Vietnam Tourism Report - Business Environment Outlook

8/6/2019 Vietnam Tourism Report - Business Environment Outlook

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Vietnam Tourism Report Q1 2011

Business Environment Outlook

Table: Asia Travel And Tourism Business Environment Ratings

Limits of Potential Returns Risks to Realisation of Returns

TourismMarket

CountryStructure Limits

MarketRisks

CountryRisk Risks

TourismRating

RegionalRank

Hong Kong 86 77 82.8 51 73 64.4 77 1

India 82 64 75.6 48 40 43.2 66 2=

Malaysia 82 52 71.6 48 57 53.1 66 2=

Singapore 64 68 65.3 55 75 67.0 66 2=

Japan 66 71 67.6 48 66 59.0 65 5

China 64 75 67.9 48 49 48.5 62 6

Thailand 64 59 62.3 65 52 57.2 61 7

Australia 44 64 51.0 65 68 66.7 56 8

New Zealand 36 60 44.5 65 72 69.2 52 9

Indonesia 42 62 49.2 55 38 44.8 48 10=

Vietnam 46 52 48.0 48 46 46.7 48 10=

Sri Lanka 17 46 26.8 58 51 53.9 35 12

Cambodia 64 60 62.6 48 na na na na

Scores out of 100, with 100 highest. Source: BMI


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BMIs Security Ratings

Table: Asia Pacific Regional Security Ratings

State Interstate Terrorism CriminalComposite

domestic riskRegional

rankComposite

security risk

Japan 93 92 87 90 3 91 1=

Singapore 90 87 96 92 2 91 1=

Australia 98 83 87 85 5= 89 3

South Korea 70 90 88 87 4 81 4

Taiwan 71 95 75 85 5= 80 5

North Korea 48 98 88 93 1 78 6

Vietnam 63 98 71 85 5= 77 7

China 81 85 60 73 9 75 8=

Thailand 87 68 71 69 10 75 8=

Malaysia 66 85 65 75 8 72 10

Indonesia 80 68 53 61 11 67 11

Philippines 87 48 43 45 13 59 12

India 68 47 53 50 12 56 13

Pakistan 48 27 37 32 14 37 14

Scores out of 100, with 100 the highest. The Composite security risk is the principal rating. It comprises Inter-state risk the risk of becoming a primary party to an inter-state conflict that threatens significant damage to homeland;Terrorism risk the risk of terrorist groups (domestic or international) being able to launch a major attack/sustainedcampaign; and Criminal risk the risk of (politically motivated) violence against expatriate workers. Each of the threerisks is given equal weighting. The Composite domestic risk rating comprises Terrorism and Criminal risk, each ofwhich is given equal weighting. Each rating (State, Terrorism, Criminal) is assessed subjectively by our analysts within aclearly defined methodology, incorporating a minimum of six conceptually distinct elements. Source: BMI

BMIs Security Ratings service, which integrates closely with our Country Risk service, offers a

comprehensive comparative analysis of security risk in three key areas interstate conflict, terrorism and

physical safety for expatriate workers across major states in each region. The ratings are combined toform a composite security rating to provide an overall guide to long-term trends and risks. We integrate

our short-term political and economic ratings with the terrorism rating, to indicate a states vulnerability

to a sustained terrorist campaign or major terrorist attack. In all instances, the rated period is two years,

with each country assigned a score out of 100, with a low score indicating a high level of risk.


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Table: Asia Pacific State Vulnerability To Terrorism Index

State TerrorismShort-term

politicalShort-termeconomic Composite Regional rank Trend Danger rating

Taiwan 97.5 84.0 81.0 90.0 1 = Amber

China 87.5 84.0 92.0 88.0 2 = Green

Singapore 87.5 98.0 76.0 87.0 3 = Green

Japan 92.5 93.0 61.0 85.0 4 = Green

South Korea 90.0 81.0 74.0 84.0 5 = Green

Australia 87.5 89.0 62.0 81.0 6= = Green

Malaysia 85.0 79.0 74.0 81.0 6= = Green

Vietnam 97.5 78.0 44.0 79.0 8 = Amber

Indonesia 70.0 73.0 66.0 70.0 9 = Amber

Thailand 68.0 63.0 70.0 67.0 10 = Amber

India 47.5 74.0 64.0 58.0 11 = Green

Philippines 50.0 66.0 63.0 57.0 12 = Amber

Pakistan 35.0 42.0 45.0 39.0 13 = Red

North Korea 71.0 75.0 na na 14 = Red

Scores out of 100, with 100 the highest. The State vulnerability to terrorism index is the principal rating. It comprisesthe Terrorism rating and BMIs Country Risk Short-term political and Short-term economic ratings, which are given

equal weighting. The State vulnerability to terrorism rating quantifies the exposure of a state to a successful majorterrorist attack/campaign, evaluating first how likely one is (Terrorism) before considering the vulnerability of thepolitical and economic environment to a sudden shock. As such, it incorporates subjective analysis of 15 conceptuallyseparate analytical elements, as well as 13 separate objective data points; na = not available. Source: BMI

Vietnams Security Risk Ratings

Physical Safety Risk Rating

Overall, expatriates living in Vietnam are not at high risk from physical safety threats, such as physical

violence or kidnapping. The local community is at risk from petty crime, as well as the ever-present threat

of bird flu.

Terrorism Risk Rating

There is little or no terrorism risk in Vietnam. Therefore, it receives a risk rating of 97.5.

Conflict Risk Rating

Vietnams bid to normalise its defence and diplomatic relations has led to some cooperation on defence

issues and the country taking on a more prominent role in the international community, such as its recent

non-permanent membership of the UN Security Council. By taking on such a role, Vietnam will no doubt


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be forging stronger ties with many states. However, it will also have to balance its new position against

the expectations of more established allies.

City Terrorism Ratings

BMIs City Terrorism Rating (CTR) covers 170 cities. It incorporates our analysts qualitative view of

the terrorist threat in a state-led approach, as well as secondary analysis of data on global terrorist

incidents from the US State Departments Worldwide Incidents Tracking System (http://wits.nctc.gov/),

to provide a quantitative assessment of the risks.

Due to the use of State Department data, the definition of terrorist incidents refers to incidents in which

subnational or clandestine groups or individuals deliberately or recklessly attacked civilians or non-

combatants. All incidents have been either claimed, or inferred as being perpetrated, by groupsdesignated as terrorists. To offer a cross-country comparison of the terrorist threat, the CTR

accommodates the qualitative difference between the terrorism threat across states, which, broadly-

speaking, can be grouped as follows: type A state: endemic terrorist threat; and type B state:

unpredictable terrorist threat.

It is important to clarify the limits of the CTR. While terrorism is popularly conflated with all challenges

to the rule of law, the CTR is more narrowly focused. It specifically excludes activities of organised

criminal gangs, whose strategy and tactics may be similar to terrorist groups, but whose aims are

different. There are cities that have a high terrorism risk but are otherwise characterised by a

comparatively strong rule of law, and vice versa. While the CTR should form part of a consideration of

the risks associated with each city, it is not a snapshot of overall risks to physical safety and security.

Please see the methodology section at the end of the report for more details.


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Table: BMIs Asia City Terrorism Index

City State Prevalence Threat Country terrorism rating

Vientiane 97.5 100 100 97.5

Wellington 90.0 100 100 97.5

Taipei 97.5 100 100 97.5

Ho Chi Minh City 97.5 100 100 97.5

Auckland 90.0 100 100 97.5

Yokohama 92.5 100 100 95.0

Hong Kong 92.5 90 100 92.5

Tokyo 92.5 90 100 92.5

Seoul 90.0 90 100 90.0

Tianjin 87.5 100 100 90.0

Osaka 92.5 80 100 90.0

Hangzhou 87.5 100 100 90.0

Sydney 87.5 100 100 87.5

Singapore 87.5 100 100 87.5

Melbourne 87.5 100 100 87.5

Naypyidaw 62.5 80 90 85.0

Beijing 87.5 90 90 82.5

Shanghai 87.5 90 70 72.5

Phnom Penh 82.5 50 80 70.0

Kolkata 47.5 80 90 70.0

Kuala Lumpur 85.0 50 80 67.5

Jakarta 70.0 70 60 60.0

Bangkok 32.5 40 60 57.5

Manila 50.0 50 30 55.0

Dhaka 62.5 50 40 45.0

Mumbai 47.5 60 20 40.0

New Delhi 47.5 60 30 35.0

Karachi 35.0 40 25 27.5

Lahore 35.0 40 20 25.0

Colombo 20.0 20 10 17.5

Islamabad 35.0 20 0 10.0

All ratings are out of 100, with 100 the best. BMIs City Terrorism Rating assesses the risk of a terrorist attack. The CTRhas components. The State rating has a 25% weighting and is our overall Terrorism Rating for the state. ThePrevalence sub-rating has a 25% weighting. It assesses the frequency of attacks, and whether the city is a prioritytarget for terrorists. The Threat sub-rating has a 50% weighting. It assesses the number of victims, and is weighted byseverity of attacks (proportion of those killed) and the ability of groups to launch sustained campaigns, rather than one-

off attacks. Source: BMI


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South East Asia Security Overview

The Strategic Outlook For The 2010s

South Asia will continue to face multiple challenges to its security in the 2010s, largely as a result of

ongoing Indo-Pakistani tensions and the US-led War on Terror. In addition, there are significant

domestic pressures jeopardising regional security. For example, rapidly rising populations and a

perceived lack of opportunities for economic advancement will mean that Islamist groups have a

substantial pool of potential recruits. Other sources of instability include local separatist groups, militant

movements, and criminal groups. Externally, the US will remain an important player in South Asias

geopolitics, but so too will China, which is increasingly competing with India for influence in the Indian

Ocean (see our online service, March 10 2010, Indian Ocean: The Growing Struggle For Dominance).

South Asia In A Global Context

South Asia has several characteristics that make it increasingly important to global security:

Population Size

The combined population of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan

and Sri Lanka is 1.644bn (UN estimates for 2010), making South Asia the most populous region

in the world. Moreover, the populations of most of these countries are increasing rapidly.

Worlds Biggest Muslim Population

The South Asia region has the largest number of Muslims in the world, with the Pew Research

Centre estimating in a 2009 report that the population stood at 511mn, or 32.5% of the worlds

total Islamic population.

Militant Islam And The War On Terror

South Asia has become the front line of the US-led War on Terror, mainly because of Western

military deployments in Afghanistan, but also because the war in Afghanistan is having major

ramifications for arch-rivals Pakistan and India.

Nuclear Rivalry

The Indo-Pakistani standoff over Kashmir and both countries possession of nuclear weapons

mean that South Asia will remain one of the worlds key nuclear flashpoints.

The Rise Of India And The Indian Ocean

The emergence of India as a major economic and potentially geopolitical power gives South

Asia added importance to global stability. Growing trade between China, India, the Middle East

and Africa is giving the Indian Ocean greater strategic significance.


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Challenges And Threats To Stability And Security

South Asia faces multiple challenges to its security over the coming decade and beyond. These include:

Poor Governance And Political Instability

South Asian countries are generally prone to a high degree of political instability and suffer from poor

governance. Bangladesh and Pakistan have a long record of military rule and family-dominated political

parties, which have left behind a legacy of authoritarianism, nepotistic practices and ultimately

corruption. Although India has been democratic for most of its post-independence history, its political

system has also suffered from nepotism and corruption and a significant proportion of its legislators have

criminal records. Sri Lanka, too, despite its democratic system, has been prone to authoritarianism, not

least because of the long war with the Liberation Tigers of Tamil Eelam (LTTE, or the Tamil Tigers).

Over the coming decade, we do not expect to see a major improvement in governance in South Asia.

Bangladesh and Pakistan will most likely muddle through their present difficulties, without making a

decisive breakthrough. Both countries could conceivably experience military coups as civilian leaders

falter but experience has shown that the generals, though initially welcomed to clean up the political

system, quickly disappoint the public, leading to renewed calls for democracy.

In India, the governments main challenge will be to ensure that the benefits of its rapid economic growth

trickle down to all levels of society and not just concentrate in the hands of the well-educated business

elites. India is currently experiencing tremendous change and managing this across such a diverse country

will be a herculean task. By far the biggest challenge in governance will be in Afghanistan, where the

government controls only a minority of the country and remains dependent on Western troops for

security. Overall, political instability will continue to put a high risk premium on investment in South

Asia.

Demographic And Social Pressures

Although birth rates have slowed, most South Asian countries are still seeing rapid population increases,

with total fertility rates (TFR, the average number of children a woman is expected to have in her

lifetime) well above the population replacement level of 2.1. Afghanistan has the highest TFR (6.3),

followed by Pakistan (3.6). Maldives has the lowest TFR of 1.9, which is already below the replacement

level, having fallen dramatically from 6.6 in 1990. Overall though, these high birth rates mean that

governments and private sectors must continue to create jobs to absorb the expanding labour force.

To some degree, a rising population means greater demand for goods and services, and thus more job

creation. However, in many cases, job creation is proving difficult, leaving a vast segment of unemployed

or underemployed young people who have only limited prospects for social and economic advancement.

This is naturally a source of discontent and means that radical groups have a sizeable pool of potential

recruits.


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South Asia faces other demographic pressures that could increase instability. Rising populations are

expected to put further strains on scarce resources, especially water. In addition, Bangladesh, which is

already one of the most densely populated countries in the world, could become ungovernable if its

population continues to rise substantially while land is lost to rising sea levels as a result of global climate

change. Environmental refugees could thus become an increasing security problem over the coming

decades.

A further demographic risk is the severe imbalance between male and female births, which is particularly

acute in parts of India. Social scientists believe that the large pool of males who are unable to find wives

(and thus have children) will have little stake in society and thus drift into crime or political extremism.

High Levels Of Poverty And Illiteracy

Despite rapid economic growth in India, Pakistan and Bangladesh in the 2000s, these countries and other

states in the region remain very poor on a GDP per capita basis. The substantial segments of the

population that feel they are being left behind could therefore be mobilised behind populist, radical, or

Islamist movements. While South Asia has not seen revolutionary levels of public demonstrations,

smaller protests can still be sufficient to cause problems. For example, public unrest and strike action in

Bangladesh prompted the military to stage a de facto coup in early 2007 and postpone elections by two

years. In India, past protest movements have prompted significant policy reversals by the government.

South Asia also has a high level of illiteracy, which arguably makes voters more susceptible to being

swayed by populist, emotive, or extreme rhetoric during political campaigns or crises, or more amenable

to vote-buying and patronage. From a security point of view, the large number of illiterate people

constrains opportunities for economic advancement and means that there are millions of people who

could become foot soldiers under the control of terrorist organisations.

One major manifestation of this poverty is the growing Maoist militant insurgency in India. The rebels,

also referred to as Naxalites, are active across most of eastern India (and 22 of Indias 28 states), mainly

in rural areas, and claim to be fighting for the rights of poor peasants and landless workers. They are

believed to number 22,000 combatants and derive their support from the millions of Indians who feel that

they have been left behind by the countrys rapid economic growth. Prime Minister Manmohan Singh has

described the Maoists as Indias biggest internal security threat, following more than 1,500 attacks -

mainly on infrastructure - in 2009.

The Indian security forces thus launched a major offensive on the Maoists in early 2010, prompting rebel

leader Koteshwar Rao to propose a 72-day ceasefire running from February 25. However, in late May

2010 the militants caused the derailment of a passenger train in eastern India, causing the deaths of

around 145 people. A further ambush against the police took place in August.


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The growing strength of the Maoists has prompted calls for the military (as opposed to federal police) to

be used in the war against them. However, as of December 2010, the Indian government had backed away

from deploying the military, owing to strong opposition from state governments amid fears that this

would alienate local populations. Instead, the military will be used indirectly to train the paramilitary

police and provide logistical support. The government also plans to increase the number of special police

officers in order to combat the Maoists.

Going forward, the governments main concern is that the insurgency will spread from the countryside to

the cities, making it harder to contain. Overall, we see a risk that an intensification of the governments

crackdown on Maoists could divert its resources away from Islamist militant threats (see below).

Islamist Militancy

There are multiple sources of Islamist militancy in South Asia. The above-mentioned demographic and

social pressures provide the backdrop for several other factors. These include the ongoing dispute

between India and Pakistan over the status of Kashmir, and the legacy of the Afghan War from 1979

onwards. For a long time, Pakistan has trained and supported Islamist militants fighting against Indian

rule as part of the Kashmir dispute. These groups have had a tendency to slip out of Pakistans control,

making them loose cannons on the regional stage. In particular, Pakistan-based terrorists have attacked

India on several occasions, taking the two countries to the brink of war in early 2002.

Lashkar-e-Taiba (LeT) is one of the most prominent Islamist groups in Pakistan, although it has not

carried out attacks in the country. Although it originates from the Afghan War in the 1980s, LeT was

officially established in 1990 with the support of Pakistans Inter-Services Intelligence (ISI) agency. It

started fighting in Kashmir in 1993. The Pakistani government was forced to ban LeT after it was accused

of attacking Indias parliament in December 2001, but it is widely believed that Pakistans authorities

unofficially tolerate the groups activities. Indeed, LeT is much more than merely a terrorist group, since

it also has a charity wing that provides services such as education and healthcare to millions of people. In

the summer of 2010, reports emerged that a charity linked to LeT was helping to provide relief to

Pakistans flood victims. A major crackdown on the group could thus provoke a backlash by those

dependent on its services.

The highest profile attack attributed to LeT in recent times was a three-day assault in Mumbai in

November 2008, in which around 166 people were killed. The Mumbai attacks were especially

noteworthy because they targeted Westerners at luxury hotels in Indias commercial capital. The attacks

predictably led to a surge in tensions between India and Pakistan, demonstrating that LeT is a major wild

card in bilateral relations. Although LeT has restricted its operations to India (as opposed to Pakistan),

foreign intelligence agencies are becoming increasingly concerned that LeT may start targeting Western

countries, or at least provide logistical support for such attacks through the use of its networks. LeT can


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also offer indoctrination and training to future terrorists, whether local recruits or Westerners of Pakistani

origin visiting their parents homeland, and serve as a gateway to al-Qaeda.

Overall, there is an emerging consensus that LeT is no longer merely a Pakistani group focused solely on

Kashmir, but a globally-minded organisation allied to al-Qaeda and perhaps even more dangerous than

the latter. LeT or its training infrastructure has already been linked to terror cells or terror plots in

Australia, France, the US and the UK, demonstrating its worldwide reach. Going forward, we expect LeT

to attract growing scrutiny from Western intelligence, resulting in ever-greater pressure being put on the

Pakistani government to curb the organisations activities. Given Islamabads perceived limited room for

manoeuvre on this, failure to neutralise the group could lead to new tensions between Pakistan and the

West. Furthermore, there are concerns that a crackdown could lead LeT to splinter and potentially

become even more dangerous.

The Afghanistan War has played a major role in the radicalisation of South Asias Muslims. During the

1980s, Pakistan, along with the US, UK, Saudi Arabia and several other major powers, supported the

Islamist Mujahideen against the Soviet occupation forces in Afghanistan. After the Soviet withdrawal in

1989 and the collapse of its Afghan regime in 1992, Pakistan supported the rise of the Taliban in

Afghanistan. By 1996, the Taliban controlled most of Afghanistan and the country became host to al-

Qaeda leader Osama bin Laden and a major terrorist training base for his group. Although the Taliban fell

in late 2001 following the US-led invasion of Afghanistan, it has been resurgent in recent years and the

rise of its Pakistani counterpart (Tehrik-i-Taliban Pakistan, TTP) has been particularly detrimental to

Pakistans security. Indeed, the Pakistani military has been forced to launch major operations in its

Waziristan regions bordering Afghanistan to root out local Taliban militants. The latter have struck back

through bomb attacks on Pakistans major cities.

One of the biggest risks to Pakistan is its core province of Punjab becoming radicalised. With 92mn

people, Punjab is the countrys most populous state and its political and economic heartland. In June

2010, Pakistani interior minister Rehman Malik acknowledged that prominent militant groups Lashkar-e-

Jhangvi, Sipah-e-Sahaba-Pakistan and Jaish-e-Mohammad, as well as more than 20 other banned

organisations, are operating in Punjab and are allied with the TTP and al-Qaeda against the central

government. If Punjab were to descend into chaos, this would raise serious doubts about the survival of

the Pakistani state.

Another source of Islamist fervour is widespread anger at US (and more broadly Western) policies

towards Afghanistan and the wider Muslim world. Key grievances include Americas support for

authoritarian leaders such as former Pakistani president Pervez Musharraf (1999-2007), its backing of

Israel, its invasions of Afghanistan and Iraq (especially the former) and Washingtons increasingly close

relations with India from around 2000 onwards.


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A final source of Islamist extremism stems from a general backlash against Western culture and the

perception that the growing integration of South Asia into the wider global economy is threatening

traditional values. These sentiments are true around much of the world but have been exploited by radical

Islamists, who favour a return to perceived traditional values.

The above factors are unlikely to dissipate any time soon. However, a major weakness of South Asias

Islamist groups is that they have not been able to overthrow the Pakistani or Bangladeshi governments

and replace them with radical anti-Western ones, let alone declare the existence of a new Islamist super-

state (caliphate). The Islamists thus lack a core state from which to project their interests. Even if

Afghanistan were to fall back under full Taliban control, the country would be too underdeveloped and

remote to serve as the basis for a new caliphate. Realistically, only Pakistan in South Asia could boost

Islamist forces were it to turn radical. This is because Pakistan is the worlds second-most populous

Muslim country (after Indonesia) and the only one with confirmed nuclear weapons.

Despite years of dire predictions of an Islamist revolution in Pakistan, the moderate regimes have proven

resilient. That does not mean they will last indefinitely, but so far the naysayers have been wrong. We see

a possibility that Islamist terrorists should they be able to do so will attack targets frequented by

Westerners (eg: major hotels and resorts) to increase the economic pressure on their governments. These

are easy targets which yield a high political impact.

In recent years, there has been growing speculation that Bangladesh could become radicalised. There are

several Islamist groups in Bangladesh, most notably Jamaat-ul-Mujahideen Bangladesh (JMB), but their

presence is much less widely felt than in Pakistan and the government has cracked down heavily on

militants. For example, in late October 2009, the Bangladeshi authorities arrested 3,000 suspected

militants following a bomb attack on a legislator and threats against the Indian embassy. In addition, in

May 2010, the police arrested Saidur Rahman, commander of the JMB, claiming he was planning a new

wave of attacks across the country. Also noteworthy was that in October 2010, police arrested four

militants belonging to Pakistans Lashkar-e-Taiba group. Unsurprisingly, Indian security officials

continue to fear that Pakistani intelligence will develop militant groups in Bangladesh to gain leverage

over India. This, along with concerns about illegal immigration and smuggling, explains why India has

constructed a 4,000km security fence along its border with Bangladesh.

Elsewhere in South Asia, Maldives leaders have warned that an increasing number of their youths have

embraced strict Islam and have gone to Afghanistan and Pakistan to wage jihad. Clearly, any

radicalisation in Maldives would be a threat to Indian security interests. India and Maldives are thus

cooperating to prevent the spread of radical Islam in the latter.


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The Indo-Pakistani Standoff Over Kashmir

Without doubt, one of the biggest threats to South Asias security is the long-standing dispute between

India and Pakistan over Kashmir, which has led to three wars in 1947, 1965 and 1971, and a quasi-war

known as the Kargil War in 1999. The stand-off has meant that both sides have deployed hundreds of

thousands of troops along the Line of Control that divides Kashmir. We see no reason to believe that the

dispute will be resolved any time soon, or even within the next decade, first because it is too deep-rooted

and intractable. Second, terror attacks in India linked to Pakistan tend to disrupt dialogue between the two

countries, often for long periods of time. Thirdly, any concessions by New Delhi and Islamabad over

Kashmir would likely be viewed negatively by domestic audiences, costing incumbent governments

political support. Fourthly, international mediation is unlikely to work. Reports in early 2009 that US

President Barack Obama was considering appointing a special envoy for Kashmir were received very

poorly in India. Realistically, the US is the only foreign power that could mediate the dispute, but any

American administration that sought to do so would probably fail, while potentially alienating both India

and Pakistan.

Kashmir was rocked by several months of anti-Indian protests starting in mid-June 2010, which

represented the biggest such disturbance since 1989. A new generation of Kashmiris has not given up

hope of a state independent of both India and Pakistan, but New Delhi largely sees such demonstrations

as being masterminded by Islamabad. The Indian government responded by deploying troops to quell the

protests, resulting in scores of deaths and injuries by September, although thereafter it relaxed security

restrictions in the local capital, Srinagar. Overall, we believe that Kashmir will continue to strain Indo-

Pakistani relations.

Ethnic Separatism

Several South Asian states have restive minorities that have exhibited separatist sentiment or conducted

some form of rebellion against the central government.

India is one of the most diverse countries in the world and has had to deal with numerous separatist

movements since its independence in 1947. Aside from Kashmir, New Delhi has faced insurgencies in its

north-eastern states, mainly in Assam, Bodoland and Nagaland, as well as from its Sikh population. In

addition, there are separatist movements within Indian states. For example, in December 2009, the federal

government agreed to a new state called Telangana being created from Andhra Pradesh state, following

many years of such demands. However, it had to backtrack after opponents of Telangana rioted against

the decision. A major sticking point was whether the putative new state would include the city of

Hyderabad, which has emerged as one of the dynamic powerhouses of Indias new economy.

Besides Telangana, there are at least six other regions within Indias existing states that are seeking to

become new states. These include the tea-growing region of Darjeeling, where the local Gurkha

community wants greater autonomy and better treatment (Gurkhas have pointed out that their demands


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are as old as Telanganas). Elsewhere, Uttar Pradesh - Indias largest state with more than 170mn people -

has faced calls for a three-way split. In the western part of Maharashtra state, those seeking a separate

state of Vidarbha have also made their voices heard.

We believe Indias government will find it increasingly difficult to strike a balance between the federal

centre and state governments, given the rapid pace of economic growth and urbanisation. These trends are

threatening to increase socioeconomic divisions between - and within - individual states.

Pakistan is also a very diverse country and the largest linguistic group, the Punjabis, account for only 44%

of the population according to the last census in 1998. Other significant linguistic groups that have

demonstrated separatist tendencies include Pashtuns (15% nationally, but forming an overwhelming

majority in the Afghan border regions), Sindhis (14%) and Baluchis (4%). Some Pakistani officials fear

that their countrys Pashtuns could eventually seek a merger with their ethnic kinsmen in Afghanistan,

who make up around 42% of the latters population. However, it is the Baluchis that have shown the

greatest tendency for separatism, especially as their province is rich in hydrocarbon resources.

Many Baluchis feel the benefits of their resources are not being seen in the region. Nonetheless, the

Pakistani government has managed to suppress secessionism by military means. Overall, separatism in

Pakistan has been contained, but any collapse of the central state could reignite centrifugal forces. As

long as the Pakistani Army remains intact, a disintegration of Pakistan would appear unlikely.

Afghanistan has been wracked by civil war for much of the past 20 years and while the countrys various

ethnic groups are not fighting for independent states, the conflict does have an ethnic dimension. The

Taliban is predominantly a Pashtun movement, while the former Northern Alliance was dominated by

Tajiks and Uzbeks. The 2009 presidential election results appeared to reflect ethnic divisions and we see a

risk that perceptions of Tajik dominance of the Afghan National Army (ANA) could inhibit its emergence

as a national institution and alienate the Pashtun population. This would make it harder for the US and its

allies to develop the ANA to sufficient strength to facilitate Western withdrawal.

Sri Lankas government finally defeated the Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers) in

May 2009, ending a 26-year civil war. Prior to the LTTEs defeat, the group had a formidable arsenal that

included light aircraft and sea vessels. However, the Tigers defeat was decisive, thereby reducing its

threat potential in the region.

Intercommunal Violence

Intercommunal violence is a major security risk in South Asia. India has seen many violent confrontations

between its Hindu majority and Muslim minority, leading to thousands of deaths. The largest

confrontation in the past decade took place in 2002, when more than 1,000 people, mostly Muslims, were

killed in the state of Gujarat. While there have been no similar incidents since then, tensions will likely


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linger. A key risk is that India will see more terror attacks orchestrated not by Pakistani groups, but by

home-grown Islamist movements.

Pakistan has seen considerable tensions between its majority Sunni Muslim population and the Shia

minority, which comprise 10-15% of the total. Every now and again, this manifests in violence. On

December 28, 2009, a suicide bomber attacked a Shia procession in Karachi, killing around 40 people.

Shia Muslims in Karachi were attacked again on February 5 2010, with two bomb blasts killing around

31 people. Dozens more died in separate bomb attacks in September 2010.

Nuclear Security

Nuclear weapons will remain a major security concern in South Asia. India and Pakistan are both

declared nuclear powers, and there are fears that a conventional conflict between the two - for example,

Indian retaliation for a future terror attack traced back to Pakistan - could escalate to nuclear level. Owing

to Pakistans growing instability and its connections with Islamist militancy, Western countries are much

more concerned about Islamabads nuclear arsenal than New Delhis. One nightmare scenario is that an

Islamist revolution in Pakistan brings to power a vehemently anti-Western regime armed with nuclear

weapons. This government could then threaten Western interests in South Asia and potentially sell

nuclear technology to Middle Eastern states. Another nightmare scenario envisages the collapse of

Pakistan, with the ensuing chaos allowing terrorists or their sympathisers to seize control of nuclear

warheads.

Pakistans nuclear arsenal, which consists of around 80-100 warheads, is arguably the countrys most

treasured possession from a security point of view and only the most trusted individuals are permitted

knowledge of and access to the weapons. There are several important safeguards on the arsenal. Firstly,

there is intensive vetting of the 8,000-10,000-strong Strategic Plans Division, which is responsible for

protecting the arsenal. Secondly, there is heavy guarding of facilities housing nuclear weapons. Thirdly,

there is considerable secrecy and deception concerning the arsenals whereabouts, and former president

Pervez Musharraf was quoted in late 2009 as saying that a vast tunnel system exists for the secure

transport and storage of nuclear weapons. Fourthly, warheads are kept separate from detonators and

missiles. Fifthly, and reportedly, the weapons have electronic locking systems modelled on the US

Permissive Action Link (PAL) system. The latter two safeguards mean that even if stolen, the warheads

would not necessarily be usable.

Nonetheless, Pakistans nuclear arsenal cannot be considered 100% safe. As regards personnel issues,

there are concerns that the potential emergence of rogue elements within the military could eventually

compromise the safety of the weapons. This could conceivably become a risk if a radical faction of the

military attempt a mutiny. On the issue of secrecy, the tunnel system means that US intelligence would

find it much harder to detect any movement of the arsenal, which means that American Special Forces

would be less capable of seizing the warheads in the event of a crisis. Yet if the warheads were to be


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moved above ground, they would arguably be more vulnerable to seizure by rogue elements.

Furthermore, there are major doubts as to whether the Pakistani military would cooperate with US

requests to physically secure the arsenal in an emergency, since this would be regarded as unpatriotic.

External Power Dynamics

There are three major external powers that have the ability to shape South Asias security: the US, China,

and Russia. Clearly, how each interacts with India will be pivotal for the regions geopolitics going

forward.

The US arguably ignored South Asia (relative to Europe, the Middle East, and East and South East Asia)

during the Cold War, but became heavily involved in the Soviet-Afghan War (1979-89) through its strong

ties with Pakistan. After that war ended, the US once again neglected South Asia until 1998, when

nuclear tests by India and Pakistan demonstrated the need to become engaged in the region. It was at this

time that Afghanistan started drawing international attention due to its hosting of Osama bin Laden. A

growing awareness of Indias rise as an economic and military power led to Bill Clinton in 2000

becoming the first US president to visit the country since 1978. This marked the start of a new US

strategic outreach to India, which gathered momentum during George Bushs presidency (2001-2009),

and seemed to mark a shift away from Washingtons traditionally pro-Pakistan policy in South Asia.

However, Pakistans importance to the US surged after the 9/11 attacks, with Washington desperately

needing Islamabads cooperation to wage war against the Taliban in Afghanistan.

However, it is evident that the US will increasingly seek to cultivate India as a major global ally. The two

countries are both democracies, are both threatened by militant Islamist groups, and are both concerned

about the rise of China. Furthermore, India is a massive market for US businesses (and vice-versa), while

the US is a major source of Indias foreign investment.

That said, we believe the US and India will hold off on forming an official alliance. For a start, India

wishes to retain strategic independence and there are significant political groups in India suspicious of US

intentions. Secondly, a formal alliance between the two countries could be interpreted by China and

Pakistan as being aimed against them. A putative alliance could thus raise regional tensions. Therefore,

while we expect Washington and New Delhi to boost cooperation, the US will have to pursue a carefully

balanced approach.

For the foreseeable future, the US influence in South Asia will be determined by its ability to stabilise

Afghanistan. The American troop presence there is approximately 100,000 (as of December 2010), with a

further 50,000 soldiers provided by allied nations. The Western war against the Taliban is also being

assisted by 134,000 Afghan government soldiers. Nonetheless, the Taliban is putting up fierce resistance

and there are real doubts that the group can be decisively defeated. If Western troops withdraw without


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leaving a durable government in place, this would be perceived as a defeat, thus providing a significant

psychological boost to Islamist forces.

China is also becoming an active player in South Asia and Indian officials are concerned that Beijing is

developing a string of pearls essentially a network of ports and naval bases in Myanmar

(Kyaukpyu), Bangladesh (Chittagong), Sri Lanka (Hambantota) and Pakistan (Gwadar) with which to

dominate the Indian Ocean, especially the principal east-west trade route along the northern rim of the

ocean. New Delhi fears that the string of pearls would contain Indian influence in the region.

However, while China is undoubtedly financing port developments in the aforementioned countries, it is

far from clear that Beijing will be allowed to use these facilities as naval bases, especially in the event of

a hypothetical war. Reports of the string of pearls would thus appear to be somewhat exaggerated.

Furthermore, India is rapidly expanding its navy and developing ties with other Indian Ocean states to

counteract Chinas influence. Finally, the US will retain a strong military foothold in the Indian Ocean

thanks to its base at Diego Garcia in the middle of the ocean.

Chinas traditional ally in South Asia has been Pakistan, and Beijing is Islamabads most consistent

friend, unlike Washington, which has arguably been much more fickle. China has also taken advantage of

occasional Indo-Bangladeshi strains and Western governments arms-length approaches towards Sri

Lankan President Mahinda Rajapaksa by developing Dhaka and Colombo as new regional allies.

The evolution of Sino-Indian relations will play a very big part in the future of South Asia. Aside from

Chinas traditional support for Pakistan and growing Sino-Indian competition in the Indian Ocean,

Beijing and New Delhi are at odds in the Himalayan region. China claims Indias state of Arunachal

Pradesh, which borders Tibet and the Kingdom of Bhutan, while India claims the Aksai Chin portion of

Kashmir, held by China. While neither of these is likely to emerge as major flashpoints, they could

further strain bilateral relations if more pressing strategic issues are already in play.

Geopolitical competition in the Himalayan region is a major reason for China refusing to countenance

Tibetan independence. Beijing fears that a putative independent Tibetan state would align with New Delhi

against it, especially given that the Dalai Lama, Tibets spiritual leader, lives in India, where there is a

substantial Tibetan diaspora. Tibet and broader Himalayan issues are also factors influencing Chinas

outreach to Nepal in recent years, taking advantage of the Kathmandu governments strained relations

with the West. At the urging of Beijing, Nepal is closing off Himalayan passages through which Tibetan

separatists have traditionally made secret trips to and from China. Nepal has a small Tibetan community

and can serve as a logistical corridor for Tibetan separatists. Any increase in Chinese influence in Nepal

will be viewed warily in India, which has traditionally exerted influence there.


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Russias influence in South Asia is much more limited by comparison. Russia remains a close ally of

India, which is a legacy of New Delhis pro-Moscow alignment during the Cold War. Russian Prime

Minister Vladimir Putins visit to India in March 2010 was noteworthy for promoting the sales of military

equipment, with the two countries jointly developing a fifth-generation fighter jet. Russia is also in the

process of refurbishing a former Soviet aircraft carrier,Admiral Gorshkov, for sale to India with delivery

expected in 2012. The vessel could significantly enhance New Delhis power projection in the Indian

Ocean. The Kremlin shares security interests with India namely preventing Afghanistan from being

used as a base to train Islamist militants, and concerns about the rise of China.

However, a Russian-Indian alliance cannot be taken for granted. Russia remains allied to China through

the Shanghai Cooperation Organisation (SCO), which includes several Central Asian nations. India and

Pakistan both hold observer status in the SCO, along with Iran and Mongolia, while Sri Lanka has

dialogue partner status, and Afghanistan is a contact partner. We see a possibility that an expansion of

the SCO to include India and Pakistan could transform the organisation from a purely Eurasian one into

one that covers most of South Asia. This would reduce tensions between China and India and potentially

India and Pakistan.


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