How to Persuade People - Logos, Ethos and Pathos

 

How to Improve your Clarity of Thought

 Conor Neil

Are Democracy and Capitalism in Conflict? Economic History in Small Doses 2

By Girish Menon*

The answer is yes. Unlike what a lot of people believe capitalism and democracy clash at a fundamental level.

 Democracy runs on the principle of ‘one person one vote’. The market (a euphemism for capitalism) runs on the principle of one rupee one vote. Naturally, the former gives equal weight to each person regardless of the money s/he has. The latter gives greater weight to richer people. Therefore, democratic decisions usually subvert the logic of markets.

 Most 19^th century liberals opposed democracy because they thought it was not compatible with a free market. They argued that democracy would allow the poor majority to introduce policies that would exploit the rich minority, thus destroying the incentive for wealth creation.

 Influenced by such thinking, all of today’s rich democracies, historically, gave voting rights only to those who owned more than a certain amount of property or earned enough income to pay more than a certain amount of tax. The election result in British India, often quoted to justify the traumatic partition, was based on votes by a subsection of the population.

Communists, who reject the ‘one dollar one vote’, were not known for their conduct of free and fair elections either.

 On the other hand, money can be a great leveller. It can work as a powerful solvent of undesirable prejudices against people of particular races, social castes or occupational groups. The fact that the openly racist apartheid regime in South Africa gave the Japanese ‘honorary white’ status is a powerful testimony to the liberating power of the market.

 Unfortunately, leaving everything to the market will result in the rich being able to realize the most frivolous element of their desires, while the poor may not even be able to survive.

 Moreover, there are certain things that should simply not be bought and sold – even for the sake of having healthy markets. Judicial decisions, public offices, academic degrees are a few such examples.

 Democracy and markets clash at a fundamental level.  They need to be balanced. Free markets are not good at promoting economic development despite what their proponents argue.

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity

Is Corruption An Obstacle to Economic Growth? - Economic History in Small Doses 1

 By Girish Menon* 

Corruption is indeed a big problem in developing countries. In fact, the consensus among the IMF led consortia is that corruption is the biggest obstacle to economic growth and development. This has led them to conclude that there is no point in giving aid to developing countries because this money will not reach the intended beneficiaries. Such reasoning has led to serious cuts in the aid programmes of the developed countries. However, is corruption an impediment to economic growth?

Corruption is a violation of the trust vested by its stakeholders in the holders of office in any organisation be it a government, a corporation, a trade union or even an NGO.

 Life would be simpler if corruption produced unambiguously negative economic consequences. But the reality is a lot messier.  In the last half century countries like Zaire under Mobutu, Haiti under Duvalier have had their economies wrecked by corruption. At the other extreme, countries like Finland, Sweden and Singapore have done well in a non corrupt environment. At the same time there are countries like China, Japan, Taiwan, Korea and to some extent India who were corrupt but have done well economically. How is it possible that corruption has such different economic consequences in different economies?

A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth. If the bribe-taker is investing that money in another domestic project that is as productive as the bribe-giver would have invested in, then the venality may have no effect on the economy in terms of efficiency or growth. The critical question then is what happens with the bribe money? If the recipient indulges in conspicuous consumption or moves it to a tax haven then the economic effects may be worse.

Corruption may also distort government regulation. If a pharmaceutical company supplying sub-standard drugs can continue its practice by bribing the relevant officials, there will be negative economic consequences. However, if the regulation was an ‘unnecessary’ one then corruption may actually increase economic efficiency. For example if all the paper work to start a business takes a year (say) and paying a bribe gets the entrepreneur the green light in a month, then isn’t corruption adding to economic efficiency?

So the consequences of corruption depend on which decisions the corrupt act affects, how the bribes are used by recipients and what would have been done with the money had there been no corruption. In India, it is rumoured that some of the bribe money makes its way back into the constituency of politicians, after a round trip to tax havens. And that is not necessarily a bad thing!

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity

Anti-Conversion bill a must for successful interfaith marriages - Kamalrukh Khan wife of Wajid Khan

 

China pulls back from the world: rethinking Xi’s Belt and Road Initiative

James Kynge and Jonathan Wheatley in The FT

It has not taken long for the wheels to come off the Belt and Road Initiative. As recently as May 2017, China’s leader Xi Jinping stood in Beijing before a hall of nearly 30 heads of state and delegates from over 130 countries and proclaimed “a project of the century”. 

This was not hyperbole. China has promised to spend about $1tn on building infrastructure in mainly developing countries around the world — and finance almost all of this through its own financial institutions. Adjusted for inflation, this total was roughly seven times what the US spent through the Marshall Plan to rebuild Europe after the second world war, according to Jonathan Hillman, author of The Emperor’s New Road. 

But according to data published this week, reality is deviating sharply from Mr Xi’s script. What was conceived as the world’s biggest development programme is unravelling into what could become China’s first overseas debt crisis. Lending by the Chinese financial institutions that drive the Belt and Road, along with bilateral support to governments, has fallen off a cliff, and Beijing finds itself mired in debt renegotiations with a host of countries. 

“This is all part of China’s education as a rising power,” says Mr Hillman, a senior fellow at Washington-based think-tank CSIS. “It has taken a flawed model that appeared to work at home, building large infrastructure projects, and hubristically tried to apply that abroad.” 

“Historically, most infrastructure booms have gone bust,” he adds. “Whether China can avert that fate may depend on its ability to renegotiate loans with countries now in urgent need of debt relief. If China is unable or unwilling to provide sufficient relief to its borrowers, it could find itself at the centre of a debt crisis in developing markets.” 

The data that describes China’s predicament comes from researchers at Boston University who maintain an independent database on China’s overseas development finance. They found that lending by the China Development Bank and the Export-Import Bank of China collapsed from a peak of $75bn in 2016 to just $4bn last year. 

The context around this is crucial. The two banks fall under the direct control of China’s state council (cabinet), so they function as arms of the state. They provide the overwhelming majority of China’s overseas development lending and the funds they disburse rival in scale those of the World Bank, the world’s largest multilateral lender. 

Between 2008 and 2019, the two Chinese banks lent $462bn, just short of the $467bn extended by the World Bank, according to the Boston University data. In some years, lending by the Chinese policy banks was almost equivalent to that by all six of the world’s multilateral financial institutions — which along with the World Bank include the Asian Development Bank, the Inter-American Development Bank, the European Investment Bank, the European Bank for Reconstruction and Development and the African Development Bank — put together. 

In global development finance, such a sharp scaling back of lending by the Chinese banks amounts to an earthquake. If it persists, it will exacerbate an infrastructure funding gap that in Asia alone already amounts to $907bn a year, according to Asian Development Bank estimates. In Africa and Latin America — where Chinese credit has also formed a big part of infrastructure financing — the gap between what is required and what is available is also expected to yawn wider. 

‘Dual circulation’ 

China’s retreat from overseas development finance derives from structural policy shifts, according to Chinese analysts. “China is consolidating, absorbing and digesting the investments made in the past,” says Wang Huiyao, an adviser to China’s state council and president of the Center for China and Globalisation, a think-tank. 

Chen Zhiwu, a professor of finance at Hong Kong university, says the retrenchment in Chinese banks’ overseas lending is part of a bigger picture of China cutting back on outbound investments and focusing more resources domestically. It is also a response to tensions between the US and China during the presidency of Donald Trump, when Washington used criticisms of the Belt and Road as a justification to contain China, Prof Chen adds. 

“In domestic Chinese media, the frequency of the [Belt and Road] topic occurring has come down a lot in the last few years, partly to downplay China’s overseas expansion ambitions,” says Prof Chen, who is also director of the Asia Global Institute think-tank. “I expect this retrenchment to continue.” 

Yu Jie, senior research fellow on China at Chatham House, a UK think-tank, says Beijing’s recently-adopted “dual circulation” policy represents a step change for China’s relationship with the outside world. The policy, which was first mentioned at a meeting of the politburo in May, places greater emphasis on China’s domestic market — or internal circulation — and less on commerce with the outside world. 

“Volatile Sino-US relations and more restrictive access to overseas markets for Chinese companies have prompted a fundamental rethink of growth drivers by Beijing’s top economic planners,” says Ms Yu. “Naturally, if state-owned enterprises decide to switch back to the domestic market in order to follow the leadership’s wishes, the budgeted financial resource for overseas investments will reduce accordingly.” 

All this is leading to a fundamental rethink by China towards both the Belt and Road and its overseas lending profile, analysts believe. Mr Wang says that one strand of a new approach would be to pursue more lending through multilateral bodies such as the Asian Infrastructure Investment Bank. In addition, Chinese financial institutions may co-operate more with international lending agencies, he adds. 

Such a change would amount to a fundamental reorientation. The Beijing-based AIIB and another multilateral bank in which China is a stakeholder, the New Development Bank, are very different organisations from the two Chinese policy banks. They have lent out a fraction of the policy banks’ annual average and are not directed by Beijing’s policies but by a board of directors who represent the interests of stakeholder countries. 

Flaws in the initiative 

Overall, though, China’s rethink betrays a tacit recognition that its overseas lending bonanza has been ill-conceived. Photographs from the 2017 Belt and Road Forum for International Co-operation — the venue at which Mr Xi declared his “project of the century” ambition — hint at what would become the programme’s fatal flaw. 

Alongside Mr Xi in successive portraits were the authoritarian leaders of countries with big debts and “junk” credit ratings, such as Alexander Lukashenko of Belarus, Hun Sen of Cambodia, Aleksandar Vucic of Serbia, Uhuru Kenyatta of Kenya and several others. 

Debt sustainability — or the ability of debtor countries to repay their loans — had to be part of any reassessment of the Belt and Road Initiative, says Kevin Gallagher, director of the Boston University Global Development Policy Center, which compiled the data on Chinese overseas lending  “This has to be the time for a rethink,” he says. “It’s been such a priority for Xi Jinping, he’s invested so much in it that he’s not going to just turn the lights off. But they need to seriously implement their own debt sustainability analysis and their own social and environmental impact tools.” 

The propensity for China’s credit-fuelled engagement of diplomatic allies to come unstuck is most spectacularly portrayed by Venezuela. Between 2007 and 2013, the China Development Bank lent Venezuela nearly $40bn, cementing a relationship that Hugo Chávez, the former president of Venezuela, characterised as “a Great Wall” against US hegemonism. 

Much of the lending to Venezuela was tied to oil resources, but even before Mr Chávez died in 2013 it was clear that things were going awry. Yet Beijing was in so deep that it felt compelled to keep supporting Nicolás Maduro, successor to Mr Chavez, even after evidence of his ineffectual economic management became clear. 

It lent another $20bn between 2013 and 2017 and is now picking through the country’s pile of $150bn in defaulted debt, pushing its claims against rival creditors. The whole episode carries crucial lessons for Beijing, says Matt Ferchen at Merics, a Berlin-based think-tank. 

“Chinese foreign policy and policy bank officials entered into their outsized economic and political relationship with [Venezuela] with a combination of hubris, ambition and naïveté,” Mr Ferchen wrote. “[This] has contributed to the region’s worst economic, humanitarian, and political crisis in decades.” 

Debt renegotiations have proliferated as the pandemic has clobbered emerging economies in Africa and elsewhere. A report by Rhodium Group, a consultancy, says at least 18 processes of debt renegotiation with China have taken place in 2020 and 12 countries were still in talks with Beijing as of the end of September, covering $28bn in Chinese loans. 

So far, Beijing appears keen to pursue a soft touch, deferring interest payments and rescheduling loans. But the experience is reinforcing a growing sense of wariness that now infuses Mr Xi’s big project. 

China is finding out, says Mr Hillman, that “risk runs both ways along the Belt and Road and the damage can return to Beijing”.

Ideological Positions and Economic History

 

My response to Shekhar Gupta's video

Dear Mr. Gupta

I believe your thesis on economic history is flawed when you argue that Japan, Korea, Taiwan and Singapore have grown because of economic freedoms i.e. I presume you mean free market practices. I have often heard you say that India too should follow free market practices to achieve similar heights. In the above process the elephant in the room i.e. how China rose with state intervention, has also been ignored.

Kindly permit me to state a few historical facts extracted from 'Bad Samaritans The Guilty Secrets of Rich Nations...' by Ha Joon Chang

1.  When Robert Walpole became the British Prime Minister in 1721 he launched a Swadeshi* policy aimed to protect British manufacturing industries from foreign competition, subsidise them and encourage them to export. Tariffs on imported foreign manufactured goods were significantly raised while tariffs on raw materials were lowered. Regulation was introduced to control the quality of manufactured goods so that unscrupulous manufacturers could not damage the reputation of British products in foreign markets. Walpole’s protectionist policies remained in place for the next century, helping British manufacturing industries catch up with and then finally forge ahead of the counterparts on the Continent.By the end of the Napoleonic wars in 1815 British manufacturers were firmly established as the most efficient in the world and it was then that they started campaigning for free trade.

2. The US too followed similar protectionist policies, espoused by Alexander Hamilton, which included protective tariffs, import bans, subsidies, export ban on key raw materials, financial aid...until the end of the Second World War (WWII). It was only after WWII, with its industrial supremacy unchallenged, that the US started championing the cause of free trade. Even when it shifted to freer trade, the US government promoted key industries by another means; namely public funding of Research and Development (R&D). Without government funding for R&D the US  would not have been able to maintain its technological lead over the rest of the world on key industries like computers, semiconductors, life sciences, the internet and aerospace.

3. In Japan the famous MITI (Ministry of International Trade and Industry) orchestrated an industrial development programme that has now become a legend. After WWII, imports were tightly controlled through government control of foreign exchange. Exports were promoted in order to maximize the supply of foreign currency needed to buy up better technology. This involved direct and indirect export subsidies as well as information and marketing help from JETRO the state’s trading agency.

4. Even Korea has not been an exception to this pattern. The Korean miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention.

5. Singapore has had free trade and relied heavily on foreign investment, but even so, it does not conform in other respects to the neo-liberal ideal. It used considerable subsidies to MNCs in industries it considered strategic. It also has one of the largest state owned enterprises which supplies housing and almost all land is owned by the government.

To conclude, I feel that Mr. Gupta’s advocacy of free markets is based on a fundamentally defective understanding of the forces driving globalisation and a distortion of history to fit the theory. Free markets and trade was often imposed on rather than chosen by weaker countries. Virtually all successful economies, developed and developing, got where they are through selective strategic integration with the world economy rather than unconditional  global integration.

Regards

Girish Menon

* Swadeshi  is a conjunction of two Sanskrit words: swa ("self" or "own") and desh ("country"). Swadeshi is an adjective which means "of one's own country".