Showing posts with label growth. Show all posts
Showing posts with label growth. Show all posts
Wednesday, 8 May 2024
Saturday, 4 May 2024
How to tell good industrial policy from bad
Gillian Tett in The FT
Five years ago Reda Cherif and Fuad Hasanov, two economists at the IMF, wrote a paper with the (slightly) sarcastic title: “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy”.
This pointed out that while strategic policy intervention was widely viewed as a key reason for the east Asian economic miracle, it had a “bad reputation among policymakers and academics” — so much so that, from the 1970s onwards, the phrase was rarely mentioned in polite company, or by the IMF.
No longer. Last month the fund reported that it had observed no less than 2,500 industrial policy actions around the world in the last year alone, of which “more than two-thirds were trade-distorting as they likely discriminated against foreign commercial interests”.
More striking still, industrial policies used to be far “more prevalent in emerging economies” than developed ones; between 2009 and 2022, there were cumulatively 7,000 subsidies tracked in developing countries, and fewer than 6,000 in developed ones. But last year’s surge was “driven by large economies, with China, the EU and the US accounting for almost half of all new [industrial policy] measures”.
That shift can be seen not just in data, but rhetoric too. Last month, Mario Draghi, former head of the European Central Bank, lamented that Europe “lack[s] a strategy for how to shield our traditional industries from an unlevel global playing field caused by asymmetries in regulations, subsidies and trade policies”. He called for the EU to fight back with industrial policy.
In the UK, the opposition Labour party is echoing these themes, calling for a “New Deal” and touting what it calls “securonomics”. In the US, Donald Trump wants huge trade tariffs, while Joe Biden has called for tariffs in sectors such as steel. The president’s Inflation Reduction Act is yet more industrial policy.
But anyone pondering that striking number in the IMF report should remember a crucial point that ought to be obvious but is often overlooked: “industrial policy” can mean many different things. As Cherif and Hasanov told a seminar at Cambridge’s Bennett Institute this week, there is an important difference between policies that try to create growth by shielding domestic companies from foreign competition and those which help those companies compete more effectively on the world stage.
The former “import substitution” strategy was pursued by many developing countries in recent years, including India. It is also the variant favoured by Trump and the one being considered by some European politicians, for instance in the case of Chinese solar panels.
But it is this latter approach that has given industrial policy a bad name. On the basis of copious data, Cherif and Hasanov argue that import substitution models undermine growth in the long term since they create excessively coddled, inefficient industries.
By contrast, the second variant of industrial policy aims instead to make industries more competitive externally in an export-oriented model, while worrying less about imports. This approach is what drove the east Asian miracle, and is what creates sustained growth, the data suggests.
The difference in approach is embodied by the contrasting fortunes of Malaysian automaker Proton car and South Korea’s Hyundai. The former was developed amid import substitution policies, and never soared; the latter flourished on the back of an export-oriented strategy.
A cynic might retort that policy is rarely so clear cut as these contrasting car tales might suggest. It is hard for any company to fly on the world stage if its key competitors are excessively subsidised in closed markets — as evidenced by the woes of EU solar-panel makers trying to compete with their Chinese rivals. It is also tough to tell countries to aim for export-driven growth in a world where trade is fragmenting and protectionism rising.
In any case, while export-oriented strategies work for small or medium-sized countries such as South Korea, they may seem less relevant for a giant such as America.
Then there is a more fundamental question around economic change. As a thoughtful paper published last year by the economists Réka Juhász, Nathan Lane and Dani Rodrik notes, while “industrial policy has traditionally focused on manufacturing”, it is the service sector that now dominates. Thus “governments are likely to look beyond manufacturing as they consider productivity-enhancing ‘industrial’ policies in the future”.
Cherif and Hasanov think institutions such as America’s Darpa give one clue to innovation-boosting measures in this space; Juhász, Lane and Rodrik cite worker training and export credit. But this needs holistic policy, which America, say, lacks.
Either way, the key point is that insofar as western politicians are now increasingly happy to utter the once forbidden words “industrial policy”, they need to define what they mean. Is the goal to exclude competitors from the domestic stage, via tariffs? Or to make domestic producers more competitive and innovative in a global sense and better able to compete? Or is it something else? Investors and markets need clear answers. So, more importantly, do voters.
Tuesday, 16 January 2024
The Economist examines India's Economic Performance
From The Economist
In the second week of 2024 business leaders descended on Gujarat, the home state of Narendra Modi, India’s prime minister. The occasion was the Vibrant Gujarat Global Summit, one of many gabfests at which India has courted global investors. “At a time when the world is surrounded by many uncertainties, India has emerged as a new ray of hope,” boasted Mr Modi at the event.
He is right. Although global growth is expected to slow from 2.6% last year to 2.4% in 2024, India appears to be booming. Its economy grew by 7.6% in the 12 months to the third quarter of 2023, beating nearly every forecast. Most economists expect an annual growth rate of 6% or more for the rest of this decade. Investors are seized by optimism.
The timing is good for Mr Modi. In April some 900m Indians will be eligible to vote in the largest election in world history. A big reason Mr Modi, who has been in office since 2014, is likely to win a third term is that many Indians think him a more competent manager of the world’s fifth-largest economy than they do any other candidate. Are they right?
To assess Mr Modi’s record The Economist has analysed India’s economic performance and the success of his biggest reforms. In many respects the picture is muddy—and not helped by sparse and poorly kept official data. Growth has outpaced that of most emerging economies, but India’s labour market remains weak and private-sector investment has disappointed. But that may be changing. Aided by Mr Modi’s reforms, India may be on the cusp of an investment boom that would pay off for years.
The headline growth figures reveal surprisingly little. India’s gdp per person, after adjusting for purchasing power, has grown at an average pace of 4.3% per year during Mr Modi’s decade in power. That is lower than the 6.2% achieved under Manmohan Singh, his predecessor, who also served for ten years.
But this slowdown was not Mr Modi’s doing: much of it is down to the bad hand he inherited. In the 2010s an infrastructure boom started to go sour. India faced what Arvind Subramanian, later a government adviser, has called a twin balance-sheet crisis, one that struck both banks and infrastructure firms. They were left loaded with bad debt, crimping investment for years afterwards. Mr Modi also took office at a time when global growth had slowed, scarred by the financial crisis of 2007-09. Then came the covid-19 pandemic. The difficult conditions meant average growth among 20 other large lower- and middle-income economies fell from 3.2% during Mr Singh’s time in office to 1.6% during Mr Modi’s. Compared with this group, India has continued to outperform (see chart 1).
Against such a turbulent backdrop, it is better to assess Mr Modi’s record by considering his stated economic objectives: to formalise the economy, improve the ease of doing business and boost manufacturing. On the first two, he has made progress. On the third, his results have so far been poor.
India’s economy has certainly become more formal under Mr Modi, albeit at a high cost. The idea has been to draw activity out of the shadow economy, which is dominated by small and inefficient firms that do not pay tax, and into the formal sphere of large, productive companies.
Mr Modi’s most controversial policy on this front has been demonetisation. In 2016 he banned the use of two large-value banknotes, accounting for 86% of rupees in circulation—surprising many even within his government. The stated aim was to render worthless the ill-gotten gains of the corrupt. But almost all the cash made its way into the banking system, suggesting that crooks had already gone cashless or laundered their money. Instead, the informal economy was crushed. Household investment and credit plunged, and growth was probably hurt. In private, even Mr Modi’s supporters in business do not mince words. “It was a disaster,” says one boss.
Demonetisation may have accelerated India’s digitisation nonetheless. The country’s digital public infrastructure now includes a universal identity scheme, a national payments system and a personal-data management system for things like tax documents. It was conceived by Mr Singh’s government, but much of it has been built under Mr Modi, who has shown the capacity of the Indian state to get big projects done. Most retail payments in cities are now digital, and most welfare transfers seamless, because Mr Modi gave almost all households bank accounts.
Those reforms made it easier for Mr Modi to ameliorate the poverty resulting from India’s disappointing job-creation record. Fearing that stubbornly low employment would stop living standards for the poorest from improving, the government now doles out welfare payments worth some 3% of gdp per year. Hundreds of government programmes send money directly to the bank accounts of the poor.
It is a big improvement on the old system, in which most welfare was distributed physically and, owing to corruption, often failed to reach its intended recipients. The poverty rate (the proportion of people living on less than $2.15 a day), has fallen from 19% in 2015 to 12% in 2021, according to the World Bank.
Digitisation has probably also drawn more economic activity into the formal sector. So has Mr Modi’s other signature economic policy: a national goods and services tax (gst), passed in 2017, which knitted together a patchwork of state levies across the country. The combination of homogenous payments and tax systems has brought India closer to a national single market than ever.
That has made doing business easier—Mr Modi’s second objective. gst has been a “game-changer”, says B. Santhanam, the regional boss of Saint-Gobain, a large French manufacturer with big investments in the southern state of Tamil Nadu. “The prime minister gets it,” adds another seasoned manufacturing executive, referring to the need to cut red tape. The government has also put serious money into physical infrastructure, such as roads and bridges. Public investment surged from around 3.5% of gdp in 2019 to nearly 4.5% in 2022 and 2023.
The results are now materialising. Mr Subramanian recently wrote that, as a share of gdp, in 2023 net revenues from the new tax regime exceeded those of the old system. This happened even as tax rates on many items fell. That more money is coming in despite lower rates suggests that the economy really is formalising.
Yet Mr Modi is not satisfied with merely formalising the economy. His third objective has been to industrialise it. In 2020 the government launched a subsidy scheme worth $26bn (1% of gdp) for products made in India. In 2021 it pledged $10bn for semiconductor companies to build plants domestically. One boss notes that Mr Modi personally takes the trouble to convince executives to invest, often in industries where they face little competition and so otherwise might not.
Some incentives could help new industries find their feet and show foreign bosses that India is open for business. In September Foxconn, Apple’s main supplier, said it would double its investments in India over the coming year. It currently makes some 10% of its iPhones there. Also in 2023 Micron, a chipmaker, began work on a $2.75bn plant in Gujarat that is expected to create some 5,000 jobs directly and 15,000 indirectly.
So far, however, these projects are too small to be economically significant. The value of manufactured exports as a share of gdp has stagnated at 5% over the past decade, and manufacturing’s share of the economy has fallen from about 18% under the previous government to 16%. And industrial policy is expensive. The government will bear 70% of the cost of the Micron plant—meaning it will pay nearly $100,000 per job. Tariffs are ticking up, on average, raising the cost of foreign inputs.
So what matters more: Mr Modi’s failures or his successes? As well as economic growth, it is worth looking at private-sector investment. It has been sluggish during Mr Modi’s time in office (see chart 2). But a boom may be coming. A recent report by Axis Bank, one of India’s largest lenders, argues that the private-investment cycle is likely to turn, thanks to healthy bank and corporate balance-sheets. Announcements of new investment projects by private corporations soared past $200bn in 2023, according to the Centre for Monitoring Indian Economy, a think-tank. That is the highest in a decade, and up 150% in nominal terms since 2019.
Although higher interest rates have sapped foreign direct investment in the past year, firms’ reported intentions to invest in India remain strong, as they seek to “de-risk” their exposure to China. There is some chance, then, that Mr Modi’s reforms will kick growth up a gear. If so, he will have earned his reputation as a successful economic manager.
The consequences of Mr Modi’s policies will take years to be felt in full. Just as an investment boom could vindicate his approach, his strategy of using welfare payments as a substitute for job creation could prove unsustainable. A failure to build local governments’ capacity to provide basic public services, such as education, may hinder growth. Subhash Chandra Garg, a former finance secretary under Mr Modi, worries that the government is too keen on “subsidies” and “freebies”, and that its “commitment to real reforms is no longer that strong.” And yet for all that, many Indians will go to the polls feeling cautiously optimistic about the economic changes that their prime minister has wrought.
Thursday, 4 January 2024
Saturday, 30 December 2023
Wednesday, 6 December 2023
Tuesday, 5 December 2023
Saturday, 2 December 2023
Wednesday, 18 October 2023
Wednesday, 4 October 2023
Sunday, 1 October 2023
Thursday, 17 August 2023
A level Economics: Convincing people of faith
ChatGPT
"You cannot convince the most ingenious mollusc that a thing like a whale was ever possible."
The quote seems to convey the idea that sometimes it's challenging to convince someone, even if they're highly intelligent or ingenious, about the existence or possibility of something that is far beyond their current understanding or experience.
In a broader sense, this quote reflects the difficulty of trying to persuade people to accept new, unconventional, or revolutionary ideas that go against their established beliefs or knowledge. It highlights the resistance some individuals might have toward accepting concepts that seem impossible or unfamiliar to them.
Here are some real-world examples to illustrate this concept:
Flat Earth Believers: Despite overwhelming evidence supporting the fact that the Earth is round, some individuals still hold onto the belief that the Earth is flat. Confronting them with scientific evidence might be akin to trying to convince an ingenious mollusc (a clever but metaphorically close-minded creature) that something as large and complex as the Earth could be round.
Historical Paradigm Shifts: Throughout history, there have been moments when new scientific or philosophical ideas challenged existing worldviews. For example, when Copernicus proposed that the Earth revolves around the sun, it contradicted the prevailing geocentric model. It took time for people to accept this heliocentric idea, as it was difficult for many to conceive of the Earth not being the center of the universe.
Advanced Technology: Imagine explaining the concept of the internet and smartphones to someone from the distant past. They might find it incredibly difficult to believe that something like the internet, which connects people around the world in seconds, is possible. It could be compared to trying to convince an ingenious mollusc of the existence of a massive creature like a whale.
In all these examples, the quote's essence comes through – the challenge of convincing someone of something that falls outside the scope of their current understanding, even if they possess great intelligence or ingenuity.
---Why not?
Why do certain individuals, even if they are intelligent and ingenious, be resistant to being convinced of new, unconventional or disconfirming ideas. There are several psychological and cognitive factors at play:
Cognitive Dissonance: People tend to seek consistency between their beliefs and their actions or experiences. Introducing a new, unfamiliar idea can create cognitive dissonance – a state of mental discomfort caused by holding conflicting beliefs. To alleviate this discomfort, some individuals may reject the new idea rather than reevaluate their existing beliefs.
Confirmation Bias: People often seek out information that confirms their existing beliefs and ignore or dismiss information that contradicts them. When presented with evidence that challenges their beliefs, they might be inclined to reject it or find reasons to discredit it.
Anchoring Bias: This bias refers to the tendency to rely heavily on the first piece of information encountered when making decisions. If someone has a long-held belief, their initial exposure to a new idea might be anchored to their existing beliefs, making it difficult for them to shift their perspective.
Limited Perspective: Individuals often rely on their own experiences and immediate surroundings to make sense of the world. Concepts that are far removed from their personal experiences might seem implausible or even absurd.
Fear of the Unknown: Venturing into unfamiliar territory can be unsettling for some people. The fear of the unknown or the uncertainty associated with embracing new ideas can lead to resistance in accepting them.
Social Pressure and Identity: People often identify with certain groups and communities, and their beliefs become intertwined with their sense of self. Embracing a new idea that contradicts the group's beliefs might result in social isolation or a sense of losing one's identity within that group.
Lack of Tangible Evidence: Some unconventional ideas might lack concrete, tangible evidence, making them harder to accept for individuals who rely heavily on empirical proof. This is particularly true when the idea challenges established scientific or societal norms.
Emotional Attachments: People can develop emotional attachments to their beliefs, especially if those beliefs are tied to personal experiences, cultural values, or cherished memories. Dislodging these emotional attachments can be difficult.
Inertia and Habit: Human behavior is often driven by inertia and habit. Changing one's perspective or beliefs requires effort and mental energy, and some people might resist such change due to the comfortable nature of their existing beliefs.
In essence, while intelligence and ingenuity are valuable qualities, they do not necessarily prevent individuals from being resistant to new ideas. The interplay of cognitive biases, emotional attachments, social influences, and personal experiences can create barriers that hinder people from easily accepting ideas that challenge their existing worldview. This is why even the most ingenious individuals might struggle to be convinced of something that seems implausible to them.
---What if the mollusc was an average citizen and the whale was an economic panacea called growth led development?
If we reinterpret the quote with the mollusc representing an average citizen and the whale symbolizing the concept of economic growth leading to upliftment, the meaning becomes more focused on the challenges of convincing people about the potential benefits of a certain economic concept, especially if it's presented as a solution for societal progress.
In this context, the quote could be highlighting the difficulty of convincing everyday individuals about the positive effects of economic growth as a means to uplift society. Here's a breakdown of the analogy:
Average Citizen (Mollusc): Just as a mollusc is a simple and relatively uninvolved creature compared to a complex entity like a whale, an average citizen might not have an in-depth understanding of economic principles or the intricate workings of economic growth. They might have limited exposure to economic concepts and might not readily grasp how economic growth can lead to broader societal benefits.
Economic Panacea (Whale): Economic growth is often touted as a solution to various societal issues, such as poverty reduction, job creation, and improved living standards. In this analogy, the economic panacea is like the whale – a large and powerful force with the potential to drive positive change on a significant scale.
Exploring why it can be challenging to convince average citizens about the benefits of economic growth led upliftment:
Complexity: Economic principles and their effects can be complex and abstract. Explaining how economic growth can lead to upliftment involves understanding factors like job creation, increased income, improved infrastructure, and better social services. These concepts might not be easily accessible to everyone.
Limited Exposure: Many individuals might not have had substantial exposure to economics or may not fully comprehend its implications. The idea of economic growth as a means of societal upliftment might seem distant and disconnected from their daily lives.
Skepticism: Some people might be skeptical about the idea that economic growth automatically translates into improved living conditions for all. They might question whether the benefits of growth truly reach all segments of society or whether it primarily benefits a privileged few.
Inequality Concerns: Skepticism might also arise from concerns about income inequality and unequal distribution of the benefits of economic growth. If an individual perceives that only a small portion of society benefits from growth, they might be resistant to accepting it as a panacea for upliftment.
Alternative Beliefs: Some individuals might hold alternative beliefs about how societal upliftment can be achieved. These beliefs could be rooted in social ideologies, environmental concerns, or other factors that prioritize different approaches over economic growth.
Limited Empirical Evidence: In some cases, individuals might not have seen firsthand evidence of the positive impact of economic growth. If their personal experiences do not align with the narrative of growth-led upliftment, they might be hesitant to accept it as a feasible solution.
In this reinterpretation of the quote, the challenge lies in conveying the potential benefits of economic growth as a means of societal upliftment to individuals who might have limited exposure to economic concepts, varying perspectives, and different beliefs about how progress should be achieved. Just as an ingenious mollusc might struggle to comprehend the possibility of a whale, average citizens might struggle to fully grasp the potential of economic growth to drive positive change across society.
--- What if the mollusc was a believer in animism while the whale was Christianity/Islam?
If we reinterpret the quote with the mollusc representing a believer in animism and the whale symbolizing major organized religions like Christianity or Islam, the meaning shifts toward the challenge of convincing someone with deeply ingrained spiritual or religious beliefs to accept a completely different faith system.
In this context, the quote could be illustrating the difficulty of convincing an individual who adheres to animism, a belief system that attributes spiritual significance to various elements of nature, to accept the more structured and monotheistic belief systems of Christianity or Islam. Here's how the analogy can be understood:
Believer in Animism (Mollusc): Just as an average mollusc might lack the capacity to comprehend something as massive and complex as a whale, a believer in animism might have a worldview deeply rooted in nature's interconnectedness and spirituality. Their belief system is likely centered around attributing spiritual essence to natural elements like plants, animals, and natural phenomena.
Organized Religions (Whale): Organized religions like Christianity and Islam are vast and intricate systems of belief, encompassing theological doctrines, moral codes, rituals, and a structured understanding of the divine. The whale, in this context, symbolizes the enormity and complexity of these established faiths.
Exploring the challenges of convincing an animism believer to accept Christianity or Islam:
Worldview Clash: Animism emphasizes a holistic connection between humans, nature, and the spiritual world. Shifting to monotheistic religions like Christianity or Islam, which emphasize the worship of a single deity, represents a significant shift in worldview and belief structure.
Spiritual Significance: In animism, various elements of nature are considered imbued with spiritual significance. Convincing someone of the exclusive divinity of a singular deity in monotheistic religions might challenge their deeply held belief that spiritual forces permeate all aspects of the natural world.
Cultural Context: Animism often has cultural roots and practices that are closely tied to specific communities or regions. Transitioning to Christianity or Islam might involve leaving behind cultural practices that are deeply meaningful to the believer.
Faith and Tradition: Believers in animism might have inherited their spiritual beliefs from generations before them. These beliefs and traditions can be deeply ingrained, making it emotionally challenging to consider adopting an entirely new belief system.
Lack of Familiarity: The concepts, rituals, and teachings of monotheistic religions can be unfamiliar and even alien to someone raised in an animistic belief system. This unfamiliarity might make it difficult for them to connect with or accept the new faith.
Attachment to Natural World: Animism emphasizes a profound connection to the natural world. Switching to monotheistic religions might be seen as a detachment from this close relationship with nature.
Societal and Family Pressures: In some cases, societal and family pressures could strongly discourage abandoning one's ancestral beliefs for a new faith, particularly when animism is an integral part of their identity and community.
In this reinterpretation of the quote, the challenge lies in attempting to convince someone deeply rooted in animism to embrace the monotheistic tenets of organized religions like Christianity or Islam. The differences in worldview, spirituality, cultural significance, and personal identity can make such a transition profoundly complex and resistant to persuasion.
---What about the use/absence of evidence?
The use or absence of evidence is indeed a crucial factor that can contribute to the difficulty of convincing someone of a different belief or idea, especially when it comes to matters of spirituality, religion, or worldview. Here's how evidence or its absence plays into the scenarios you've described:
Believer in Animism (Mollusc) vs. Organized Religions (Whale):
- Use of Evidence: Monotheistic religions often emphasize faith and belief in the absence of tangible evidence. Believers are encouraged to have faith in the divine based on spiritual experiences, teachings, and traditions, even when empirical evidence might be lacking.
- Absence of Evidence: From the perspective of someone rooted in animism, the absence of empirical evidence for the specific theological claims of monotheistic religions might be a barrier to acceptance. Animism might have a more immediate connection to natural phenomena that believers can perceive, leading them to question the basis for monotheistic religious claims.
Average Citizen (Mollusc) vs. Economic Panacea (Whale):
- Use of Evidence: The concept of economic growth as an upliftment tool often involves presenting historical data, case studies, and economic theories to demonstrate its positive effects. Proponents rely on evidence of improved living standards, decreased poverty rates, and enhanced infrastructure resulting from economic growth.
- Absence of Evidence: Skeptics might resist accepting economic growth as an effective solution if they perceive a lack of concrete evidence that it benefits all segments of society. They might point to instances where economic growth has led to increased inequality or negative environmental consequences.
Average Citizen (Mollusc) vs. Christianity/Islam (Whale):
- Use of Evidence: Monotheistic religions like Christianity and Islam often involve the presentation of holy scriptures, historical events, and spiritual experiences as evidence of their truths. Proponents rely on these sources to provide a foundation for their claims.
- Absence of Evidence: Those who come from a different belief system might find it challenging to accept the theological claims of monotheistic religions if they don't see the same evidentiary basis in their own belief system. The absence of tangible evidence for certain religious teachings might be a point of contention.
In all these cases, the use or absence of evidence can influence an individual's willingness to accept a new belief or idea. The availability and interpretation of evidence are essential components of persuasive communication. When evidence aligns with an individual's existing beliefs or experiences, they might be more open to considering a new perspective. However, when evidence is lacking or contradicts deeply held beliefs, convincing them to embrace a different viewpoint becomes more challenging.
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