three papers that follow are devoted to an analysis of recent developments in India’s balance of payments and their implications for the future exchange rate regime, the integration of exchange rate policy with other aspects of macroeconomic policy, and capital account convertibility, respectively. The sixth paper is devoted to an examination of the performance of the Indian banking system and the implications of the dominant role of government-run banks.

India's Trade Reform, by Arvind Panagariya

The first paper, by Arvind Panagariya, provides a broad review of India’s external sector policies; the impact of these policies on trade flows, efficiency, and growth; and the future direction trade policies should take. Since trade policies are a means to an end, namely faster growth and improved efficiency, and since trade policies support other domestic policies, Panagariya’s review necessarily ranges into these areas as well. Finally, to place India’s performance in perspective, Panagariya makes extensive comparisons throughout between Indian and Chinese outcomes over the past two decades (1980–2000), a period when both economies have chosen to reintegrate into the world economy.

India’s growth experience since 1950 falls in two phases. The first thirty years were characterized by steady growth of around 3.5 percent; thereafter growth has tended to stay in the 5 to 6 percent range. Panagariya links this differential growth performance with the imposition and subsequent relaxation of microeconomic controls, particularly in the external sector. In turn he divides these external sector policies into three phases. Between 1950 and 1975 the trend was toward virtual autarky, particularly after a balance of payments crisis in 1956–57. This was succeeded by a period of “ad hoc liberalization” starting around 1976, when reform of quantitative restrictions on trade was complemented by deregulation of industrial licensing in certain sectors. A further balance-of-payments crisis in the period from late 1990 to early 1991, concurrent with a general election, provided the background for a switch to deeper and more systematic liberalization, which, in fits and starts, continues today.

In the merchandise trade area the focus of reform has been to reduce tariff levels, particularly on nonagricultural goods. This has been done by gradually reducing the peak rate and reducing the number of tariff bands. In 1990–91 the peak rate stood at 355 percent, while the simple average of all tariff rates was 113 percent. By early 2004 the peak rate on individual goods was down to 20 percent, though there were notable exceptions, such as chemicals and transport equipment. Similarly, there has been less than ideal progress in reducing end-user and other exemptions. In nonindustrial areas there has been substantial liberalization of trade (and investment) in services, but following the OECD example, less in agriculture.

Panagariya next reviews the impact of this liberalization on trade flows, on efficiency, and on growth, in many cases using China as a benchmark. India’s share in world exports of goods and services—which had declined from 2 percent at Indian independence in 1947 to 0.5 percent in the mid-1980s—bounced back to 0.8 percent in 2002, implying that for roughly twenty years India’s trade has grown more rapidly than world trade. In addition, the deeper reforms of the 1990s yielded a pick-up of almost 50 percent over the previous decade, from 7.4 percent to 10.7 percent. Encouraging though these numbers are in light of India’s past performance, they pale in comparison with the Chinese record over the same period. Aside from any issues that may arise in the measurement of Chinese GDP at a time of rapid institutional and economic change, the combined share of exports and imports of both goods and services rose in China from 18.9 percent in 1980 to 49.3 percent in 2000, according to World Bank data. For India, the comparable numbers were 15.9 percent (in 1980) and 30.6 percent (in 2000).

The increase in India’s trade intensity has been accompanied by significant shifts in composition. The most dramatic has been the increased share of service exports in the 1990s. Within industry, exporting sectors with above-average growth tended to be skill- or capital-intensive rather than labor-intensive, while on the import side the share of capital goods imports declined sharply. In the area of services, rapid growth was exhibited by software exports and recorded remittances from overseas Indians. However, tourism receipts remain below potential. With regard to trade partners, the main shift over the 1990s was a move away from Russia toward Asia, particularly developing Asia. An interesting recent development has been the rapid expansion of India’s trade with China.

Panagariya then reviews the evidence on the impact of liberalization on static efficiency and on growth. One common approach is to use a computable general equilibrium (CGE) model to estimate the effects of the removal of trade distortions. The one study cited estimates the impact as raising GDP permanently by 2 percentage points. Additional domestic liberalization could raise this figure to 5 percentage points. Panagariya argues, however, that such models miss some key sources of gains. He cites two in particular: the disappearance of inefficient sectors and improvements in product quality. In addition, disaggregated analysis at the five-digit SITC level reveals far more dynamism in product composition of both exports and imports than is revealed at the two-digit level. This suggests greater gains from trade and improved welfare from enhanced choice than is captured in more aggregate models.

The links between liberalization and aggregate growth—or growth in total factor productivity (TFP)—have been controversial both in India and elsewhere in the emerging economies of Asia. In the case of India, the focus has been almost exclusively on manufacturing. After reviewing several studies, which admittedly differ in methodology and data quality, Panagariya judges that the weight of the evidence indicates that trade liberalization has led to productivity gains. Notwithstanding this reasonably positive assessment, Panagariya reminds us that overall, Indian industry’s performance in the 1980s and 1990s has been pedestrian, particularly compared with that of services.

The poor performance of Indian industry and the stronger growth performance of Chinese industry form the backdrop for Panagariya’s final section, on future policy. He discusses four issues: domestic policies bearing on trade; autonomous liberalization; regional trade agreements; and India’s participation in multilateral negotiations. With regard to the first, the central question for Panagariya is why Indian industry’s response to liberalization has been more sluggish than China’s. Panagariya attributes this in part to differences in economic structure but also to differences in the two countries’ domestic policies. He argues that it is easiest to expand trade in industrial products, and it is easier to do so if the industrial sector represents a large share of national value added. As far back as 1980, the share of industry in China was 48.5 percent, while in India it was half that, at 24.2 percent. Two decades later things are not very different. Panagariya makes a further interesting point: a relatively small industrial sector also reduces the capacity of the economy to absorb imports, leading to a tendency toward exchange rate appreciation (although even China has not been immune from this tendency). He concludes that it is imperative to stimulate industrial growth and cites reform in three areas as being essential: reduction of the fiscal deficit; reduction and ultimately elimination of the list of manufactured products “reserved” for small-scale industry; and reform of the country’s labor laws, which make reassignment or retrenchment of workers prohibitively difficult in the so-called formal or organized sector.

Turning next to autonomous trade reform, Panagariya is critical of the view, widely held in India, that the tariff structure ought to favor final goods over intermediates. He also notes that the current tariff structure remains riddled with complexity. He urges the authorities to move quickly to a single uniform tariff of 15 percent for nonagricultural goods and to move to a uniform tariff of 5 percent by the end of the decade. With regard to agriculture, Panagariya points out that India stands to gain from autonomous tariff liberalization given its potential as an agricultural exporter. He also addresses the issue of “contingent protection,” wherein India’s liberal use of antidumping regulations has clearly had protectionist intent. Panagariya urges changes in the antidumping procedures currently in place and also greater use of safeguard measures, as they are applied on a nondiscriminatory basis to all trading partners.

While India has traditionally taken comfort in a multilateral rule-based system of international trade, it has more recently embarked on an ambitious program of regional trade negotiations. It has signed free trade area (FTA) agreements with Sri Lanka and Thailand and is in the advanced stages of negotiating an FTA with Singapore. Panagariya analyzes the global, regional, and domestic factors that have brought about this shift in strategy—essentially the weakening of the U.S. commitment to multilateral negotiations, together with political imperatives. Panagariya observes that for a relatively protected economy, trade diversion and the associated revenue loss should be important concerns. He is also concerned that preoccupation with FTAs diverts attention from both unilateral liberalization and multilateral negotiations, each of which yields greater return for the effort expended. However, Panagariya concedes that there is a strategic case for FTAs, both to exert leverage in the multilateral sphere and to create a template that reflects India’s interests in future bilateral and multilateral negotiations. In this context he is critical of the template developed in the agreement on the South Asian Free Trade Area (SAFTA), which, in his view, is cluttered with many nontrade issues. In the specific case of a U.S.-India FTA, he believes that there is a strong case for an agreement in services, with mutually beneficial exchange of market access.

The paper ends with a discussion of India’s interests in ongoing multilateral trade negotiations. Panagariya’s main point is that India has a strong interest in successful conclusion of the Doha Round and could agree to the U.S. proposal aimed at eliminating tariffs on industrial goods by 2015. As noted before, India also has interests in improved market access in agriculture; given the considerable water in its bound tariffs, some concessions should be possible, particularly if accompanied by reductions in subsidies by rich countries.

Should a U.S.-India FTA Be Part of India's Trade Strategy, by Robert Z. Lawrence and Rajesh Chadha

The 1990s and the new millennium have seen a massive proliferation of preferential trade arrangements (PTAs), which typically lead to free trade among two or more countries, as, for example, under the North American Free Trade Agreement (NAFTA). Until recently, Asian countries had more or less stayed away from these arrangements, but this is changing rapidly, with many countries in the region now forging free trade areas. In their paper, Robert Lawrence and Rajesh Chadha assess the likelihood and benefits of the negotiation of a free trade area between India and the United States. Like Panagariya, Lawrence also embeds his discussion of India’s trade policy within the framework of the larger Indian reform effort.^[1] Following Ahluwalia, he characterizes Indian reform since 1991 as incremental, not radical.^[2] While there has been deepening consensus about the broad direction of reform within the policy elite, excessive clarity on endpoints and on the pace of transition is seen to be politically risky. Trade policy reform has been an important part of this liberalization effort, and it has been similarly characterized by a clear direction but fitful implementation and shifting promises as to endpoints.

Lawrence accepts that this strategy has been relatively successful in producing steady growth without major policy reversals or financial crises over the last decade. Yet, like Panagariya, he notes that trade reform is a job only half done. India’s tariff rates remain among the world’s highest, and there remain significant barriers to foreign investment. Within India, there continues to be political resistance to liberalization. Lawrence asks what the best trade and reform strategy for India is now, given the tasks yet to be accomplished.

Lawrence articulates three options available to India at this time: continued incremental unilateralism dictated, as in the past, by domestic concerns and feasibility; more active engagement with multilateral negotiations through the World Trade Organization (WTO); and what he calls a multitrack approach, whereby deeper bilateral free trade agreements complement the first two channels. Within this larger context the specific question he explores in depth is what role might be played by an FTA between India and the United States. He recognizes that consideration of such an FTA is at best at a nascent stage in official circles and that it is far from being an idea whose time has come. Nonetheless, his core thesis is that given India’s domestic reform goals, a multitrack approach centered on a U.S.-India FTA would be superior to excessive reliance on the WTO, given likely outcomes under the ongoing Doha Round. This is the argument that the paper attempts to substantiate.

Lawrence first considers a purely defensive motive for such a FTA. From this perspective, the key issue is to establish a legal and institutional framework for keeping trade in information technology (IT) services free. Noting the rapid growth in India’s export of such services, Lawrence cites studies that suggest that this trade is still in its infancy. Given that the United States is currently the destination of two-thirds of India’s IT services exports—and that this share could well be maintained—trade between the United States and India has the potential to become one of the most dynamic examples of trade in global commerce.

Will this growth be allowed to take place? Protectionist pressures in the United States already are strong. Outsourcing is headline news in the United States, and federal and state governments are taking politically visible stands to restrict the practice under government contracts. While some of this is undoubtedly election year politics, preserving access for India in the U.S. market is a genuine challenge. Lawrence explores various options available to India to preserve its access, including through the General Agreement on Trade in Services (GATS) agreement within the WTO. He notes that GATS operates on a positive list approach, which can create some ambiguity as to what forms of market access have been bound. By contrast, services liberalization in U.S. bilateral agreements already uses a negative list approach: trade is allowed unless it has specifically been prohibited.

Lawrence then explores the possibility, from the U.S. perspective, of an FTA with India. He notes that the United States first moved away from exclusive reliance on multilateral negotiations as far back as the 1980s, when it signed FTAs with Canada and Israel, followed by NAFTA in 1993. Under the Bush administration the pace of negotiation of bilateral agreements has accelerated dramatically. Agreements with Chile, Singapore, and Jordan have been implemented; those involving the Central American Free Trade Area (CAFTA), Morocco, and Australia have been completed; and numerous others are either under active negotiation or planned.

In this environment Lawrence believes that an FTA with India would be seen by the U.S. authorities as being of great strategic interest in the larger U.S. negotiating strategy but also politically difficult to achieve, given the current mood in Congress. But he is skeptical of the possibility that such an agreement could be restricted to services alone—as proposed, for example, by Panagariya and by a recent task force of the Council on Foreign Relations. The United States is unlikely to forgo the opportunity of obtaining preferential access for the exports of its goods to the Indian market. In addition, dropping all goods trade in an agreement with India would create a difficult precedent for the United States in its other FTA negotiations, in which, with few exceptions, there have not been sectoral opt-outs.

Accordingly, in his discussion Lawrence deals with the case for a comprehensive U.S.-India FTA with most of the features of those that the United States already has concluded. These include a negative list for services; investment provisions with a few sectoral exclusions; full national treatment for U.S. companies; intellectual property rules that might be more comprehensive than those in the WTO; and additional provisions relating to labor, environmental standards, technical barriers, and government procurement. While the phase-in periods may differ for the two sides, once the agreement was fully implemented (generally in fifteen years), the obligations would be symmetric.

Lawrence readily concedes that willingness to sign an FTA agreement of this scope with the United States would be a radical departure for India in a number of respects. While much Indian trade liberalization has been unilateral, India has so far been a strong advocate of multilateral trading rules, but there too its efforts have concentrated on obtaining special and differential treatment for developing countries. As Panagariya has also noted, India has only lately entered the game of bilateral FTAs, so far with countries in Asia, but even in terms of goods trade these have not been comprehensive. A U.S.-India FTA would have major implications for India’s trade and domestic policies. It is the positive (or offensive) case for such a radical shift that Lawrence next examines.

He starts by offering some hypotheses on the political economy of liberalization. At the beginning, an opportunistic and piecemeal approach may be necessary to create constituencies for liberalization. But unilateralism carries the risk of reversal, and such policy uncertainty can inhibit the private investment decisions needed to shift the economy in the direction of its comparative advantage. Trade agreements, whether bilateral, regional, or multilateral, can impart credibility to commitments by the home government, making it more likely that liberalization will be successful. Such enhanced credibility is not costless, however. In contrast to an incremental approach, a comprehensive agreement means that many political battles have to be conducted simultaneously. This drawback can be offset by the fact of reciprocity, which can be used to develop coalitions of exporters who favor the trade reform. A further set of allies is provided by proponents of domestic reform, who can argue that the domestic reforms necessary for domestic growth can also deliver improved access to international markets. Lawrence believes that such a strategy was followed by the Chinese in connection with their accession to the WTO.

If these are some of the benefits of comprehensive reciprocal agreements, the question of what type of reciprocal agreements, multilateral or bilateral, remains. This is the choice addressed by Lawrence in the remainder of the paper. In making his assessment, Lawrence uses as a yardstick the impact of each of the two routes in assisting India to undertake changes in its own interest while avoiding constraints that have the potential to damage its welfare.

In order to assess the impact of a U.S.-India FTA, Lawrence examines some of the FTAs that the United States has recently negotiated. His review makes it clear that the institutional changes needed in the Indian economy would indeed be deep but in most areas they would prod Indian policymakers to move in directions that are inherently desirable. A particular concern of Indian policymakers is the introduction of labor and environmental standards through an FTA, and Lawrence clears up several misconceptions in this area. Recent bilateral agreements place the emphasis on each government enforcing its own domestic environmental and labor laws and not weakening those laws or reducing protections to encourage trade or investment. While these obligations are backed by the dispute settlement provisions of the agreements, trade measures may not be used to retaliate. On balance, implementing a U.S.-India FTA at this time would probably help to bolster and accelerate many dimensions of economic reform, but Lawrence notes that the benefits depend crucially on taking a range of complementary actions. Failure to do so could lead to conditions that were worse than before.

Lawrence then examines whether a successful conclusion to the Doha Round could deliver equivalent benefits to the cause of Indian reform. In so doing he notes that those who argue for exclusive reliance on multilateral liberalization compare actual FTAs with an idealized version of multilateral liberalization. But actual achievement under multilateral liberalization is heavily conditioned by the specific rules of trade negotiations, which may not actually result in significant domestic liberalization at all. As a developing country, India benefits from the “special and differential treatment” provisions of the General Agreement on Tariffs and Trade (GATT), while benefiting from the most-favored nation provisions of the multilateral system. An additional institutional feature is the gap between applied and bound tariffs, which is particularly large where agricultural goods are concerned. A final feature is what Lawrence (following Jagdish Bhagwati) calls “first difference” reciprocity, where the offers made by each nation are measured against their protection levels at the beginning of the round.

Taking these elements into account and reviewing the actual performance of past rounds in reducing industrial tariffs, Lawrence comes to the strong conclusion that the current WTO system actually impedes a developing country like India from using WTO agreements to support meaningful liberalization; he also believes that the diffuse reciprocity involved in the most-favored nation system is not a strong catalyst for rallying exporter interests in favor of import liberalization.

Having provisionally concluded that an FTA would be of greater assistance than exclusive reliance on multilateral negotiations, Lawrence then explores the benefits to India of blending the two approaches in what he calls a multitrack approach. In his view, a U.S.-India FTA would certainly make India a more attractive negotiating partner for third countries hoping to match the access obtained by U.S. firms. Equally, assuming that it preceded the conclusion of the Doha Round, willingness to sign an FTA with the United States would also improve India’s negotiating credibility in the multilateral sphere. India could then challenge developed countries to improve their own offers dramatically by indicating a willingness to engage in extensive multilateral liberalization itself. A comprehensive FTA with India would also be of strategic importance to the United States in its current policy of competitive liberalization. This would strengthen India’s hand in its negotiations with the United States, while strengthening the U.S. hand in negotiating with other significant but reluctant partners.

The paper ends with some quantitative welfare simulations undertaken by Lawrence’s coauthor, Rajesh Chadha of the NCAER, using a computable general equilibrium model of world production and trade developed by the NCAER and the University of Michigan. The simulations deal only with the impact of liberalization on trade in goods. The model is designed to capture the long-run impact of an agreement. More crucially, it is a real model that holds employment and the trade balance constant; as such it captures the second-round adjustments needed to restore full employment in the economy following an initial trade shock.

A U.S.-India FTA is compared first with the current situation and then with a number of counterfactuals. The results reveal that aggregate welfare gains are greatest under multilateral liberalization, next greatest under unilateral liberalization in each country, and least under a bilateral FTA, but they note that even in the last case the effects are positive. The results also point out asymmetries between the United States and India in unilateral and multilateral liberalization, given the differences in the openness of the two economies. Indian and world welfare both rise significantly when India liberalizes unilaterally, while for the United States the greatest welfare gains flow from multilateral liberalization.

Lawrence concludes that the more difficult decision facing India today is whether to opt for reciprocal approaches in lieu of the unilateral approach that it has traditionally pursued. There are gains in credibility to be achieved, but these could entail reduced policy space and require a significant agenda of complementary reform to achieve their full effect. Should India choose to pursue the reciprocal route, he suggests a U.S.-India FTA as worthy of serious consideration, precisely because of its comprehensive and deep character.

Foreign Inflows and Macroeconomic Policy in India, by Vijay Joshi and Sanjeev Sanyal

India has had a turnaround in its balance of payments in recent years, with a swing in the current account from a deficit to a surplus and rapid growth in the capital account surplus. It has used those inflows to build up substantial holdings of foreign exchange reserves that now stand at $120 billion. While the initial reserve accumulation was welcome insurance against the risk of unanticipated future outflows, the current level is adequate to meet any foreseeable challenge, and policymakers need to develop an exchange policy that goes beyond simple reserve accumulation. Should India accelerate the process of capital account liberalization, perhaps allowing the export of capital by residents? Should it allow an appreciation of the exchange rate or speed up the liberalization of the trade regime? Above all, how should the exchange policy be integrated with the broader concerns of domestic economic policy?

In their paper, Vijay Joshi and Sanjeev Sanyal provide a broad review of the external aspects of Indian macroeconomic policy over the past decade. They use that review as the backdrop for a discussion of the policy options open to India in the future, posing the question of how economic policy should respond to the continuation of the strong balance-of-payments position of recent years. In their answer, they argue in favor of a combination of accelerated import liberalization on the external side and domestic fiscal consolidation. In particular, they view trade liberalization, which provides a means of absorbing continued capital inflows without constraining the competitiveness of the export sector, as an alternative to exchange rate appreciation.

In reviewing the economic events of the 1990s, they emphasize the degree to which India relied on an extensive system of capital controls. Foreign direct investment and portfolio investment inflows were gradually liberalized and foreign investors could freely repatriate their investments, but capital outflows by residents were prohibited. Offshore borrowing and lending by Indian companies and banks were also strictly limited. The capital controls allowed Indian monetary policy to maintain a relatively fixed exchange rate regime with minimal conflict with domestic economic policy. India’s restrictive measures on the capital account, reluctance to permit short-term foreign borrowing, and strong accumulation of foreign exchange reserves allowed it to escape any serious consequences from the Asian financial crises.

By accumulating foreign reserves over the decade, India passed up the opportunity to use capital inflows to finance a larger current account deficit. Joshi and Sanyal argue that this policy imposed relatively small costs in terms of forgone investment and growth. The reserve accumulation averaged 1.2 percent of GDP annually, and even if all of the accumulation had been used alternatively to purchase investment goods, the incremental impact on economic growth would have been small. This conclusion is in sharp contrast to the claims of others that foreign reserve accumulation imposed large costs in terms of forgone growth.

Overall, Joshi and Sanyal believe that the external aspects of Indian economic policy were well executed during the 1990s. However, the ample level of foreign exchange reserves and the continuation of strong capital inflows present a more difficult policy choice going forward. The current policy of sterilized intervention in exchange markets has outlived its usefulness, and further additions to reserves will impose rising fiscal costs with few benefits. At the same time, the authors oppose exchange rate appreciation because of its negative impact on export competitiveness. An intermediate policy of continued intervention in the foreign exchange market but without any attempt at sterilization would translate into an easing of domestic monetary policy and higher growth in the short run. However, they fear that it would quickly lead to increased inflationary pressures, and the resulting rise in the real exchange rate would be as unattractive from the export perspective as outright nominal appreciation.

Instead, Joshi and Sanyal argue for a mixed strategy that combines a faster rate of import liberalization on the external side with domestic fiscal consolidation. A rise in imports would provide a means of absorbing the excess capital inflows with no loss of export competitiveness. Since India’s tariff structure is among the world’s highest, the policy would also intensify the competitive pressures on the import-competing industries and strengthen incentives to raise productivity. The constraining factor is the negative public revenue impact of reductions in tariffs, but that is consistent with greater reliance on an expanded value-added tax to meet the revenue needs of both the central government and the states.

They stress the importance of action on the fiscal side because of fear that maintaining the large deficit will crowd out investment and slow the pace of growth in future years. A combination of fiscal contraction and monetary expansion would produce lower interest rates with strong incentives for growth. The greater foreign and public saving would provide the resources necessary to support the higher rate of investment and growth.

Finally, Joshi and Sanyal reflect a strong shift in professional sentiment in their lack of enthusiasm for further liberalization of the capital account. They argue against liberalization of the restrictions on capital outflows by residents, based on the risks they pose in the event of adverse future shocks. In fact, they conclude with a willingness to use Chilean-type taxes in the event that inflows of foreign capital should intensify.

India's Experience with a Pegged Exchange Rate, by Ila Patnaik

In a paper that is largely devoted to a positive analysis of the experience with exchange rate management in India, Ila Patnaik examines the reactions of the monetary authority to the changing external environment. The exchange rate plays a central role in the economic policy of most emerging economies, as monetary policy is torn between a focus on stabilizing the domestic economy and maintaining an exchange rate that is consistent with export competitiveness. In a world of capital controls, it is possible to manage both of these goals simultaneously, but once the economy is fully open to the free inflow and outflow of capital, monetary policy must choose between the external and the internal balance. Over the 1990s, Indian monetary policy operated in a transitional phase, as it only gradually reduced its restrictions on capital account transactions. Since 1993, the external value of the rupee has been determined by market forces, but the central bank intervenes extensively to maintain a stable rate vis-à-vis the U.S. dollar. The continuation of partial controls on capital flows provides some room for an independent monetary policy.

Patnaik focuses on two periods of substantial net capital inflows that necessitated large-scale intervention by the central bank to prevent currency appreciation. The first was a relatively short episode extending from June 1993 to November 1994; the second lasted from August 2001 until at least the middle of 2004. Despite official protestations to the contrary, Patnaik’s empirical analysis demonstrates that India is best characterized as operating a tightly pegged exchange rate over the full period. Her paper explores the extent to which the focus on the exchange rate limited the operation of a monetary policy directed at stabilizing the domestic economy.

The first period began with an easing of the restrictions on inflows of portfolio capital in early 1993. The result was a sharp surge of capital inflows and private expectations of a rise in the exchange rate. However, the Reserve Bank of India (RBI) chose to purchase a large portion of the inflow to prevent appreciation. The bank also acted to sterilize a portion of the inflow, financing some purchases through the sale of government debt. However, the lack of liquidity in the bond market restricted the efforts at sterilization and led the bank to finance much of its purchases through an expansion of reserve money. It attempted to offset the inflationary effects of a rapid growth in the monetary base through a series of increases in the cash reserve ratio. However, the net result was still a significant acceleration of growth in the money supply and, at least in the early months, a decline in interest rates. Despite the small size of the external sector and the limited openness of the capital account, the episode represented India’s first experience with the partial loss of monetary policy autonomy, dictated by the need to intervene in the currency market.

The second episode, beginning in the summer of 2001, was triggered by a swing in the current account from deficit to surplus. Increased capital inflows played a significant role only in later years. Again, the RBI intervened to prevent appreciation, and the exchange rate actually depreciated slightly up to mid-2002. This time around, the market for debt was considerably more developed. The bank was able to finance nearly all of its purchases of foreign currency through the sale of government debt instruments, avoiding use of the currency reserve ratio. There was little or no acceleration of growth in reserve money, and the growth of a broad-based measure of the money supply (M3) actually slowed. However, the RBI did not attempt to hold the exchange rate completely fixed after the summer of 2002, opting instead for a small but steady appreciation. Capital inflows also began to accelerate at the same time, perhaps motivated by currency speculation.

The two episodes differ in the extent to which the RBI was able to engage in sterilizing interventions to avoid any conflict with its policies for domestic stabilization. Patnaik’s review suggests that controls on the capital account are still sufficient to permit considerable discretion in the conduct of domestic monetary policy. To date, Indian policymakers have opted to prevent the capital inflow from translating into a current account deficit. However, the sustainability of the bank’s interventions in future years is debatable because the fiscal costs of accumulating additional reserves are rising.

Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms, by Kenneth Kletzer

The paper by Kenneth Kletzer offers a third perspective on India’s exchange rate regime, focusing on the issue of capital account convertibility. Should India accelerate the pace of its liberalization of capital account transactions? Kletzer views this as a particularly critical decision in light of a history of severe repression of domestic financial markets. He points to numerous international examples in which liberalization led to large financial inflows followed by equally abrupt outflows and financial crisis. In his paper, he lays out the conditions necessary to achieve a successful policy for capital account liberalization.

Kletzer begins with a review of the potential benefits and costs of capital mobility. On the benefits side, he points to five factors. First, there are gains from trade in commodities across time, just as there are gains from contemporaneous trade in goods and services. Second, international financial integration, which brings direct foreign investment, may raise the growth rate by raising productivity growth. Third, such integration allows the sharing of risk between savers and investors. Domestic residents are able to diversify risk, which may raise the saving rate. Fourth, the presence of these flows may reduce output and consumption volatility. Finally, capital account liberalization may provide a means for forcing an end to financially repressive policies. The ability of resources to move across borders in response to unsustainable fiscal or financial policies may impose discipline on public authorities.

The principal cost of an open capital account is the possibility that a crisis may occur in the form of capital flight, leading to large depreciation, large-scale bank failures, or both. For example, under a pegged exchange rate regime, a realization or expectation of monetization of public sector budget deficits that is inconsistent with the pegged rate of currency depreciation forces its abandonment sooner or later in a sudden outflow of international reserves. Such depreciations may then spill over into bank failures if the banks have large, unhedged foreign currency–denominated liabilities and home currency–denominated assets.

To date, the international empirical evidence on the growth effects of capital account liberalization for emerging markets is inconclusive. The bottom line is that countries tend to benefit from liberalization when they can better absorb capital inflows by having higher levels of human capital, more developed domestic financial markets, and greater transparency in financial and corporate governance and regulation. On the other hand, the opening of the capital account in the presence of significant macroeconomic imbalances reduces net gains and raises the prospects of subsequent crisis.

Turning to India, Kletzer notes that India had a relatively unrestricted financial system until the 1960s. Starting in the 1960s, interest rate restrictions and liquidity requirements were adopted and progressively tightened. The government established the State Bank of India, a public sector commercial bank, and went on to nationalize the largest private commercial banks toward the end of the decade. Through the 1970s and into the 1980s, credit directed to “priority” sectors constituted a rising share of domestic lending and interest rate subsidies became common for targeted industries. With the start of economic reforms in 1985, steps were taken toward internal financial liberalization, mainly in banking. The government began to reduce financial controls by partially deregulating bank deposit rates, though that step was partially reversed in 1988. However, in later years the government simultaneously began to relax ceilings on lending rates of interest. Progressive relaxation of restrictions on both bank deposit and lending rates of interest and the reduction of directed lending was under way by 1990.

Liberalization accelerated after the 1991 crisis, when important steps were taken toward external liberalization. Specifically, both direct foreign investment and portfolio investment were progressively opened. A major development was full current account convertibility of the rupee under IMF Article 8 in August 1994. In the subsequent years, sectoral caps on direct foreign investment and restrictions on portfolio borrowing and foreign equity ownership were relaxed. Currently, foreign investment income is fully convertible to foreign currency for repatriation. External commercial borrowing has been relaxed, but it is regulated with respect to maturities and interest rate spreads. Effective restrictions continue on the acquisition of foreign financial assets by residents and on currency convertibility for capital account transactions.

According to Kletzer, there remain four macro-cum-financial vulnerabilities that must be considered in evaluating the case for full capital account convertibility: high public debt and fiscal deficit; financial repression; weakness in the banking sector; and a tendency to peg the exchange rate. India’s external debt is low in relation to its foreign exchange reserves, so there is less to fear on that front.

Using two alternative measures of the real interest rate, Kletzer evaluates the sustainability of the current public debt as a proportion of GDP and concludes that without a major reduction in the primary deficit (fiscal deficit minus interest payment on the debt) it cannot be stabilized at its current level of 82 percent. Based on one measure, the current primary deficit of 3.6 percent must be turned into a primary surplus of 0.8 percent for the debt to be sustained at its current level. On the deficit, Kletzer points out that the combined central and state government budget balances understate total public sector liabilities. Unfunded pension liabilities, various contingent liabilities, and guarantees on the debt issued by loss-making public enterprises (most notably state electricity boards) must also be taken into account.

High levels of public debt and deficits have been sustained partially through financial repression, which has been a central aspect of the Indian fiscal system for decades. Capital controls provide the public sector with a captive capital market and allow lower-than-opportunity rates of interest for government debt. Kletzer estimates that the implicit subsidy to the government averaged 8.2 percent of GDP from 1980 to 1993 and 1.6 percent from 1994 to 2002. Thus the liberalization of the 1990s is clearly reflected in the substantial reversal, though not elimination, of financial repression. In the same vein, the government collected seignorage revenues that averaged 2 percent over the entire 1980–2002 period, but 1.4 percent from 1997 to 2002. The decrease in public sector revenue from financial repression is large, indicating some significant progress in financial policy reform.

Policies of financial repression hamper domestic financial intermediation and raise the vulnerability of the banking system to crisis as international financial integration increases. At the end of March 2003, according to the Reserve Bank of India, the gross nonperforming assets of the commercial banks were 9.5 percent of bank advances; taking provisions into account, this figure drops to around 4.5 percent. Directed credit to priority sectors accounted for 31 percent of commercial bank assets but about 40 percent of nonperforming assets of the banks. At 2 percent of GDP, nonprovisioned and nonperforming assets are not large. But some researchers estimate that the actual figure may be twice as large as the official one. Banks also suffer from unhedged interest rate exposure arising from the large holdings of government debt (currently 40 percent of their total assets) and the liberalization of deposit rates.

Finally, capital controls allow policymakers to manage the nominal exchange rate and influence domestic rates of interest as independent objectives of monetary policy. Past exchange rate management in India displays resistance to currency appreciation. The adoption of a floating exchange rate, albeit managed relatively tightly, reduces crisis vulnerability. The government can resist exchange rate movements while not offering any exchange parity guarantee, as under a pegged exchange rate (or crawling peg or narrow target zone). The uncertainty that is induced, especially for short-term rates of change in the exchange rate, could lead to private sector hedging against currency risk. A possible source of concern is the revealed tendency of the government to lean against exchange rate movements that could result in sudden losses of reserves and capital account reversals under an open capital account.

Kletzer concludes that the initial conditions for capital account convertibility in India are strong, with the exception of public finance. India’s very low short-maturity foreign debt exposure, low overall foreign debt, large stock of foreign reserves, and flexible exchange rate place the Indian economy in a strong position by international standards. The average maturities of foreign and public debt could be expected to fall with international financial integration, but a prospective rise in short-term debt does not in itself justify capital controls. The stock of foreign reserves exceeds the current level of short-term external debt several fold. Liberalization and further opening of the banking system requires regulatory improvement, but the present level of nonperforming assets in the banking system is not excessive in comparison with the emerging markets.

In concluding, Kletzer notes two aspects of fiscal vulnerability relevant to financial integration. First, the primary deficit and the need to amortize public debt constitute the government borrowing requirement that would need to be financed on international terms under an open capital account. Second, the banking system holds the overwhelming majority of the public debt; with international financial integration, these become risky assets. Any gain to the government from currency depreciation or rising interest spreads on public debt would be matched by losses by the banks. These holdings pose a threat to the banking system, and a capital account crisis could begin with the exit of domestic depositors. In this case, deposit insurance could reduce the exposure of the banking system to crisis. Limiting the contingent liability of the government created by deposit insurance so that it just offsets public sector capital gains requires institutional reform to ensure successful prudential regulation.

Banking Reform in India, by Abhijit Banerjee, Shawn Cole and Ester Duflo

The final paper, by Abhijit Banerjee, Shawn Cole, and Esther Duflo, addresses some of the concerns raised above about India’s domestic financial system. In comparison with its peers at similar stages of development, India has an advanced and extensive banking system, with branches throughout rural and urban areas, providing credit not only to industry but also to a significant number of farmers. As in many other developing countries, publicly held banks are by far the largest players, and financial sector reforms have become major policy goals. The authors evaluate the performance of India’s banking sector in terms of its provision of financial intermediation and its contribution to the achievement of a variety of “social goals.” They also offer a comparison of the performance of public and private sector banks.

The paper begins with an overview of banking in India, including the two episodes of bank nationalization in 1969 and 1980. Because the Indian government used a strict policy rule (based on the asset base of banks) to determine which banks were nationalized and which were left in the private sector, India offers an ideal case study in the relative performance and behavior of public and private sector banks.

A primary rationale for bank nationalization was to increase the flow of credit, both in general and to targeted “priority sectors” such as agriculture and small-scale industry. In the first section of the analysis, Banerjee and colleagues use detailed records from a public sector bank to determine whether there is “under-lending” to priority sector firms in the Indian financial system. They define under-lending as a situation in which the marginal product of capital for a firm is higher than the rate of interest it is currently paying. A change in lending regulations that increased the amount of credit issued by banks to one group of firms but not another allowed them to estimate the effect of additional credit on output and profits. They find a strong, positive effect of the change, suggesting that the firms are indeed credit constrained.

Enhancing credit supply was a primary goal of nationalization: while the performance of this public sector bank was not impressive, perhaps private sector banks fared worse? Using a regression discontinuity approach, the authors compared the propensity of public and private banks to lend to borrowers in several sectors of the economy: agriculture, small-scale industry, and the composite sector called trade, transport, and finance. They find that public sector banks did lend substantially more to agricultural borrowers than did private sector banks. Contrary to popular wisdom, however, they find that once bank size is taken into account, public sector banks lend no more to small-scale industry than do private sector banks.

Nor does bank nationalization appear to have increased the overall speed of financial development. The authors find that in the period 1980–91, nationalized and private banks of similar asset size grew at about the same rate. However, in the more liberalized period of 1992–2000, old private sector banks grew 8 percent more than public sector banks. (The lack of attention to new private sector banks is explained by the fact that there are simply not enough data at this stage to allow meaningful analysis.)

To gain further insight into under-lending and a low level of financial development, the authors again study the loan information from the same public sector bank. Under government regulations, loan officers are required to calculate credit limits on the basis of firm size (as measured by turnover) rather than profitability; though the rules do allow for some flexibility on the part of the loan officer, the authors find that in most cases loan officers simply reapproved the previous year’s limit. Because of inflation, real credit thus typically shrinks. Firms that are growing rapidly or that have profitable opportunities are not rewarded with additional credit, nor are poorly performing firms cut off.

The authors then turn to potential explanations for the reluctance of loan officers to lend. Public employees are subject to strict anticorruption legislation, and bank officers have expressed concern that if they issue a new loan that subsequently goes bad, they could be charged with corruption, denied promotion, fired, or even put in jail. The authors test this hypothesis by examining whether a corruption charge against a bank employee in a specific bank led to a reduction in overall lending by all loan officers in that bank. They find that it did: corruption charges led to a reduction in lending of approximately 3 percent compared with lending of other banks. That decline lasted approximately twenty-four months.

Critics of public enterprises are quick to point out that since employees tend not to have a stake in the performance of the enterprise, they may tend to exert less effort. For public bankers, this may mean making guaranteed safe loans to the government rather than spending time and energy on screening new clients and monitoring existing ones. To test this possibility, the authors compare how public sector banks in low- and high-growth states responded to a change in spread between lending rates and the rate at which the government was willing to borrow. They find that banks in lowgrowth states were more inclined to make “low-effort” loans to the government when the spread increased.

The final exercise was to examine the contentious issue of nonperforming assets, bank failures, and bailouts. The official rates of nonperforming loans in public sector banks tend to be higher than those in private sector banks, but because those numbers are notoriously unreliable, the authors instead compare the fiscal costs of bailing out failed private banks with the costs of recapitalizing poorly performing public sector banks. Using data starting from the first nationalization, they identify twenty-one cases of bank failure between 1969 and 2000 and compute the costs imposed on the government in rupees at 2000 prices. That sum is compared with the substantial cost of recapitalization of public sector banks in the 1990s. Controlling for size, the cost of the bank failures appears to be slightly higher than recapitalization, implying a small advantage for public sector banks. However, since recapitalization expenses are recurring, in all likelihood the public sector banks represent a greater cost to the treasury.

The authors conclude by arguing that the evidence suggests a tentative case for privatizing public sector banks. Privatization is not a panacea, however, and both public and private sector banks could benefit from significant internal reform. Liberalization and privatization should be accompanied by strong regulation to ensure the continued existence of social banking. But in net terms, the reduction in agency problems, the increased flexibility, and the reliance on private rather than public incentives to limit corruption and NPAs should make for a more dynamic banking system that is more responsive to borrowers’ needs.

ABSTRACT

The overall economic efficiency of a quantity-based approach to greenhouse gas mitigation depends strongly on the extent to which such a program provides opportunities for compliance flexibility, particularly with regard to the timing of emissions abatement. Here I consider a program in which annual targets are determined by choosing the optimal time path of reductions consistent with an exogenously prescribed cumulative reduction target and fixed technology set. I then show that if the availability of low-carbon technology is initially more constrained than anticipated, the optimal reduction path shifts abatement toward later compliance periods. For this reason, a rigid policy in which fixed annual targets are strictly enforced in every year yields a cumulative environmental outcome identical to the optimal policy but an economic outcome worse than the optimal policy. On the other hand, a policy that aligns actual prices (or equivalently, costs) with expected prices by simply imposing an explicit price ceiling (often referred to as a "safety valve") yields the opposite result. Comparison among these multiple scenarios implies that there are significant gains to realizing the optimal path but that further refinement of the actual regulatory instrument will be necessary to achieve that goal in a real cap-and-trade system.

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Abstract

Background: One controversial issue in the larger cap-and-trade debate is the proper use and certification of carbon offsets related to changes in land management. Advocates of an expanded offset supply claim that inclusion of such activities would expand the scope of the program and lower overall compliance costs, while opponents claim that it would weaken the environmental integrity of the program by crediting activities that yield either nonexistent or merely temporary carbon sequestration benefits. Our study starts from the premise that offsets are neither perfect mitigation instruments nor useless "hot air."

Results: We show that offsets provide a useful cost containment function, even when there is some threat of reversal, by injecting additional "when-flexibility" into the system. This allows market participants to shift their reduction requirements to periods of lower cost, thereby facilitating attainment of the least-cost time path without jeopardizing the cumulative environmental integrity of the system. By accounting for market conditions in conjunction with reversal risk, we develop a simple offset valuation methodology, taking into account the two most important factors that typically lead offsets to be overvalued or undervalued.

Conclusions: The result of this paper is a quantitative "model rule" that could be included in future legislation or used as a basis for active management by a future "carbon fed" or other regulatory authority with jurisdiction over the US carbon market to actively manage allowance prices.

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On March 4, The India Project at Brookings hosted an online panel discussion to review the first full-year budget released by Prime Minister Narendra Modi’s government on February 28, 2015. Panelists discussed the significance of the budget, key takeaways, the hits, and misses, as well as what actions they would like to see the Indian government take vis-à-vis the Indian economy over the next few months. Panelists included James Crabtree, Mumbai bureau chief for the Financial Times; Eswar Prasad, the New Century Chair in International Trade and Economics at the Brookings Institution and senior fellow in Brookings’s Global Economy and Development program; and Shamika Ravi, fellow at the Brookings India Center in Delhi, in the Development Assistance and Governance Initiative at Brookings, and in Brookings’s Global Economy and Development program. Tanvi Madan, fellow in the Foreign Policy program and director of The India Project at Brookings, moderated the discussion.

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On May 26, 2014, after the Bharatiya Janata Party won a convincing majority in India’s national elections, Narendra Modi took office as prime minister. The first Indian premier to be born after independence, he formed the first majority government in India in more than 25 years. Over the past 12 months, policymakers, corporate leaders, analysts, and the media in India and abroad have been watching closely to see whether Modi can deliver on the promises of growth, good governance, greater role and respect on the world stage, and getting things done.

On May 20, the India Project at Brookings hosted an event to assess the Modi government’s first year in office. The panel considered developments over the last year in the economic, social, energy, and foreign policy realms, as well as in domestic politics. Panelists discussed their perspectives of the government’s performance, where they see continuity vs. change, what has surprised them, what we might expect to see in the future, and key developments to look for over the next year.

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• The Modi government in India turns one: An assessment

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Over the last couple of years, a number of crucial political and policy-related developments have unfolded in India, as well as in U.S.-India relations. These developments have emerged as the next generation of Indian politicians, born after the country’s independence, is coming to the fore—including in parliament.

On October 7, The India Project at Brookings hosted a delegation of Indian parliamentarians to discuss the current state of Indian policy and politics. The panel featuring MPs from different political parties and states in India explored the state of the Indian economy and foreign policy, federalism, the role of regional parties, coalition politics, the role of the media and technology, and U.S.-India relations.

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Prime Minister Narendra Modi has made India’s external relations a key focus of his policy agenda over the past year and a half. The recently released book, "The Oxford Handbook of Indian Foreign Policy" (Oxford Press, 2015), is well-timed. Edited by David M. Malone, C. Raja Mohan, and Srinath Raghavan, the "Handbook" includes essays which focus on the evolution of Indian foreign policy, its institutions and actors, India’s relations with its neighbors, and its partnerships with major world powers.

On November 13, the Foreign Policy program at Brookings hosted a panel discussion featuring some of the contributing authors to the "Handbook." The panelists discussed the current state of Indian foreign policy, its past, and its future, as well as the tools available to India’s foreign policy practitioners today and the constraints they might face.

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On his fourth trip to the U.S. as Indian Prime Minister, Narendra Modi will spend some quality time on Capitol Hill on Wednesday, where he'll address a joint meeting of the U.S. Congress. House Speaker Paul Ryan will also host the Indian premier for a lunch, which will be followed by a reception hosted jointly by the House and Senate Foreign Relations Committees and the India Caucus. What's the significance of this Congressional engagement and what might be Modi's message? 

Given that all the most-recent Indian leaders who've held five-year terms have addressed such joint meetings of Congress, some have asked whether Ryan's invitation to Modi is a big deal. The answer is, yes, it is an honour and not one extended all that often. Since 1934, there have been only 117 such speeches. Leaders from France, Israel and the United Kingdom have addressed joint meetings the most times (8 each), followed by Mexico (7), and Ireland, Italy and South Korea (6 each). With this speech, India will join Germany on the list with leaders having addressed 5 joint meetings of Congress: Rajiv Gandhi in 1985, P.V. Narashima Rao in 1994, Atal Bihari Vajpayee in 2000 and Manmohan Singh in 2005. India's first premier, Jawaharlal Nehru, spoke to the House and Senate in separate back-to-back sessions in 1949 as well. 

Congress is a key stakeholder in the U.S.-India relationship and can play a significant supportive or spoiler role. While American presidents have a lot more lee-way on foreign policy than domestic policy, Congress is not without influence on U.S. foreign relations, and shapes the context for American engagement abroad. Moreover, the breadth and depth of the U.S.-India relationship, as well as the blurring of the line between what constitutes domestic and foreign policy these days means that India's options can be affected by American legislative decisions or the political mood on a range of issues from trade to immigration, energy to defense. 

The Indian Foreign Secretary recently said that the U.S. legislature was at "very much at the heart" of the relationship today. He noted it has been "very supportive" and "even in some more difficult days where actually the Congress has been the part of the US polity which has been very sympathetic to India." But India's had rocky experiences on the Hill as well--which only heightens the need to engage members of Congress at the highest levels. 

The speech and the other interactions offer Modi an opportunity to acknowledge the role of Congress in building bilateral relations, highlight shared interests and values, outline his vision for India and the relationship, as well as tackle some Congressional concerns and note some of India's own. He'll be speaking to multiple audiences in Congress, with members there either because of the strategic imperative for the relationship, others because of the economic potential, yet others because of the values imperative--and then there are those who'll be there because it is important to their constituents, whether business or the Indian diaspora. There is also the audience outside Congress, including in India, where the speech will play in primetime. What will Modi's message be? A glimpse at previous speeches might offer some clues, though Modi is likely also to want to emphasize change. 

The speeches that came before

The speeches of previous prime ministers have addressed some common themes. They've acknowledged shared democratic values. They've mentioned the two-way flow of inspiration and ideas with individuals like Henry David Thoreau, Mahatma Gandhi, Martin Luther King getting multiple mentions. They've noted the influence of American founding documents or fathers on the Indian constitution. They've highlighted India's achievements, while stressing that much remains to be done. 

They've noted their country's diversity, and the almost-unique task Indian leaders have had--to achieve development for hundreds of millions in a democratic context. Since Gandhi, each has mentioned the Indian diaspora, noting its contributions to the U.S. Each prime minister has also expressed gratitude for American support or the contribution the U.S. partnership has made to India's development and security. They've acknowledged differences, without dwelling on them. They've addressed contemporary Congressional concerns that existed about Indian policy--in some cases offering a defense of them, in others' explaining the reason behind the policy.

Many of the premiers called for Congress to understand that India, while a democracy like the U.S. and sharing many common interests, would not necessarily achieve its objectives the same way as the U.S. And each subtly has asked for time and space, accommodation and support to achieve their goals--and argued it's in American interests to see a strong, stable, prosperous, democratic India.

In terms of subjects, each previous speech has mentioned economic growth and development as a key government priority, highlighting what policymakers were doing to achieve them. Since Gandhi, all have mentioned nuclear weapons though with different emphases: he spoke of disarmament; Rao of de-nuclearization and concerns about proliferation; two years after India's nuclear test, Vajpayee noted India's voluntary moratorium on testing and tried to reassure Congress about Indian intentions; and speaking in the context of the U.S.-India civil nuclear talks, Singh noted the importance of civil nuclear energy and defended India's track record on nuclear non-proliferation.

Since Rao, every prime minister has mentioned the challenge that terrorism posed for both the U.S. and India, with Vajpayee and Singh implicitly noting the challenge that a neighboring country poses in this regard from India's perspective. And Rao and Singh made the case for India to get a permanent seat on the U. N. Security Council.

The style of the speeches has changed, as has the tone. Earlier speeches were littered with quotes from sources like Christopher Columbus, Swami Vivekananda, Abraham Lincoln, Lala Lajpat Rai and the Rig Veda. Perhaps that was reflective of the style of speechwriting in those eras, but perhaps it was also because there were fewer concrete issues in the bilateral relationship to address. The evolution in the areas of cooperation is evident in the speeches. 

Rao's speech about two decades ago, for instance, listed U.S.-India common interests as peacekeeping, environmental crises, and combating international terrorism and international narcotics trafficking. Compare that to Singh's address which talked of cooperation on a range of issues from counterterrorism, the economy, agriculture, energy security, healthy policy, humanitarian assistance and disaster relief (HADR), democracy promotion, and global governance.

The speech yet to come

Modi will likely strike some similar themes, acknowledging the role that the U.S. Congress has played in shaping the relationship and expressing gratitude for its support. Like Vajpayee, particularly in a U.S. election year, Modi might note the bipartisan support the relationship has enjoyed in recent years. He'll undoubtedly talk about shared democratic values in America's "temple of democracy"--a phrase he used for the Indian parliament when he first entered it after his 2014 election victory. Modi will not necessarily mention the concerns about human rights, trade and investment policies, non-proliferation or India's Iran policy that have arisen on the Hill, but he will likely address them indirectly. 

For example, by emphasizing India's pluralism and diversity and the protection its Constitution gives to minorities, or the constructive role the country could play regionally (he might give examples such as the recently inaugurated dam in Afghanistan). Given the issues on the bilateral agenda, he'll likely mention the strategic convergence, his economic policy plans, terrorism, India's non-proliferation record, defense and security cooperation, and perhaps--like Vajpayee--the Asia-Pacific (without directly mentioning China). And like Vajpayee, he might be more upfront about Indian concerns and the need to accommodate them. 

While he might strike some similar themes as his predecessors and highlight aspects of continuity, Modi will also want to emphasize that it's not business as usual. He'll likely try to outline the change that he has brought and wants to bring. In the past, he has noted the generational shift that he himself represents as the first Indian prime minister born after independence and the Modi government's latest tag line is, of course, "Transforming India." And he might emphasize that this changed India represents an opportunity for the U.S.

He won't wade directly into American election issues, but might note the importance of U.S. global engagement. He might also try to address some of the angst in the U.S. about other countries taking advantage of it and being "takers." He could do this by making the case that India is not a free rider--that through its businesses, market, talent and diaspora it is contributing to American economy and society, through its economic development it will contribute to global growth, and through Indian prosperity, security and a more proactive international role--with a different approach than another Asian country has taken--it'll contribute to regional stability and order. He might also suggest ways that the U.S. can facilitate India playing such a role.

Unlike previous leaders, he has not tended to appeal to others not to ask India to do more regionally and globally because it's just a developing country and needs to focus internally. The Modi government has been highlighting the contributions of India and Indians to global and regional peace and prosperity--through peacekeeping, the millions that fought in the World Wars, HADR operations in its neighborhood, evacuation operations in Yemen in which it rescued not just Indian citizens, but Americans as well.

His government has been more vocal in joint contexts of expressing its views on the importance of a rules-based order in the Asia-Pacific and Indian Ocean regions--and we might hear more on this in his address. Overall, a theme will likely be that India is not just a "taker," and will be a responsible, collaborative stakeholder.

It'll be interesting to see whether the Indian prime minister notes the role that his predecessors have played in getting the relationship to this point. With some exceptions--for example, he acknowledged Manmohan Singh's contribution during President Obama's visit to India last year--he has not tended to do so. But there's a case to be made for doing so--it can reassure members of Congress that the relationship transcends one person or party and is based on a strategic rationale, thus making it more sustainable. Such an acknowledgement could be in the context of noting that it's not just Delhi and Washington that have built and are building this relationship, but the two countries' states, private sectors, educational institutions and people. 

This wouldn't prevent Modi from highlighting the heightened intensity of the last two years, particularly the progress in defense and security cooperation. (From a more political perspective, given that there has been criticism in some quarters of India-U.S. relations becoming closer, it can also serve as a reminder that the Congress party-led government followed a similar path).

Modi will be competing for media attention in the U.S. thanks to the focus in the U.S. on the Democratic primaries this week, but he'll have Congressional attention. But it's worth remembering that Indian prime ministers have been feted before, but if they don't deliver on the promise of India and India-U.S. relations that they often outline, disillusionment sets in. Modi will have to convince them that India is a strategic bet worth making--one that will pay off.

This piece was originally published by Huffington Post India.