General Awareness Updates – January 2010

Miscellaneous:2

India in Afghanistan

With a pro-India administration in Kabul , New Delhi has thwarted the nefarious designs of Pakistan . Since the dethroning of the Taliban, India has played a very active role in the rehabilitation and reconstruction of Afghanistan . There are over four thousand Indian nationals working on several Government of India-sponsored projects across Afghanistan . In the last eight years, India has committed U.S. $.1.5 billion in aid to Afghanistan , making it the largest recipient of New Delhi ’s overseas aid budget.

India is one of very few countries to have set up consulates in major Afghan cities like Herat in the west and Jalalabad in the east. Pakistan has often accused India of running spy bases behind the facade of consular offices. In the last few years, the Taliban has killed several Indians, both civil and military personnel, all aimed to frighten India into giving up its strategic designs in Afghanistan . However, the Government of India has vowed to stay put in Afghanistan .

In fact, in late 2008 the Government of India completed and dedicated to the Afghan people a strategic road linking Zaranj on the Iran border to Delaram in its north-east. The 218-km road will loosen Pakistan ’s stranglehold on its land-locked neighbour by allowing Afghanistan access the Iranian port of Chabahar . The time taken to reach the sea will be much less than that taken via the Pakistan route as Delaram is on the Kandahar-Herat road. This will not only increase the volume of Afghan trade, it will facilitate the transit of Indian goods to that country. Pakistan can no longer play difficult and refuse permission to ferry goods through their territory.

China & Russia

China . Like Pakistan (and to an extent, Iran also), Afghanistan is an important part of the western security zone for China . China sees Afghanistan as a corridor through which it can secure its commercial, military, and strategic interests in Pakistan as well access to much-needed natural resources in the region. Further, China fears that if the Taliban comes to power in Kabul , then it may have a terrible spillover into its Muslim-majority province of Xinjiang , (on the Afghan border), something that has set off alarm bells in Beijing .

Russia . With memories of Islamist terror campaigns in Chechnya and Dagestan still fresh in mind, Russia knows that a Taliban victory in Afghanistan can pose a serious threat to Moscow ’s strategic interests in Central Asia , a region it considers its strategic backyard. Moscow is especially concerned by the regular involvement of jihadists from Chechnya and Dagestan with Taliban fighters.

K for Karzai’s Corruption

Probably the biggest failure of Afghan President Hamid Karzai’s administration is the lack of progress on the promised reconstruction in the country. Decades of civil war and ethnic strife have left much of the country in ruins. While the government promised a lot on this front, not much has happened, in reality.

The country lacks basic healthcare, education, and communication infrastructure, not to speak of an effective law and order machinery. Such failings, coupled with rampant corruption, have only prolonged the misery of the ordinary Afghans who, in the months following the U.S. ascendancy in Kabul , looked forward to a peace dividend, which unfortunately they have not been able to reap.

The lack of progress on reconstruction has forced the local Pashtun population’s allegiance to shift to the Taliban, thus hindering the U.S. military’s intelligence-gathering ability while providing fertile recruiting ground for radical Islamists.

Mr. Tomsen provides some insight on this: “Afghans are not ideological… They’re not pro-U.S., pro-Pakistan, or pro-Taliban. They go where the wind is blowing, where they’ll get maximum benefit. And right now the wind is blowing in the Taliban’s favour.”

Mr. Karzai looks increasingly like a man presiding over chaos. While there are many who see Mr. Karzai as a failure, he is still the best guy around to preside over, well, chaos. Says political scientist Seth Jones: “Not all of Mr. Karzai’s problems can be solved in Afghanistan , however. With growing frustration, the Afghan leader has repeatedly blamed his eastern neighbour for fomenting violence and even trying to assassinate him. Whatever the truth of these accusations, Mr. Karzai is pointing his finger in the right direction: Pakistan is, at a minimum, playing host to militants that represent a mortal danger to the Afghan state. And yet the United States , Mr. Karzai’s No.1 backer, still has no comprehensive political, economic, and military strategy to deal with that threat.”

Will the new strategy work?

There are three core elements of the new Afghan strategy: a military effort to create the conditions for a transition; a civilian surge that reinforces positive action; and an effective American partnership with Pakistan .

Said Mr. Obama: “To create a civilian surge that reinforces positive action, the U.S. will work with allies and partners, the United Nations, and the Afghan people to pursue a more effective civilian strategy, so that the government can take advantage of improved security.

“This effort must be based on performance. The days of providing a blank check are over. President Karzai’s inauguration speech sent the right message about moving in a new direction. And going forward, we will be clear about what we expect from those who receive our assistance. We’ll support Afghan ministries, governors, and local leaders that combat corruption and deliver for the people. We expect those who are ineffective or corrupt to be held accountable. And we will also focus our assistance in areas — such as agriculture — that can make an immediate impact in the lives of the Afghan people.”

Speaking of Pakistan , a country Afghans accuse of supporting of the Taliban, Mr. Obama said that, “[We] will act with the full recognition that our success in Afghanistan is inextricably linked to our partnership with Pakistan .

“We’re in Afghanistan to prevent a cancer from once again spreading through that country. But this same cancer has also taken root in the border region of Pakistan . That’s why we need a strategy that works on both sides of the border...  The Pakistani army has waged an offensive in Swat and South Waziristan . And there is no doubt that the United States and Pakistan share a common enemy.

“In the past, we too often defined our relationship with Pakistan narrowly. Those days are over. Moving forward, we are committed to a partnership with Pakistan that is built on a foundation of mutual interest, mutual respect, and mutual trust. We will strengthen Pakistan ’s capacity to target those groups that threaten our countries, and have made it clear that we cannot tolerate a safe haven for terrorists whose location is known and whose intentions are clear.”

While Mr. Obama has placed touching faith in Pakistan ’s good intentions, when it comes to fighting the Islamists, Pakistan has always been a two-faced Janus. Even in the recent campaign against Islamist terrorists in the Swat and Waziristan regions, it has selectively targeted elements of the Pakistan Taliban while letting the Afghan Taliban go scot free. This balancing strategy makes sense from a Pakistani perspective — it is self-interested, not evil — but it creates real problems for the U.S.-ISAF effort in Afghanistan and increases the chance of terrorism in the West. In the long run, it spells trouble for Pakistan as well. Its not that the Americans do not know this; rather, behind all the sweet talk in the public, they have been tightening the screws on those who hold the levers of power in Pakistan .

Says Seth Cropsey, a senior fellow at the Washington-based Hudson Institute: “The most important battle is in fact next door in Pakistan , a country that, even more than Afghanistan , risks not just failure but utter collapse. The nuclear neighbor has become a haven for Taliban and Al Qaeda fighters, and its powerful military has been reluctant to take them on. Even when it has, its clumsy, heavy-handed tactics have displaced hundreds of thousands of civilians. All the while, the elected government of President Asif Ali Zardari has only grown weaker.”

The U.S. military and NATO’s ISAF have been trying to stem the resurgence of the Taliban but if that does not come about, then Afghanistan risks sliding back into anarchy. This is a danger the world can ill-afford to ignore—the last time it was ignored, the Taliban ruled from Kandahar and spawned a terrorist state, a frightening and nightmarish prospect.

For decades now, Afghanistan has been struggling to set up itself as a stable nation. The War on Terror still plods on, and the only thing certain is that there’s still a long road ahead - one that is full of pitfalls, especially for the battle-weary people of Afghanistan . In case, their  current strategy fails, then the Americans may well remember the words of their Admiral Mike Mullen, who told his planners: “I just hope you have a Plan B. Life doesn’t turn out to be perfect.” Looks like they will need one.

Forex Rate Mechanism

The Foreign exchange rate between two currencies specifies how much one currency is worth in terms of the other. For example, an exchange rate of Rs.40 to the United States $ means that forty Indian Rupees are worth the same as one U.S. Dollar.

Currency quotes could be made with respect to both currencies. For example, in India the exchange rate of the dollar can be quoted as Rs.40 for U.S.$1 or Re.1 for U.S.$.025.

When the quote is made in terms of one foreign currency being equal to so many home currencies, it is called a direct quotation with respect to the home country and is followed by most countries. When the quote is given the other way, that is, one home currency being equal to so many foreign currencies, it is called an indirect quotation.

Largest financial market

A foreign exchange market exists wherever one currency is traded for another. It is by far the largest financial market in the world, with an average estimated trading equivalent to U.S.$3 trillion a day. Individual traders form a very small fraction of this trade, which is dominated by large banks, multinational corporations, and governments.

Every country manages its currency with respect to foreign currencies and the foreign exchange market. The way it is done is called the Exchange Rate Regime.

Types of exchange rates

Floating rate is the most common regime today, where the market dictates the movements of the exchange rate. Dollar, Euro, Yen, etc. are examples of float currencies.

Another regime is the ‘pegged float’ where the central bank of the country keeps the rate from deviating too far from a target ‘band’.

In a fixed exchange regime, the currency is tied to another currency where the exchange rate will remain fixed.

Market mechanism

Currency prices are a result of supply and demand forces. A currency will become more valuable when the demand for it is greater than the available supply. It will become less valuable when the supply is more than the demand. This does not mean that people will not want money; it just means that they will prefer to hold their wealth in another currency.

No other market encompasses as much as what is happening in the world at any given time as foreign exchange. The ever-changing current events have a huge influence on the foreign exchange market. The supply and demand of currencies is not dependent on any single element. Political conditions, market psychology, and economic factors are the three broad categories of elements that affect the exchange rate.

Diverse determinents

Internal, regional, and international political events and conditions can have an impact on currency markets. For instance, political instability can have a negative impact on the nation’s currency. Events in a region or a country may spur positive or negative effects in a neighbouring country. Unsettling international events can lead investors to move to a safer place. Then there will be a greater demand for the currencies of these countries which are perceived to be stronger, which, in turn, will result in a price rise.

Currency markets look at a long term price trend that rises from an economic and political trend. Investors focus on the relevance of ‘outside events’ to currency prices. Due to this, rumours play a major role in currency pricing.

It is a tendency for the price of a currency to reflect the impact of a particular action before it occurs. When the anticipated event does not occur, the market reacts in exactly the opposite manner. The economic numbers of a country (or countries) like money supply, inflation, employment, and trade balance, may become important to market psychology and can have an immediate impact on the foreign exchange rate.

Several economic factors also affect the rate. These include economic policies like government fiscal policy and monetary policy, as well as economic conditions. The exchange market reacts negatively to a widening government budget deficit and positively to a narrowing one.  Countries trade goods and services, which, in turn, indicates the demand for a country’s currency to conduct trade. A trade deficit or a surplus reflects the competitiveness of a nation’s economy. Trade surplus may have a positive effect on the country’s currency while a trade deficit can have the opposite effect.

A currency will lose value if the inflation in a country is high or is perceived to be rising. Inflation will decrease the purchasing power of currency, which, in turn, will decrease the demand for the currency.

Forex risk

Companies which do international business with different currencies face a financial risk due to fluctuating rate, called the ‘foreign exchange risk’. For example, a company in India accepts a project from an American company for U.S.$100,000. The Indian company expects an exchange rate of Rs.40 to a dollar (total converted figure of Rs.Forty Lakh). Let’s say the company budgets for an expense of Rs.38 lakh and expects to make a profit of Rs.2 lakh. After the completion the project, at the time of receiving the money, let’s say the exchange falls to Rs.38.5 to a dollar. Even though the company gets U.S.$100,000, after the exchange they will realise Rs.38.5 lakh only. Now the profit the company has made has reduced to Rs.50,000. In fact, the company can even make a loss if the exchange rate falls below Rs.38 to a dollar.