Why well-to-do Indians are fleeing the country and economists aren’t returning

The economic refugees of old have been replaced by well-placed people leaving (or staying away from) India’s unattractive political economy writes TN NINAN in The Print

Montek Singh Ahluwalia, in his non-memoir, Backstage: The Story behind India’s High Growth Years, recounts how he and wife, Isher, decided to return to India from Washington 40 years ago, giving up attractive careers at the World Bank and International Monetary Fund (IMF). Montek joined government as an economic adviser in the finance ministry, and Isher joined a think tank. They would have had modest salaries and below-par government housing, but they felt they were contributing to India’s development process. Along the way, they became the capital’s power couple, so life had its compensations.

Other economists too came back around the same time, some earlier, and some later: Manmohan Singh, Bimal Jalan, Vijay Kelkar, Shankar Acharya, Rakesh Mohan, and so on. They returned after studying at the best universities and working in plum jobs at international organisations. They and others like them became the leading makers (or influencers) of economic policy for the next three or four decades, rising like Montek to high offices and enjoying good reputations, plus of course the bungalows of Lutyens’ Delhi and social cachets that would not be available to them elsewhere.

The question that was posed earlier this week at the release of Montek’s book was: Why aren’t people like them coming back today, bag and baggage, to set down roots here in India? The ones who came more recently were clutching the green cards that gave them an escape hatch through which to return to green pastures: Arvind Panagariya, Raghuram Rajan, Arvind Subramanian, and other perfectly honourable gentlemen like them.

One answer is that India has always had economic refugees, and they went where they could find jobs (in West Asia and Singapore), or a better education that would underwrite good careers. Many have done brilliantly, heading global tech giants and winning Nobel prizes. But there is a darker side to the story. Although India is no longer the desperately poor country of the 1980s and 1990s (having risen a few years ago to lower-middle income status), has ceased to be an economic prison like Cuba, and offers more career options with higher salaries, vastly superior cars and consumer goods, modern hospitals, and new liberal arts colleges, and the simple freedom to travel without signing “P” forms and getting eight dollars to take with you, it seems to have become a less attractive country in which to live and work.

Businessmen, including some with recognisable names and faces, are becoming “overseas citizens”. They are investing more in other markets where life is simpler. Wealthy professionals with internationally marketable skills and degrees are also taking their money with them (prompting the finance minister in her Budget to introduce a tax on such money transfers). They may be fleeing tax terrorism, prodded by more limited economic opportunities than they had imagined, or simply keeping one foot in India and another overseas because public discourse here has acquired a nasty edge and who knows what’s coming next. Or perhaps it is just the air quality in our cities which is a deterrent. Whatever the reason, the economic refugees of old have been replaced by well-placed people leaving (or staying away from) India’s unattractive political economy. Diplomats from under-populated countries like Australia and Canada report a sudden increase in the number of Indians seeking to emigrate.

The other question is, should our economists look back with satisfaction, or in anger? To be sure, there were high points like the reforms of 1991, the years of rapid growth a decade ago, and transformation in sectors like telecom. But we should not have waited till 1991 to launch the reforms. As Montek writes, Rajiv Gandhi was warned by the IMF chief in early 1988 that a crisis was building up, but he did nothing. The telecom revolution here was not special to India; other countries too engineered dramatic improvements in tele-density. Nor were India’s years of rapid growth unique; emerging markets as a whole grew at 7.9 per cent in 2004-08. Forget China, today India is being bettered in trade by Bangladesh and Vietnam. And the Thai baht is worth Rs 2.25; it was half that in 1991.

Economists should learn lessons from meteorologists

Weather forecasters make hypotheses and test them daily writes Tim Harford in The FT


The UK’s national weather service, the Met Office, is to get a £1.2bn computer to help with its forecasting activities. That is a lot of silicon. My instinctive response was: when do we economists get one? 

People may grumble about the weather forecast, but in many places we take its accuracy for granted. When we ask our phones about tomorrow’s weather, we act as though we are gazing through a window into the future. Nobody treats the latest forecasts from the Bank of England or the IMF as a window into anything. 

That is partly because politics gets in the way. On the issue of Brexit, for example, extreme forecasts from partisans attracted attention, while independent mainstream forecasters have proved to be pretty much on the money. Few people stopped to praise the economic bean-counters. 

Economists might also protest that nobody asks them to forecast economic activity tomorrow or even next week; they are asked to describe the prospects for the next year or so. True, some almanacs offer long-range weather forecasts based on methods that are secret, arcane, or both — but the professionals regard such attempts as laughable. 

Enough excuses; economists deserve few prizes for prediction. Prakash Loungani of the IMF has conducted several reviews of mainstream forecasts, finding them dismally likely to miss recessions. Economists are not very good at seeing into the future — to the extent that most argue forecasting is simply none of their business. The weather forecasters are good, and getting better all the time. Could we economists do as well with a couple of billion dollars’ worth of kit, or is something else lacking? 

The question seemed worth exploring to me, so I picked up Andrew Blum’s recent book, The Weather Machine, to understand what meteorologists actually do and how they do it. I realised quickly that a weather forecast is intimately connected to a map in a way that an economic forecast is not. 

Without wishing to oversimplify the remarkable science of meteorology, one part of the game is straightforward: if it’s raining to the west of you and the wind is blowing from the west, you can expect rain soon. Weather forecasts begin with weather observations: the more observations, the better. 

In the 1850s, the Smithsonian Institution in Washington DC used reports from telegraph operators to patch together local downpours into a national weather map. More than a century and a half later, economists still lack high-definition, high-frequency maps of the economic weather, although we are starting to see how they might be possible, tapping into data from satellites and digital payments. 

An example is an attempt — published in 2012 — by a large team of economists to build a simulation of the Washington DC housing market as a complex system. It seems a long way from a full understanding of the economy, but then the Smithsonian’s paper map was a long way from a proper weather forecast, too. 

Weather forecasters could argue that they have a better theory of atmospheric conditions than economists have of the economy. It was all sketched out in 1904 by the Norwegian mathematician Vilhelm Bjerknes, who published “The problem of weather prediction”, an academic paper describing the circulation of masses of air. If you knew the density, pressure, temperature, humidity and the velocity of the air in three dimensions, and plugged the results into Bjerknes’s formulas, you would be on the way to a respectable weather forecast — if only you could solve those computationally-demanding equations. The processing power to do so was to arrive many decades later. 

The missing pieces, then: much better, more detailed and more frequent data. Better theory too, perhaps — although it is striking that many critiques of the economic mainstream seem to have little interest in high-resolution, high frequency data. Instead, they propose replacing one broad theory with another broad theory: the latest one I have seen emphasises “the energy cost of energy”. I am not sure that is the path to progress. 

The weather forecasters have another advantage: a habit of relentless improvement in the face of frequent feedback. Every morning’s forecast is a hypothesis to be tested. Every evening that hypothesis has been confirmed or refuted. If the economy offered similar daily lessons, economists might be quicker to learn. All these elements are linked. If we had more detailed data we might formulate more detailed theories, building an economic map from the bottom up rather than from the top down. And if we had more frequent feedback, we could test theories more often, making economics more empirical and less ideological. 

And yet — does anyone really want to spend a billion pounds on an economic simulation that will accurately predict the economic weather next week? Perhaps the limitations of economic forecasting reflect the limitations of the economics profession. Or perhaps the problem really is intractable.

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The white swan harbingers of global economic crisis are already here

Seismic risks for the global system are growing, not least worsening US geopolitical rivalries, climate change and now the coronavirus outbreak writes Nouriel Roubini in The Guardian
 

 

A swan fighting with crows on a beach. Photograph: Kamila Koziol/Alamy Stock Photo/Alamy Stock Photo


In my 2010 book, Crisis Economics, I defined financial crises not as the “black swan” events that Nassim Nicholas Taleb described in his eponymous bestseller but as “white swans”. According to Taleb, black swans are events that emerge unpredictably, like a tornado, from a fat-tailed statistical distribution. But I argued that financial crises, at least, are more like hurricanes: they are the predictable result of builtup economic and financial vulnerabilities and policy mistakes.

There are times when we should expect the system to reach a tipping point – the “Minsky Moment” – when a boom and a bubble turn into a crash and a bust. Such events are not about the “unknown unknowns” but rather the “known unknowns”.
Beyond the usual economic and policy risks that most financial analysts worry about, a number of potentially seismic white swans are visible on the horizon this year. Any of them could trigger severe economic, financial, political and geopolitical disturbances unlike anything since the 2008 crisis.

For starters, the US is locked in an escalating strategic rivalry with at least four implicitly aligned revisionist powers: China, Russia, Iran and North Korea. These countries all have an interest in challenging the US-led global order and 2020 could be a critical year for them, owing to the US presidential election and the potential change in US global policies that could follow.

Under Donald Trump, the US is trying to contain or even trigger regime change in these four countries through economic sanctions and other means. Similarly, the four revisionists want to undercut American hard and soft power abroad by destabilising the US from within through asymmetric warfare. If the US election descends into partisan rancour, chaos, disputed vote tallies and accusations of “rigged” elections, so much the better for rivals of the US. A breakdown of the US political system would weaken American power abroad.

Moreover, some countries have a particular interest in removing Trump. The acute threat that he poses to the Iranian regime gives it every reason to escalate the conflict with the US in the coming months – even if it means risking a full-scale war – on the chance that the ensuing spike in oil prices would crash the US stock market, trigger a recession, and sink Trump’s re-election prospects. Yes, the consensus view is that the targeted killing of Qassem Suleimani has deterred Iran but that argument misunderstands the regime’s perverse incentives. War between US and Iran is likely this year; the current calm is the one before the proverbial storm.

As for US-China relations, the recent phase one deal is a temporary Band-Aid. The bilateral cold war over technology, data, investment, currency and finance is already escalating sharply. The Covid-19 outbreak has reinforced the position of those in the US arguing for containment and lent further momentum to the broader trend of Sino-American “decoupling”. More immediately, the epidemic is likely to be more severe than currently expected and the disruption to the Chinese economy will have spillover effects on global supply chains – including pharma inputs, of which China is a critical supplier – and business confidence, all of which will likely be more severe than financial markets’ current complacency suggests.

Although the Sino-American cold war is by definition a low-intensity conflict, a sharp escalation is likely this year. To some Chinese leaders, it cannot be a coincidence that their country is simultaneously experiencing a massive swine flu outbreak, severe bird flu, a coronavirus outbreak, political unrest in Hong Kong, the re-election of Taiwan’s pro-independence president, and stepped-up US naval operations in the East and South China Seas. Regardless of whether China has only itself to blame for some of these crises, the view in Beijing is veering toward the conspiratorial.

But open aggression is not really an option at this point, given the asymmetry of conventional power. China’s immediate response to US containment efforts will likely take the form of cyberwarfare. There are several obvious targets. Chinese hackers (and their Russian, North Korean, and Iranian counterparts) could interfere in the US election by flooding Americans with misinformation and deep fakes. With the US electorate already so polarised, it is not difficult to imagine armed partisans taking to the streets to challenge the results, leading to serious violence and chaos.

Revisionist powers could also attack the US and western financial systems – including the Society for Worldwide Interbank Financial Telecommunication (Swift) platform. Already, the European Central Bank president, Christine Lagarde, has warned that a cyber-attack on European financial markets could cost $645bn (£496.2bn). And security officials have expressed similar concerns about the US, where an even wider range of telecommunication infrastructure is potentially vulnerable.

By next year, the US-China conflict could have escalated from a cold war to a near hot one. A Chinese regime and economy severely damaged by the Covid-19 crisis and facing restless masses will need an external scapegoat, and will likely set its sights on Taiwan, Hong Kong, Vietnam and US naval positions in the East and South China Seas; confrontation could creep into escalating military accidents. It could also pursue the financial “nuclear option” of dumping its holdings of US Treasury bonds if escalation does take place. Because US assets comprise such a large share of China’s (and, to a lesser extent, Russia’s) foreign reserves, the Chinese are increasingly worried that such assets could be frozen through US sanctions (like those already used against Iran and North Korea).

Of course, dumping US Treasuries would impede China’s economic growth if dollar assets were sold and converted back into renminbi (which would appreciate). But China could diversify its reserves by converting them into another liquid asset that is less vulnerable to US primary or secondary sanctions, namely gold. Indeed, China and Russia have been stockpiling gold reserves (overtly and covertly), which explains the 30% spike in gold prices since early 2019.

In a sell-off scenario, the capital gains on gold would compensate for any loss incurred from dumping US Treasuries, whose yields would spike as their market price and value fell. So far, China and Russia’s shift into gold has occurred slowly, leaving Treasury yields unaffected. But if this diversification strategy accelerates, as is likely, it could trigger a shock in the US Treasuries market, possibly leading to a sharp economic slowdown in the US.

The US, of course, will not sit idly by while coming under asymmetric attack. It has already been increasing the pressure on these countries with sanctions and other forms of trade and financial warfare, not to mention its own world-beating cyberwarfare capabilities. US cyber-attacks against the four rivals will continue to intensify this year, raising the risk of the first-ever cyber world war and massive economic, financial and political disorder.

Looking beyond the risk of severe geopolitical escalations in 2020, there are additional medium-term risks associated with climate change, which could trigger costly environmental disasters. Climate change is not just a lumbering giant that will cause economic and financial havoc decades from now. It is a threat in the here and now, as demonstrated by the growing frequency and severity of extreme weather events. 

In addition to climate change, there is evidence that separate, deeper seismic events are under way, leading to rapid global movements in magnetic polarity and accelerating ocean currents. Any one of these developments could augur an environmental white swan event, as could climatic “tipping points” such as the collapse of major ice sheets in Antarctica or Greenland in the next few years. We already know that underwater volcanic activity is increasing; what if that trend translates into rapid marine acidification and the depletion of global fish stocks upon which billions of people rely?

As of early 2020, this is where we stand: the US and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of US Treasuries are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the US and four revisionist powers are escalating; and the real-world costs of climate change and other environmental trends are mounting.

This list is hardly exhaustive but it points to what one can reasonably expect for 2020. Financial markets, meanwhile, remain blissfully in denial of the risks, convinced that a calm if not happy year awaits major economies and global markets.

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