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Showing posts with label BRIC. Show all posts
Showing posts with label BRIC. Show all posts

Monday, 24 August 2015

Is the game up for China’s much emulated growth model?



Jayati Ghosh in The Guardian



Illustration by Robert G Fresson



Whatever happened to emerging markets? Brics, Mints, whatever global investors call them: For a while it appeared as if countries such as Brazil, India and Turkey had secure and buoyant futures, regardless of the travails of advanced economies. There was much trumpeting of their advantages, such as the demographic bulges producing young populations. Few asked about the nature of the growth, or whether it could last. The euphoria spread, leading to large private-capital inflows that pushed up asset prices in these countries.

That already seems a long time ago, as investor opinion has done yet another volte face. Investors who were slow to read the tea leaves during the boom times have now taken fright. In just 13 months, capital outflows from these countries have crossed $1tn. Stock markets have tanked across countries as distant and diverse as Malaysia, India, South Africa and Brazil; currencies have depreciated; and bond issues are slowing down, with fewer takers.

For a change, this is not being driven by policy in the developed world. Unlike the “taper tantrum” unleashed in mid-2013 by Ben Bernanke, the then US Federal Reserve chairman – when he simply announced the possibility of reducing the massive liquidity stimulus that was being provided in the US – the current skittishness in emerging markets is the fallout of what is happening in China. This is hugely important, not just because of China’s major role in global trade, but because it signifies the end of a particular growth strategy that many other countries were trying to emulate.

The recent travails of China’s economy are well known by now: falling real estate prices put paid to the construction boom, and the subsequent bursting of the stock market bubble was hamfistedly controlled through official measures. But these current difficulties are the outcome of earlier economic strategies that were widely celebrated, when the going was good.

From the early 1990s China adopted an export-led strategy that delivered continuously increasing shares of the world market, fed by relatively low wages and very high rates of investment, enabling massive increases in infrastructure. It led to big increases in inequality and even bigger environmental problems, but the strategy seemed to work – until 2008-09, when exports were hit by the global financial crisis.

Yet even then, China, India and other large emerging markets continued to grow. The talk at the time was that they were already “decoupled” from the west. In reality, China (and much of developing Asia) had simply shifted to a different engine of growth without abandoning the focus on exports. The Chinese authorities could have generated more domestic demand by stimulating consumption through rising wage shares of national income, but this would have threatened their export-driven model. Instead they put their faith in even more accumulation to keep growth rates buoyant.

So the “recovery package” in China essentially encouraged more investment, which was already nearly half of GDP. Provincial governments and public sector enterprises were encouraged to borrow heavily and invest in infrastructure, construction and more production capacity. To utilise the excess capacity, a real estate and construction boom was instigated, fed by lending from public sector banks as well as “shadow banking” activities winked at by regulators. Total debt in China increased fourfold between 2007 and 2014, and the debt-GDP ratio nearly doubled to more than over 280%.

We now know that these debt-driven bubbles end in tears. The property boom began to subside in early 2014, and real estate prices have been stagnant or falling ever since. Chinese investors then shifted to the stock market, which began to sizzle – once again actively encouraged by the Chinese government. The crash that followed has been contained only because the government pulled out all the stops to prevent further falls.

All this comes in the midst of an overall slowdown in China’s economy. Exports fell by around 8% in the year to July. Manufacturing output is falling, and jobs are being shed. Construction activity has almost halted, especially in the proliferating “ghost towns” dotted around the country. Stimulus measures such as interest rate cuts don’t seem to be working. So the recent devaluation of the yuan– which has been dressed up as a “market-friendly” measure – is clearly intended to help revive the economy.

But it will not really help. Demand from the advanced countries – still the driver of Chinese exports and indirectly of exports of other developing countries – will stay sluggish. Meanwhile, China’s slowdown infects other emerging markets across the world as its imports fall even faster than its exports and its currency moves translate into capital outflows in other countries.

The pain is felt by commodity producers and intermediate manufacturers from Brazil to Nigeria and Thailand, with the worst impacts in Asia, where China was the hub of an export-oriented production network. Many of these economies are experiencing collapses of their own property and financial asset bubbles, with negative effects on domestic demand. The febrile behaviour of global finance is making things worse.

This is not the end of the emerging markets, but is – or should be – the end of this growth model. Relying only on exports or debt-driven bubbles to deliver rapid growth cannot work for long. And when the game is finally up, there can be severe political fallout. For developing countries to truly “emerge”, a more inclusive strategy is essential.

Monday, 17 August 2015

Doomsday clock for global market crash strikes one minute to midnight as central banks lose control

China currency devaluation signals endgame leaving equity markets free to collapse under the weight of impossible expectations


 

The mushroom cloud of the first test of a hydrogen bomb
It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations. Photo: Reuters
By John Ficenec in The Telegraph
 

When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.


Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.


The FTSE 100 has now erased its gains for the year, but there are signs things could get a whole lot worse.



1 - China slowdown


China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil- and resource-rich emerging markets.


The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.


The People’s Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame.

Data for exports showed an 8.9pc slump in July from the same period a year before. Analysts expected exports to fall only 0.3pc, so this was a huge miss.

The Chinese housing market is also in a perilous state. House prices have fallen sharply after decades of steady growth. For the millions who stored their wealth in property, it makes for unsettling times.


2 - Commodity collapse

The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.


The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe.

Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about $50 per barrel.


Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom.

The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.


3 - Resource sector credit crisis

Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices.

With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.



Nowhere has this been felt more acutely than shale oil and gas drilling in the US. Tumbling oil prices have squeezed the finances of US drillers. Two of the biggest issuers of junk bonds in the past five years, Chesapeake and California Resources, have seen the value of their bonds tumble as panic grips capital markets.


As more debt needs refinancing in future years, there is a risk the contagion will spread rapidly.


4 - Dominoes begin to fall

The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.

The central banks are rapidly losing control. The Chinese stock market has already crashed and disaster was only averted by the government buying billions of shares. Stock markets in Greece are in turmoil as the economy grinds to a halt and the country flirts with ejection from the eurozone.

Earlier this year, investors flocked to the safe-haven currency of the Swiss franc but as a €1.1 trillion quantitative easing programme devalued the euro, the Swiss central bank was forced to abandon its four-year peg to the euro.


5 - Credit markets roll over

As central banks run out of silver bullets then, credit markets are desperately seeking to reprice risk. The London Interbank Offered Rate (Libor), a guide to how worried UK banks are about lending to each other, has been steadily rising during the past 12 months. Part of this process is a healthy return to normal pricing of risk after six years of extraordinary monetary stimulus. However, as the essential transmission systems of lending between banks begin to take the strain, it is quite possible that six years of reliance on central banks for funds has left the credit system unable to cope.



Credit investors are often far better at pricing risk than optimistic equity investors. In the US while the S&P 500 (orange line) continues to soar, the high yield debt market has already begun to fall sharply (white line).




6 - Interest rate shock

Interest rates have been held at emergency lows in the UK and US for around six years. The US is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency. UK rate rises are expected to follow shortly after.




7 - Bull market third longest on record

The UK stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.



UK markets have been a beneficiary of the huge balance-sheet expansion in the US. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.


8 - Overvalued US market

In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.

Monday, 22 July 2013

Prospect interviews Amartya Sen

 

The full transcript of Jonathan Derbyshire’s interview with renowned Nobel Prize-winning economist Amartya Sen 
Amartya Sen
Jonathan Derbyshire: We first met four years ago. You said something to me then that I think bears on the preoccupations of your new book, co-written with Jean Drèze, An Uncertain Glory. We were talking about the Indian left. You said: “I’ve been very critical of the political balance of the left in India in recent years. A party which has a real commitment to the underdogs of society should be much more worried than it seems to be that India has a higher proportion of undernourished kids than anywhere else in the world.” That insight is, more or less, the point of departure for your new book isn’t it? You’re interested, in other words, in what you call the “two-way relationship” between “social justice” (your term) and economic growth, which of course has been spectacular in India over the past 15-20 years.
Amartya Sen: That’s exactly right. At the time, I hadn’t done the systematic work to see what the other indicators looked like, but I knew that on the undernourishment index we [ie India] were very low. But then when I found that this was true in other many other aspects – having a stable and secure medical arrangement for all; having a well functioning school system to which every child has actual access; universal coverage of immunisation  – in all these areas India seemed to be doing worse than many countries which it has overtaken in terms of per capita income- for example, Bangladesh. So this, four years ago, was a thought that was bothering me which I always wanted to follow up. As I looked through it with my friend and collaborator Jean Drèze, it became clear that systematically India was underperforming in these respects, even when it was outperforming other large economies, with the exception of China (today, despite its fall in growth rate, it still has the third highest rate of growth among large economies, after China and Indonesia).
JD: That context – the competition with China and the other BRIC nations, India’s sense of itself as punching its weight on the global stage – matters doesn’t it?
AS: Yes. Economic growth is important precisely because it can help people to lead better lives, but to take growth itself to be a fetishistic object of admiration is part of the problem.  We may legitimately worry about the slowing of Indian growth that is happening compared to, say, Indonesia.  But we have to ask the right questions and note, for example, the importance of the fact that Indonesia has a higher ratio of literacy, education, higher ratio of secure healthcare. I think we have to understand  that ultimately not having an educated, healthy population is not only bad for well-being but also bad in the long run for sustaining our economic growth.
JD: A question about the theoretical framework of the book. You said you started from a number of empirical observations about these indices (healthcare, literacy and so on) in which India was doing much worse than countries that it was outstripping in terms of GDP growth. I wondered whether your notion of “capabilities” is shaping your approach here (access to healthcare, education etc being “capabilities” that make human lives go better rather than worse).
AS: Yes, it’s very important for two different reasons. The first reason is that in order to judge how a country is doing you can’t just talk about per capita income. India used to be 50 per cent richer than Bangladesh in per capita income terms but is now 100 per cent richer. Yet, in the same period … when, in the early 1990s, India was three years ahead of Bangladesh in life expectancy, it is now three or four years behind. In India it is 65 or 66, in Bangladesh it’s 69. Similarly, immunisation: India is 72 per cent, Bangladesh is more like 95 per cent. Similarly, the ratio of girls to boys in school. So in all these respects, we are looking at capability. We’re looking at the capability to lead a healthy life, an educated life, to lead a secure life (with immunization making people immune to some preventable illnesses), having the capability to read and write, for girls as well as boys.
Expanding and safeguarding human capability is central to thinking about policy making.  That understanding informs our work. But what plays a more dialectical role in this book is  the insight that many Indian policy analysts may have missed is that human capability is not only important in itself, but that human capability expansion is also a kind of classic Asian way of having sustained economic growth. It started in Japan, just after the Meiji restoration, where the Japanese said: “We Japanese are no different from the Europeans or the Americans; the only reason we’re behind is that they are educated and we are not.” They then had this dramatic expansion in universal education and then, later, widespread enhancement of healthcare. They found that a healthy, educated population served the purpose of economic growth very well. That lesson was later picked up in South Korea. Korea had quite a low educational base at the end of the Second World War. But following Japan, they went in the same direction. The same happened in Singapore, Hong Kong, Taiwan and, to some extent, even Thailand. And gradually, in a smaller way, in Indonesia. Of course, they reaped as they had sown. So human capability expansion is very important for Asian economic growth.
This can be seen to be closely related,  to use the terms economists seem to prefer, to the importance of “human capital”.  I don’t like the term “human capital” very much. Adam Smith says somewhere – it may have been in a letter to Hume – that in this way of talking about human beings, there’s a danger you won’t be able to distinguish between a good human being and a good chest of drawers!
JD: The other central part of the argument in this book concerns democracy and the state of public discourse in India. I think it’s your view that democratic participation is part of the capability set required to live a flourishing human life. Of course, one of the things about the Asian market economies you’ve just discussed, certainly in the 1980s when they experienced the most dramatic growth, is that although they had flourishing civil societies, political participation was actually limited – this is certainly true of Singapore, say, and I think South Korea in that period. How does that sit with the claims you’re making in the book about democracy?
AS: The choice those Asian economies made [to extend healthcare, education etc] wasn’t a democratic choice, but it was a very smart choice. You can be smart without being democratic.  However, good practice of democracy – well informed and vigorous – can help to select smart governments, humane governments, and can make those qualities be less fragile and transitory. For this the quality and force of media discussion are important.  But if you are lucky enough to  have a friendly authoritarian government, they can take  smart decisions without having to rely on forceful media discussion. That’s what they did in South Korea and in Taiwan.  But North Korea did not.  Nor did Cambodia in the 1970s.  Democracy can help to make the choice of government not a matter of luck, but of conscious and reasoned public choice.  For this to be ensured the opportunities offered by democracy have to be strongly seized.  This is where India’s record is divided – excellent use in some areas and very slack use in others.  We have to make democratic practice more comprehensive.
Over the decades China has presented examples of good and smart as well as weak and confused authoritarian rule.  The gigantic famines of 1958-61 resulted from terrible policy choices that could not be changed for three years despite tens of millions dying each year- no political party could criticize the terrible policies, and newspapers could not even cover the bad news.  But after that, despite many other problems, China did remarkably fast progress in education and healthcare for all – an example of good authoritarianism.  But they were irrationally prejudiced about the use of markets, which they shunned until the reforms of 1979.  With the reforms there were some smart moves (with marketization China did brilliantly in manufacturing and agriculture) but also a big mistake when they marketised health insurance, so you had to buy health insurance rather than being insured by the state or the commune; the Chinese were not alert to the terrible consequences of marketizing everything. The percentage of health coverage went down after 1979 from 100 per cent to 10 or 12 per cent, with downward effects on the high pace of China’s progress in life expectancy.  Again, it took them many years to recognise that they had made a mistake, and went about un-doing the harm, a correction that became full speed only in 2004 – a quarter century after the error of marketizing health insurance in 1979.  Now they have nearly a hundred percent coverage – and with much better quality health care thanks to China’s economic prosperity.
An authoritarian system, if it is intelligently and humanely led (but there is no guarantee of that), can get its way quickly. A democratic system is somewhat slower, because you have to convince everyone. In the case of India, the question is which issues get dramatised and politicised. Famine was instantly politicised, because it is so central to the Indian view of the British Raj. The Raj began with a famine [in 1769] and ended with a famine [in 1943].  The elimination of famines was an immediate success of democratic India.  There have been other successes, particularly when there have been crises – with HIV, for example – when there has been a real sense of urgency, which the media discussion and democratic pressure reflected. Five or ten years ago, people were saying that India was going to have more cases of HIV than anywhere else in the world – not only as an absolute number, but as a proportion. But it hasn’t happened. That challenge was met and things were done to reduce the vulnerability of the population.  These challenges received public attention and advocacy, and a democratic success followed.
Unfortunately, the challenge has not been seized in the case of general healthcare, not even general immunisation. And nor has it happened with general education. So I think there is no guarantee that democracy will get there immediately, but it depends on the people to make it happen. And of course the foundational  reason for wanting democracy isn’t that. The basic reason for wanting democracy is that it  gives people dignity, political freedom, and voice – democracy has its own value. If that is compatible with doing good things, and if what happened with famine and HIV crisis could be translated to general healthcare and chronic undernourishment, then that would be a wonderful combination.  There is no reason at all why we- and here I speak as an Indian citizen – cannot make that happen.
JD: You argue that there is a “two-way relationship” between growth, on the one hand, and the expansion of human capability on the other. It’s easy to grasp that point from the side of growth. Could you explain the other side of the argument? How does the expansion of capability enhance growth?
AS: Well, I think the basic insight is that of the Meiji restoration I mentioned earlier – namely that an educated, healthy workforce is very productive. And ultimately it is productivity and skill-formation on which economic and social progress depends. That is the Adam Smithian point. Smith asked “why is trade good?” Trade is good because it allows you to specialise and specialisation allows you to develop skills. He didn’t take the view which can be associated with David Ricardo, that trade is important because of comparative advantage. Smith’s view was that any country could typically produce any good (unless they are unusually geography-dependent). But if you specialise in something you become frightfully good at it – like the Swiss, making chocolate, watches or running banks. Once that happens, then your productivity rises, while in other countries’ productivity rises in other things. Smith also emphasised that general education is something that the state ought to do. He thought it’s a good thing to have an educated population but also that it would help skill-formation.
I think that connection the Asian economies saw, and they also saw the central role of skill-formation. Are there studies showing how productivity responds to nourishment, education, healthcare? There are indeed such studies, though we don’t go into a great deal of detail on this in the book. We were going more by the experiences of different countries which have adopted the human development strategy and have all done well. Similarly, states within India – Kerala, for example, which has a faster rate of growth than most others. Every state in India which went in the direction of human capability-formation typically led by the state – think of Tamil Nadu or Himachal Pradesh in addition to Kerala – ended up having a faster rate of economic growth and being ahead. Now some people who earlier were saying that Kerala’s early focus on state-financed education and healthcare could not be sustained now seem to be saying there is nothing to explain! Keralans are rich and therefore have high human capabilities. But that overlooks how they became rich.
JD: So what the other Asian economies show us is that you don’t have to have liberal democratic political institutions in order to have human capability growth?
AS: Yes. But I’ve never denied that.
JD: So what’s the claim about democracy being in this book then?
AS: There are in fact three claims being made. One, that democracy is important in itself, and it is compatible with human capability-based expansion. Two, democratic practice would be deeply favourable to human capability expansion, through good and forceful use.  What has been done in the case famine-prevention or HIV-handling can be done more generally through the same practice of democratic pressure.  Three, there is no guarantee that you will have human capability expansion with authoritarianism any more than we can be sure about a democracy, except that in the case of a democracy we know how to correct that neglect – in fact through more forceful and informed democratic practice.   As the examples I discussed earlier illustrates, while human capability expansion may be well pursued by some authoritarian governments, it may be entirely neglected by other authoritarian rule.  With authoritarianism, we do not know whether we would be South Korea or North Korea.
And even when things go well in many ways in an authoritarian state, there is always a fragility [in authoritarian states]: under good rulers you go one way, under bad rulers another. In many ways, Akbar’s India was a benign state, but it depended on the authoritarian rulers having these values. There was nothing in the system that guaranteed it. Democracy doesn’t have that fragility, though it may be harder to get there, slower to get there. For example, consider the fact that one morning in 1979 China abolished universal healthcare – if there had already been universal healthcare in India in 1979, as there was in China, I don’t think any government in India would have been able to abolish that.
JD: How robust do you think Indian democracy is?
AS: Its institutions are robust enough, but its practice is still quite limited. We have to be more vigilant. Gender inequality, long neglected, is a subject that is being taken up much more  now, partly because of the terrible incident of rape on 16 December (leading to mass protests). Democracy itself is quite stable in India, but the practice of democracy has been partially vigorous and partially very lethargic. Can we be sure of its vigour?  It depends on us – the citizens of the country.  Like liberty, democracy requires eternal vigilance.
JD: You distinguish, it seems to me, two questions about democracy. First there’s a question about the compatibility between democracy and growth and you say that question has been definitively settled – we know the two are compatible. The second question is more interesting and difficult to answer and has to do with democracy, on the one hand, and what you call “the use of the fruits of growth for social advancement” on the other. And here the picture is much less clear isn’t it?
AS: Indeed, much less clear. Democracy’s difficulty is that the vocal and the active can influence the agenda in a way that the inactive and unvocal cannot. And the active ones have been the relatively poor among the rich – the bottom 40 per cent of the top 20 per cent (though they’re still part of the top 20 per cent). So, for example, they have asked for a diesel subsidy, and got it; they asked for a cooking gas subsidy and got it; they insisted on electricity being sold to urban consumers at below cost. There have been many other concessions which have cost money. The surplus has gone in their direction because they’ve been more vocal. And what is pernicious, or at least disturbing, is that they speak in the name of “ordinary people”. But ordinary people don’t drive diesel vehicles. Ordinary people don’t have cooking arrangements to which gas cylinders can be attached. And many ordinary people don’t have electricity. Democracy is a guarantee of process. But offers no guarantee as to how that that process will be pursued and what will come of it. If you don’t do anything, you won’t get anything.
JD: Another preoccupation of the book is the contrast between capability growth in India and in China. Presumably that’s a central preoccupation of the India elite? The race with China.
AS: For some parts of the elite. The media gives the impression that the number of people preoccupied with the comparison with China is very large. But it is a relatively small part of the population who read the “pink papers” (the local equivalents of the Financial Times). They are very concerned about this. But I’m not sure it’s an obsessive concern of the Indian elite generally. The literary elite is not very aware of how … they’re quite happy that India is a big player now in literature, in film and in technology. The Indian elite is often under-informed, which is why this book is so information-focused. The business elite is certainly very concerned with the horse race with China without ever asking how India can catch up with China in life expectancy, in literacy, in immunisation. And that’s a bizarre focus.
JD: One aspect of the way India lags behind China is that wage growth in China has far outstripped wage growth in India. Why do you think that is?
AS: First, the bargaining power of workers has been relatively small in India. Also, India has had a high growth rate but based on highly skilled labour – pharmaceuticals, information technology and car parts. But these don’t provide as much employment as you would expect from other industries. As a result, the general competition for labour hasn’t actually occurred. By contrast, a lot of American and European investors in China complain that wages have been rising very fast there. But that’s a sign of success. An economy that’s growing at six, seven or eight per cent a year should not be experiencing wage stagnation of the kind we have in India.
JD: But surely the bargaining power of labour in China is not significantly better in authoritarian China than it is in democratic India?
AS: The bargaining power of labour is better there, definitely. They don’t have unions, certainly, but the unions in India often serve those already relatively better-placed, rather than landless labourers in agriculture or those engaged in other basic unskilled labour. There was a time when the left parties did do that. But since then the more middle-class oriented left parties have been concerned with skilled labour. Skilled labourers’ wages have sometimes risen, but it’s the basic wages of the common labourer which have stagnated. And at that level I think that China does have more competition. But it doesn’t come from the unions – they don’t tolerate unions!
JD: Back to this question about the relationship between GDP growth and capability growth. You know that there is a competing view to yours which says that successful economic development necessarily occurs in two stages – this is a “two-track” account according to which “Track 1” reforms are designed to increase GDP and pull up the poor; healthcare and educational reforms belong to “Track 2”. And that it’s only Track 1 which makes Track 2 possible. You reject that model don’t you?
AS: Well, there’s no historical illustration of that. Japan isn’t. China isn’t. Korea isn’t. Hong Kong isn’t. Taiwan isn’t. Thailand isn’t. Europe isn’t. America isn’t. Brazil isn’t. So what are we drawing that model from? That’s not how things have happened in the world. They’ve all done it through increasing capability. I know of no example of unhealthy, uneducated labour producing memorable growth rates!
JD: What about the charge that you don’t pay as much attention in the book as you might to what one might call the negative externalities of growth and development – principally, the environment and population growth.
AS: On the environment, we do say quite a bit about that in the book, but maybe it’s not adequate – our primary battle was on a different front. Is growth inescapably damaging to the environment? I don’t think so. The biggest influence in reducing the fertility rate, for example, is women’s literacy. The best way of cutting population growth is women’s education, women’s gainful employment. Even in China, the low fertility rate they’ve achieved is explicable entirely by the good things China has done – widespread education of girls, widespread economic independence of women. Anything that increases the voice of young women tends to cut down the fertility rate because the lives that are battered most by the continuous bearing of children are those of young women. So human capability-expansion in the form of education is very environment-friendly in that respect. Now if you want just growth and nothing else, then you may have a clashing course. But if you are concerned with growth and human capability, that’s part of your calculation as to how you can make growth better oriented. It’s a point that Adam Smith makes: we are not concerned commodities themselves; we want them because they allow us to do certain things. If you want to be able to take part in the life of the community and appear in public without shame, then you have to have clothes like those of others. Similarly, if you live in California, you have to have a car to drive around. But what is the point of public reasoning if it doesn’t engage the fact that by having good public transport you can cut down the need for having cars, for example? There is no automatic process by means of which growth itself becomes sustainable without giving thought to it.
JD: We’ve spoken a lot about China. But the book also spends some time on the comparisons between India and another of the BRIC countries, namely Brazil. The account you give of the recent history of Brazil says that what the Brazilians have done in the last 20 years, say, is to correct for what you called “unaimed opulence” with active social policies. Obviously, the book was finished before the current unrest in Brazil began. How are we to understand what is happening in Brazil today? Are we to blame it on sluggish social reform? Probably not, because as you point out, these have been far-reaching. Or do the causes lie elsewhere? Do they lie, for example, in something else you discuss, that is in failures of accountability and corruption in the system?
AS: Yes. Most popular agitations in the world have not been about capability issues. That is the problem we have been discussing in the case of India, too – the cause of the basic education of the common man is not easy to translate into democratic agitation. On the other hand, corruption is; the specific deprivation or organised groups is. Many countries suffer from corruption, including China. Incidentally, those who think India is not growing as fast as China because it’s more corrupt, we don’t know that this is the case. As I’ve said, I think the reason is that they’re dealing with a healthier and better educated population. In the case of Brazil, they are also dealing with a healthier and more educated population. But that’s not what the agitation is about – the protestors aren’t calling for universal healthcare or education. They are talking about corruption and other issues. I think it’s very difficult to judge what’s really going on. Take the Falklands War, which changed the fortunes of Mrs Thatcher completely. It was a minor issue when you think about it. Similarly, there was a kind of massive groundswell to intervene in Iraq in 2002-03, into which initially even very sane voices moved. So I wouldn’t draw any big conclusions on the basis of what is going on in Brazil. By the way, mine isn’t a theory of public agitation. I don’t have a general theory of public discomfort!
JD: Chapter 8 of the book is devoted to the question of inequality. Could you say something about how in India caste aggravates and exacerbates the economic inequalities that are a feature of all advanced market economies?
AS: It does this in a very big way. First, it is stratification. Second, it is stratification on very hardened lines – it’s not like becoming rich. It’s easier to become bourgeois than it is to become a high-caste Brahmin! Third, there is a kind of approach that has gone along with the caste system, which is that it is a natural order and you can’t change it, and that the alternative is chaos. And that’s quite important to recognise. There are a lot of people who tend to think that undoing the caste system now would be a destabilising course of action. I think caste is about the worst form of inequality you can think of. And the fact that it has gone on for 2,500 years indicates how much of a historical background it has. Class and gender also play a part in Indian inequality. The idea that you need a good school, basic healthcare with a medical unit near where you live, that everyone needs a toilet in their home – these have become more ingrained in many societies, even poor ones, than has been the case in India. You can still build a large condo complex where, given Indian social structures, there will be many servants, without constructing toilets for them. And I think this is a ridiculous failure of vision. So, in that respect, inequality in China, though it is high, is quite different to that in India.
JD: It’s a failure of vision, but not an insuperable obstacle to change? After all, the book ends on an optimistic note.
AS: Yes. In order to get there in a democracy you have to fight for it. There is no way that democracy automatically guarantees that. I first argued that functioning democracies prevent famine in around 1979/80. I think today I would put it slightly differently and say that human beings in a functioning democracy prevent famine. The system in itself wouldn’t do it unless there was activity along with it. In the case of famine, it’s very easy to generate activity. In the case of under-nourishment, less so. We could only make a difference by trying harder.
JD: This invites the question what you mean by “democracy”. As you point out, democracy is about more than free elections. So what’s the ramified notion of democracy at work here?
AS: There are three aspects to it. At some level democracy was to involve majority rule and free voting. That’s the point at which someone like Samuel Huntington would like to stop. I would like to go further. It must also include minority rights, which are part of the institutional structure, and the protection of public discussion – free public discussion, free media and so on. Now, these two requirements are institutional. But the third aspect is not purely institutional – it’s the requirement that people use public reasoning; democracy would be more active the more we use public reasoning in an open way. Now, if the latter doesn’t obtain but the first two do, is it a democracy or not? I won’t go into that debate. I’d say, it is a democracy but it’s not doing very well. That’s what I’d say about India today. When you think about it more widely – America had Iraq; also Americans don’t necessarily quickly vote for healthcare (even those without health insurance don’t seem to see the merit of it) – there are all kinds of ways in which democratic debate doesn’t proceed well. And I’m really amazed that there is so little discontent in this country about the intellectually inadequate idea of “austerity”. It can’t be a tribute to democracy in Britain that Labour leaders should be tempted to endorse austerity just as most of the best economists in the world have rejected it. That the Labour Party thinks that by embracing the “wisdom” of austerity it can capture votes is not a tribute to the functioning and practice of democracy in the United Kingdom. That should not be the case. So all democracies have limitations. But the limitation in India is much more detrimental to the good life of the people than even the eccentricity of the opposition party backing austerity today. And that’s bloody eccentric!
JD: There’s another aspect of your views about democracy and democratic participation that intrigues me. There are moments where you come close to holding that democratic participation itself is part of what it is to live a flourishing human life – that’s an almost neo-Roman or republican view. Is that your view?
AS: I regard the advocates of that kind of view to be saying something important – namely that participation is important in our lives. But it can’t be the only thing that we value. You cannot say that if I lived in an authoritarian system, that had happened to generate for me a better level of education, healthcare and immunisation, that that isn’t an achievement because it wasn’t achieved through republican methods, I won’t accept that! You’ve achieved something. It would have been better if it had better had it been achieved through neo-Roman self-government, but it is better to have achieved it than not at all.
JD: And this is an insight that is derived from the example of the Asian economies that we discussed earlier, because one of the things they show is that having a market economy doesn’t entail having a particular set of political institutions. Market economies, in other words, flourish in a variety of institutional contexts.
AS: Yes, but it would difficult to think of any successful market economy in which the state doesn’t play an important part. And that was a point that was made already by Adam Smith in 1776! It’s true of Germany, of the United States, it’s true of Britain when it was doing very well, it’s true of Japan, China, Korea, Taiwan and so on. So I think, there could be variations, but a certain there is a certain necessity for the state to play its part, along with people having the freedom to pursue market opportunities.
JD: I was thinking more of the fact that Singapore and Korea in the 1980s were authoritarian market states, in which individuals had the freedom to pursue market opportunities but political freedoms were curtailed. So civil society flourished alongside authoritarian political institutions.
AS: I think that’s right. Historically, democracy was a big change that occurred in the 19th and 20th centuries in the West. But there had been degrees of democratic participation in authoritarian states. The point was made very clearly in the 7th century AD by Shotoku, the prince of Japan. He said that in order to have good governance we have to talk and consult with people. This was 600 years before Magna Carta. In some ways there has to be consultation. Magna Carta was just about that – it wasn’t about making Britain a democratic state. But it was a contribution to that Millian perspective according to which democracy is government by discussion. Look at China. I happen to be closely associated with two Chinese universities, Peking University and the People’s University. On the subject of healthcare, which interested a number of economists in Peking University, these economists were not being listened to. But eventually the Chinese government saw fit to hear their technical arguments, including about inequality, that they had to rein in inequality. So the point is this: would I prefer have the Chinese form of government rather than the Indian? No I wouldn’t. On the other hand, would I say that it’s authoritarian in the sense that it’s like Genghis Khan deciding what he wants to do? No. It isn’t like that.
JD: I find this fascinating. For it seems to me that our vocabulary is rather impoverished when it comes to trying to describe what it is, exactly, that the Chinese have. We reach for a shorthand such as “authoritarian market state” which, if you’re right, doesn’t come close to capturing the reality of things there.
AS: The point is that China is successful. And that success is based on enlightenment. Listen, democracy or government by discussion is a very important contribution to enlightenment. But enlightened decisions make a contribution even if they don’t happen to have been arrived at through democratic means. I irritated some people when I said once that I believe Keynes had the right things to say on austerity but that, on the other hand, he does not sufficiently defend the role of the state – namely that it has to do things like healthcare, social services and the basic welfare state. And I irritated some of my friends when I said that on this subject, Keynes had less to say than Bismarck did. Now Bismarck was not a democrat, but he was enlightened on this subject. I don’t see anything puzzling about China. Can I give an example of their making a mistake? Of course. I can mention famine. I can mention their abandonment of universal healthcare in 1979. That was a huge mistake.
So it’s fragile, but right now they’re in terrific shape and we have a lot to learn – about what they’re doing rather than the undemocratic procedures that lie behind it. I think we should be able to distinguish between why a policy is right and whether it was arrived at by the right procedure. My hope is that because the intellectuals in China are quite strong and because the commitment to government by discussion (this is actually a term of Bagehot’s) is very strong, it won’t be easy for the Communist Party to change things, even if they wanted to. So I’m completely at peace. I don’t see any contradiction there. I don’t see that I have anything to explain. It’s not as if I’ve said that China has an authoritarian system and they’ve never had any problems. I didn’t. Democracy is not the only thing we should be looking at. After all, the Soviet record in education was extraordinarily good. Look at those bits of Asia today that were part of the Soviet Union. They have enormously better levels of education than the neighbouring states. The Soviets did know something. And in this case communist ideology and Marxism made a major contribution. It had nothing to do with democracy.

Thursday, 4 July 2013

Emerging markets (BRICs) mania was a costly mistake: Goldman strategist


 
 
Wall Street Trader
Goldman Sachs executive Mossavar-Rahmani argues that the net gains for US stock markets may just be a taste of the reassertion of western dominance that may emerge in the next few years.

LONDON: Investors who wrongly called time on US economic supremacy during the financial crisis are set to pay a hefty price for betting too much on the developing world, according to a top Goldman Sachs strategist. 

The US investment bank helped inspire a twenty-fold surge in financial investment in China, India, Russia and Brazil over the past decade, its chief economist popularizing the term BRICs in a 2001 research paper. 

Sharmin Mossavar-Rahmani, in charge of shaping the portfolios of the bank's rich private clients, has been arguing against that trend for four years, however, trying to persuade investors and colleagues they were safer sticking with the developed world. 

The past six months has substantially vindicated that view.
China's boom is finally wobbling under the weight of economic imbalances including an undervalued currency, and emergingstock markets are down 13 per cent compared to an 11 per cent rise in the US S&P 500 index over the same period. 

"Many investors and market commentators have been too euphoric about China over the last decade and this euphoria is finally abating. Many just followed the herd into emerging markets and over-allocated to many of the key countries," she says. 

"It is easier to be part of the herd even if one is wrong, than stay apart from the herd and be right in the long run." 

The net gains for US stock markets may just be a taste of the reassertion of western dominance that may emerge in the next few years, Mossavar-Rahmani argues. 

Structural advantages like abundant mineral wealth, positive demographics and, most importantly, inclusive, well-run political and economic institutions make the United States the best bet going forward, she says. 

"(Emerging market) investors are taking on so many risks compared with the US where the risk is largely cyclical rather than structural," she says. 

Many of the cyclical issues affecting the US such as high levels of debt, are also on their way to being resolved. 

"One thing that normally puts investors off from increasing their US holdings is the long term debt profile, but we think the magnitude of the work done to address this has been underappreciated by investors," she says. 

West is best 

The idea that authoritarian countries are less effective than open economies like the US at incentivising entrepreneurship and innovation is long accepted in academia. 

Daron Acemoglu and James Robinson laid out the case for doubting the emerging power of China and others in a book 'Why Nations Fail' last year, arguing poor institutions that entrench inequality will hamper a country's path to prosperity. 

But this view was largely put aside by professional investors who allowed themselves to be swept up in a "mania" about the rewards up for grabs in emerging markets, especially China. 

The widely held position, enhanced by the crisis of 2007-8, was that the developed world was entering a long decline and the best prospects for investors would be found in emerging markets, particularly in Asia. 

That prompted a boom in emerging market themed equity funds, which in Europe multiplied from 13 in 2002 to 67 in 2012 according to Lipper, a Thomson Reuters company that tracks the funds industry. 

Lipper data also shows the balance of money flowing into emerging market themed equity funds globally, including those focused on the BRICs, soared from 2.42 billion euros in 2008 to 51.23 billion euros in 2012. 

In contrast, equity funds overall lost 21.5 billion euros in 2012. 

Unrest 

China's efforts to rebalance its economy from an export dependent to consumer-led model is likely to bring slower growth, more market volatility and greater potential for social unrest - a worrying trinity of red flags for foreign investors who have poured cash into China in recent years. 

Meanwhile, mass protests are causing political crisis in Brazil and investors are fretting about ponderous, economically stifling bureaucracy in India. South Africa, sometimes called a fifth BRIC, is also struggling with a tide of labour unrest and infrastructure and social problems. 

Data from fund tracker EPFR Global shows investors pulled out a record $10 billion from emerging markets debt and equity funds in the week to June 28. 

Mossavar-Rahmani argues investors should not base decisions so heavily on which countries post the most impressive economic growth numbers, a temptation to which she says many succumbed when overallocating money to China. 

Even when countries enjoy rapid economic growth, the increases in GDP do not equate to similar jumps in investment returns, she says, citing a study published in 2005 by the London Business School. 

"If you rank the world's economies from fastest to slowest in terms of growth, the fastest-growing quintile actually generate the lowest investment return while the slowest third deliver the highest," she said.

Saturday, 22 June 2013

Why are the BRICs all crumbling? Welcome to the permanent revolution


PAUL MASON in The Independent


In most of the Bric countries economic rise has involved increased inequality, exacerbated corruption and failing public services - and that's just half the story


Tear gas cannot stop it. Not even when fired point blank into the faces of protesters. State censorship is powerless against it. The bloodless prose of the official media cannot encompass it. But what is it? What is the force that put a million people on the streets of Brazil on Thursday, turned Turkey’s major cities into battlefields and – even now – bubbles under from Sofia to Sarajevo?
The answer is in the detail: the self-shot videos, the jokes scrawled on handwritten signs, the ever-morphing hashtags on Twitter and the Guy Fawkes masks. Brazil’s protests may have started over the equivalent of a 5p rise in bus fares, but the chants and placards in Rio speak to something different: “We’ve come from Facebook”, “We are the social network”, and in English: “Sorry for the inconvenience, we are changing Brazil”.
The bus-fare protest in Sao Paulo involved, at first, maybe a few thousand young activists. There was CS gas, burning barricades, some Molotovs and riot shields, but never enough to stop the traffic, which flowed, surreally, past it all. When police arrested 60 people, including a prominent journalist, for possessing vinegar (to dull the sting of tear gas), it became the “Salad Revolution”. Then, last weekend, tens of thousands turned into hundreds of thousands, and the protests spread to every major town.
It’s clear, now, what it’s about. Brazil’s economic rise has been spectacular – but as in most of the so-called Bric countries it has involved increased inequality, exacerbated corruption and the prioritisation of infrastructure over public services. “Less stadiums, more hospitals,” reads one plaintive placard. The fact that the whole process was fronted by the relatively liberal and pro-poor Workers’ Party led, for a time, to acquiescence. The government sold the idea that hosting the World Cup, clearing some of the slums and pacifying the rest with heavy policing, together with a new transport system in the major cities, would complete Brazil’s emergence as a developed country.
But the World Cup is draining money from public services; the cost of the urban transport system is squeezing the lower middle class. And blatant corruption enrages a generation of people who can see it all reported on social media, even if the mainstream TV ignores it.
If this were just one explosion it would be signal enough that the economic model for the so-called emerging markets – rapid development at the cost of rising inequality – is running out of democratic headroom. But the same social forces were on the streets of Istanbul. The same grievances forced the Bulgarian government to sack its recently appointed and seemingly professionally unqualified state security chief on Wednesday.
In Turkey’s Taksim Square, as the tear gas drifted, roaming around with a microphone was a bit like being at a graduate careers fair. What do you do, I would ask. They would be always young, often female, and in perfect English reel off their professions from beneath their balaclavas: doctor, lawyer, marketing exec, shipping, architect, designer.
This too is one of the fastest developing countries on earth. And here too there was a mixture of economic grievance and concern about freedom. Some complained that, despite the growth, all the wealth was being creamed off by a corrupt elite. At the same time, the ruling AK Party, with its religious base, was seen as encouraging what the Turkish fashion writer Idil Tabanca has called “a growing unspoken air of animosity toward the modern”.
And everywhere there is protest – from Taksim and the Maracana Stadium to the Greek riots and Spanish indignados of two years ago – there is “non-lethal” policing that seems designed to turn passive bank clerks into bandanna-wearing radicals. It is striking that in both Brazil and Turkey, excessive force against peaceful demonstrators was the moment that turned a local protest into a globally significant revolt.
But the grievances, in the end, tell only half the story. It is the demographics, the technology and the zeitgeist that make the wave of current protests seem historic. Look first at the symbolism: the V for Vendetta mask is everywhere now – but it originated as the signifier of the Anonymous hacker movement. The hand-scrawled placard signifies a revolt not just against the state but against the old forms of hierarchical protest, where everybody chanted the same thing and followed leaders. In every tent camp protest I have ever been in, it is clear that the unspoken intention is to create a miniature utopia.
Velocity of information matters as much as action itself. It is striking how badly the incumbent elites in each case totally lose the information war. Whether it’s Greece, Turkey, Egypt or Brazil the unspoken truth is it is hard to gain a voice in the official media unless you are part of the in-group. This creates the mindset that drove Egyptian TV to ignore Tahrir, and Turkish TV to replace 24-hour news with cookery programmes as the fighting raged outside their studios. But it doesn’t work. People have instant access not just to the words, stills and videos coming from the streets, but to publish it themselves. As a result, when crisis hits, the volume of “peer to peer” communication – your iPhone to my Android, my tweet to your uploaded video – overwhelms any volume of information a state TV channel can put out. And when it comes to the content of the “memes” through which this generation communicates, the protesters and their allies find suddenly that everything they are saying to each other makes sense, and that everything the elite tries to say becomes risible nonsense.
In each case – from Egypt, through Greece, Spain and the Russian election protests – the revolt was already there, simmering in cyberspace. And in each case, the ultimate grievance was the difference between how life could be for the educated young, and how it actually is. They want a liberal, more equal capitalism, with more livable cities, and more personal freedom. But who will provide it?
Each time the movement subsides, the old generation’s commentators declare it dead, overhyped, romanticised in the heat of the moment. But the protests keep coming back. In 1989, we learned that people prefer individual freedom to communism. Today, in many countries, it is capitalism that is associated with cronyism, repressive force and elite politics, and until that changes, this Human Spring looks likely to continue.

Wednesday, 10 April 2013

In this nuclear standoff, it's the US that's the rogue state



The use of threats and isolation against Iran and North Korea is a bizarre, perilous way to conduct foreign relations
Mellor nuclear
'The alleged crises over North Korea and Iran are just not serious enough to warrant the classroom language of ­shunning and punishment.' Illustration by Belle Mellor
By coincidence two clashes over nuclear issues are hitting the headlines together. North Korea and Iran have both had sanctions imposed by foreign governments, and when they refuse to "behave properly" they are submitted to "isolation" and put in the corner until they are ready to say sorry and change their conduct. If not, corporal punishment will be administered, since they have been given fair warning by the enforcers that "all options are on the table".
It's a bizarre way to run international relations, one we continue to follow at our peril. For one thing, it is riddled with hypocrisy, and not just because states that have hundreds of nuclear weapons are bullying states that have few or none. The hypocrisy is worse than that. If it is offensive for North Korea to talk of launching a nuclear strike at the United States (a threat that is empty because the country has no system to deliver the few nuclear weapons that it has), how is it less offensive for the US to warn Iran that it will be bombed if it fails to stop its nuclear research?
Both states would be resorting to force when dialogue is a long way from being exhausted. They would also be acting against international law. That is patently clear if North Korea ever managed to launch a nuclear strike against South Korea or the US, but the same is true of an altogether more feasible attack on Iran. There is no conceivable scenario under which the United Nations security council would authorise the United States, let alone Israel, to take military action, even if Iran were to tear up its long-standing statement that nuclear bombs are un-Islamic and produce one. So why does Washington go on with its illegal threats?
The underlying cause of most international tension is the unwillingness of powerful states to recognise that we live in a multipolar world. The idea of hegemony, often sanitised as "leadership", is unacceptable. In a post-colonial era there are multiple centres of authority, international influence and soft power, and we should rejoice when new or old states, individually or collectively, have the courage and ability to challenge another state's ambition to be a superpower. States will always make common cause or "coalitions of the willing" on specific issues, but interests fluctuate and priorities change – and we should junk the cold war-style system of military alliances and ideological or sectarian camps.
Let us go further and drop the figment of an "international community", at least in its current western definition as "the United States and its friends". By the same token, let's correct the myopia around isolation. When the leaders of 120 nations travelled to Tehran to ratify Iran's presidency of the Non-Aligned Movement last August, it was risible to hear US officials still talking of Iran being "a rogue state".
In Washington and Whitehall it may seem self-evident that the international community should arm the opposition to Syria's President Assad, but that is not the view of the world's largest democracy, India, or of the most democratic African and Latin American states, South Africa and Brazil. When their leaders convened with Russia and China (in the new Brics coalition) in Durban last month, they "re-affirmed our opposition to any further militarisation of the conflict" and called for a political settlement.
Of course, the non-aligned and Brics summits were barely covered by the US media in its news or comment columns, the normal technique of reality suppression used by American opinion-formers and policy-makers. Rami Khouri, the distinguished US-trained Lebanese writer, calls it "professionally criminal". After a month in the US recently, he found that coverage of Iran was based on "assumptions, fears, concerns, accusations and expectations almost never supported by factual and credible evidence". In as much as these distortions build public support for a military attack on Iran, he finds it as culpable as the media's role in the runup to the attack on Iraq a decade ago.
The alleged crises over North Korea and Iran are just not serious enough to warrant the classroom language of shunning and punishment. Dialogue and respect for other people's positions are the better course. Discuss everything as a package rather than dangle incentives one by one like sweets.
Ironically, it was Iran at the recent talks with security council members that suggested a roadmap with a clear end state: the acceptance of Iran's right to enrich uranium like any other signatory of the non-proliferation treaty. In other words, the issue is primarily a matter of national dignity and sovereignty. Meanwhile, the US declined to promise to lift all sanctions whatever Iran does.
On Korea the best approach is also comprehensive. This would mean trying to reach the full-scale peace treaty that was never concluded when the war ended 60 years ago. North Korea wants a treaty as a sign, like Iran, that the US accepts it as a legitimate state. Steps towards one were agreed in 2007 and a few positive moves followed. But they collapsed when the mentality of suspicion and sanctions revived under the pressure of electoral politics in Seoul and Washington and the arrival of an inexperienced new leader in Pyongyang. It is not too late to drop the self-defeating language of "rogue states" beyond the pale of the "international community" and try again.