The investment drought of the past two decades is catching up with us

Martin Sandbu in The FT

In all the talk of “building back better” and making economies “match fit”, “strategically autonomous” and “resilient”, there is an unstated but tragic premise. For decades, most advanced economies did not build their future but languished in an investment drought, the scandal of which is greater for being unacknowledged. 

Between 1970 and 1989, the share of gross domestic product devoted to investment by six of the world’s seven biggest economies averaged from 22.6 per cent for the US to 24.8 per cent for Germany. The seventh, Japan, was an outlier with 35 per cent. 

Of the G7, only Canada has sustained this level of investment: its 22.5 per cent in this millennium is barely down from 22.8 back then. All the others have only managed to match their 1970-89 investment levels in four instances: the US in the boom years of 2000 and 2005-06, and France in 2021. 

Yet these past 20 years have been the era of lower-than-ever financing costs, first because of market exuberance, then thanks to central banks’ ultra-lax monetary policy. And what do we have to show for all that cheap credit? Two lost decades for investment. As economics writer Annie Lowrey concisely puts it, “we blew it”. 

France and the US have invested nearly two percentage points of GDP less this century than they did in the 1970s and 1980s; Germany and Italy about 4.5 points less; the UK and Japan 6 and 10 percentage points less respectively. These are enormous numbers. The G7 account for about $45tn in annual GDP. Restoring their investment ratios could fill nearly half the global shortfall to the $4tn the International Energy Agency calls for in annual clean technology investment if we are to meet net zero by 2050. 

Those are total investment numbers, but a similar story holds for the public sector on its own. In the US, net government investment (after accounting for depreciation of the existing public capital stock) fell by almost two-thirds in the decade to 2014, when it dropped to 0.5 per cent of GDP. 

In the eurozone, net public investment went negative in the same year, thanks to extreme fiscal austerity in the eurozone periphery and chronic under-investment in Germany. 

Some will be tempted by claims that we need not worry. It is normal to invest less as you get richer — so one argument goes — because adding to an already large capital stock is increasingly useless. The cost of capital goods has fallen, so the same money buys you more real investment, goes another. A third is that the current economy needs intangible, not physical capital, and while this is harder to measure, countries seem to be doing better on that front. 

Yet such reassurances, even if factually true, are no use. No one who takes a close look at most western countries’ physical infrastructure can think it fit for purpose — not when that purpose expands to include decarbonising our industries and energy and transport systems. 

Why have we lived for so long off past investments and failed to make enough new ones? Financing costs have clearly not been the problem, with interest rates at record lows. (Crisis-hit eurozone countries in the sovereign debt crisis were the exception, but even Spain and Italy have out-invested Britain for decades.) 

More likely culprits are a lack of demand and cheap labour. Businesses that don’t expect enough demand to absorb expanded output have no reason to invest. And when they are permitted to treat workers as cheap and disposable, they may choose that over irreversible capital investments. This is why faster wage growth and the so-called “labour shortages” (really competition for workers) are something we should embrace if we are to prod businesses into productive investments. 

Something similar may have been true for cheap energy in Europe. The 2010s were a time of unusually low-cost natural gas and hence electricity. This may have undermined the urgency of investing in both greater renewable generation and geopolitically safe natural gas developments. Oil prices, too, were low for much of the decade. 

But underneath these economic factors, I think our failure to invest is profoundly political. Raising the investment-to-GDP ratio, whether through boosts to private or public investment, or both, means that a smaller ratio of GDP is left over for consumption. Even if this prepares a better future, it can feel like a measlier existence today. And that is something a generation of politicians across the rich world have been afraid to inflict on their voters. 

That is true in good times, when transfer payments, tax cuts and immediate public goods are all politically more attractive than capital investment. (Something equivalent is at work in the private sector: witness companies’ choice to return cash to owners through share buybacks rather than invest in their own growth.) It has also been true in bad times, when investment is the easiest expenditure for belt-tightening governments and companies to cut. 

European countries have come to rue how they used the “peace dividend” of 1989 to cut defence spending. The same moment pushed the west as a whole to forget the broader idea of short-term sacrifice for a more prosperous future. But this is not inevitable, as exceptions such as Canada and the Nordics’ sustained investment show. Western voters and governments have both unlearned the virtue of delayed gratification. They have to relearn it, and fast.

Message from Sri Lanka

Jawed Naqvi in The Dawn

ONE can see a few instructive lessons from the painful turbulence underway in Sri Lanka. The most crucial of these for neighbours and beyond is the resounding message that there are limits to socially divisive policies any government or state can pursue, particularly to mask the distress brought about by bad economic prescriptions. In other words, sooner or later people catch on.

The jostling is already on between narratives about the crisis. The dominant narrative about an economic collapse as the trigger for mass protests is a tautology. Another perspective, inevitably, is focusing on the ousted Rajapaksa government’s refusal to vote with the US against Russia over Ukraine. The last-minute call to Vladimir Putin for help, chiefly with oil, will be interpreted in myriad ways.

There will be comments also about the need for the IMF to fix things urgently. The problem is this had happened to India when the Gulf War induced economic instability with oil prices nudging a veteran pro-Soviet India into becoming a darling of the West. The prescription the IMF gave Manmohan Singh required secrecy. It had to be kept away from parliamentary scrutiny. The Ayodhya movement of L.K. Advani was activated to occupy the nation’s attention, away from the IMF-induced pain that inevitably comes with its trickle-down economic advisory.

Be that as it may, Ranil Wickremesinghe looks the man of the moment for the US. Never mind that he lost the last election when his party couldn’t win a single seat. He came into parliament through the backdoor, the national list.

Would that work for the purpose of evicting China from its perch in Colombo? If the Western purpose falters, there could be worse awaiting the hapless country. So, here we are. The president who courted China’s economic worldview and refused to vote against Russia has fled. (Remember Kyiv in 2014?) And Wickremesinghe, nephew of Sri Lanka’s first pro-US president J.R. Jayewardene, has taken charge, and is threatening to quell the protests by force if necessary.

There’s always a backup script if things go wrong. The ousted president was a close ally of the Bodu Bala Sena. The Sinhalese chauvinist group has cast itself in the image of India’s RSS, a Muslim and Christian-hating Buddhist clone of the Hindutva order. Other similarities between India and Sri Lanka are eerier. Remember how prime minister Solomon Bandaranaike was assassinated by a Buddhist monk angered by his quest for a friendly pact with the minority Tamils? The murder bore an uncanny resemblance to Gandhi’s assassination by Hindu supremacists hostile to his alleged appeasement of Muslims. 

Certain things about Sri Lanka’s heart-wrenching mess one can do little about, among them being the fact that Covid-19 waylaid the tourism industry, the island nation’s economic backbone. Small-scale entrepreneurs, critically the garment exporters, took a hit. The resultant cap on foreign imports coupled with an outlandish nationwide move to switch to organic farming, (mainly to mask the slashing of fertiliser imports) wrecked the prospects of an early recovery from pandemic-induced setbacks. The horror could strike Sri Lanka whose human development indices are far ahead of its neighbours.

Decades before Gen Musharraf sealed his military support against the Tamil Tigers, India and Sri Lanka bonded as close friends. Former president Chandrika Kumaratunga particularly treasures an old picture of Nehru hoisting her in the air. Later Indira Gandhi stopped Sirimavo Bandaranaike from quitting during a Sinhalese communist insurrection in 1971, the year Mrs Gandhi would go to war with Pakistan. “Indu called me to say under no circumstances was I to resign.” The Janatha Vimukthi Peramuna insurrection would have rattled any government. It was the first of two unsuccessful armed revolts conducted by the communist group against the socialist United Front Government of Sri Lanka. The revolt lasted two months before Indian troops helped quell it.

I met Mrs Bandarnaike when she was in the wheelchair with paralysed toes. It was a peep into the India-Sri Lanka backstage. Her son Anura Bandaranaike was a devotee of India’s healer-guru Sai Baba of Pattapurthi. On his advice, the mother flew to Puttaparthi. The Sai Baba promised quick recovery but it was a tall claim. The Buddhist press was up in arms over the leader of their country falling prey to the ‘mumbo jumbo’ of an Indian guru.

It didn’t help that India was firmly in the Soviet camp while its neighbours had cosy ties with China and the US, both allies against Moscow. Pakistan, Bangladesh, Nepal and Sri Lanka led the movement for Saarc, the South Asian club that met in Dhaka for the first summit in 1985. Gen Ershad, its host, would later tell me that it was a collective effort by India’s neighbours to deal with Delhi jointly. “We were allergic to India,” Ershad told me bluntly in a TV interview. “So we decided to deal with India jointly.”

Sri Lanka is in a serious quandary today and does not have the emotional wherewithal to deal with the IMF’s conditionality that always comes. The protesters represent Sri Lanka’s multicultural bouquet. There’s just no room for dividing them again. Nor is there stomach for more IMF pills.

Palitha Kohona, Sri Lanka’s ambassador in Beijing shared the fears with the Global Times. The patience is running thin.

“In some cases, it’s difficult because the belt is already on the last notch. Sri Lanka has a state-funded healthcare system from birth to death. Some are worried that the IMF might recommend that we tighten the healthcare system. Our education system is also free from grade one to university level. This might be another area that the IMF might recommend pruning. But these may add to the unrest, which is already hampering the recovery of the country and unsettle any government, which takes over in the next few weeks. We have to deal with these issues, and it’s not going to be easy for Sri Lanka.”

Should we have a ‘truth law’?

Today’s politicians mislead with impunity – could we legislate to stop them lying? asks Sam Fowles in The Guardian



 
For months the British government has floated the idea of unilaterally breaking the so-called Northern Ireland protocol, part of the withdrawal treaty it agreed with the European Union. That would undermine the Good Friday agreement, reanimate the prospect of sectarian violence and damage the UK’s international reputation. Such action demands a weighty justification and ministers have one, with the attorney general arguing that “Northern Ireland’s economy is lagging behind the rest of the UK”.

Except it’s not. Statistics show that Northern Ireland is outstripping every part of the UK except London.

In recent years politicians have repeatedly based the case for historic changes on lies. These have ranged from the infamous “Brexit bus”, which promised £350m a week for the NHS, to government framing of recent rail strikes as “selfish” because, as Boris Johnson told one interviewer: “Train drivers are on £59,000 and some are on £70,000.” (The average wage of a striker is below £36,000.) Politicians consistently mislead about issues of national importance. I know this first-hand – I was part of the legal team that proved Johnson’s prorogation of parliament in 2019 was unlawful.

Truth is democracy’s most important moral value. We work out our direction, as a society, through public discourse. Power and wealth confer an advantage in this: the more people you can reach (by virtue of enjoying easy access to the media, or even controlling sections of it), the more likely you are to bring others round to your point of view. The rich and powerful may be able to reach more people but, if their arguments are required to conform to reality, we can at least hold them to account. Truth is a great leveller.

The problem is that our public discourse has become increasingly divorced from reality. The pollster Ipsos Mori conducts regular surveys on what the British public believes about the facts behind frequently discussed issues. In one memorable study it discovered that, in the words of one headline, “the British public is wrong about nearly everything”. Among the concerns was benefit fraud: people surveyed estimated that around £24 of every £100 of benefits was fraudulently claimed, whereas the actual figure was 70p. When asked about immigration, people estimated that 31% of the population were born outside the UK, when in truth it was 13%.

Members of parliament have played a prominent role in getting us to this point. They make and vote on laws, help set the political agenda and influence the national conversation. Of course, politicians have always had a tendentious relationship with the truth. From the Zinoviev letter to the Profumo affair, history is littered with scandals that result from lies being exposed. Profumo resigned because he misled parliament once. Today’s ministers regularly do the same with impunity.

Commentators often paint Johnson as uniquely mendacious, but he is merely the latest prime minister to embrace lying for political gain. David Cameron won two elections by misleading the country about the causes of the financial crash and the economic impacts of austerity. Theresa May built her early career in government on dubious anti-immigration rhetoric, notably the lie that one immigrant had been allowed to stay in the country because he had a pet cat.

Democracy cannot function properly in this environment and an existential problem demands a radical solution. So, MPs (and peers in the House of Lords) should be formally required to tell the truth: in the debating chamber, on TV, in print and on social media. To publish a statement that wilfully or negligently misrepresents information should be classed as misconduct in public office (a criminal offence). In other words: we need a truth law.

Ensuring the offence captures both “wilful” and “negligent” misrepresentation will obviate spurious defences such as Johnson’s claim that he thought the Downing Street parties were “work events”. With researchers and civil servants at their disposal, parliamentarians have no excuse for misrepresenting the facts. Even so, I suggest that they should not be prosecuted if they correct the record and apologise in parliament within seven days.

Radical as it may seem, we already have all the tools to make this work within established law. “Publish” has a clear legal meaning (essentially “to make public”). Tests of wilfulness or negligence are frequently applied across civil and criminal law. Determining whether someone has “misrepresented information” (ie, not told the truth) is often the core business of the courts. The penalty for misconduct can go all the way up to life imprisonment. While some may find that rather satisfying, I suggest limiting it, in this class of cases, to a fine. The courts should also have the power to refer an offender to the Standards Committee for further parliamentary sanction. 

I imagine that there will be two main objections to this idea. First, it may have a chilling effect on parliamentarians’ free expression. But parliamentarians are not ordinary citizens. They hold a special position of trust and power, which they assume voluntarily, and for which they are rewarded handsomely. It’s right that that they should be subject to stricter rules. Many professions limit the freedom of expression of their members in the public interest. As a barrister I am subject to “truth telling” rules which, if breached, could end my career (and potentially lead to a prosecution for contempt of court). Politicians’ words have more influence than barristers’, so it’s fair to subject them to more exacting standards.

Second, any truth law would breach “parliamentary privilege”. This guarantees that MPs will not be prosecuted for anything they say in parliament. That rule was developed to stop monarchs persecuting their political opponents. It was never intended to be a licence to lie. We now have an independent prosecution authority and independent courts: it’s time we addressed today’s challenges to democracy, not ones that were last relevant centuries ago.

My proposal won’t eradicate lying in public life. But it’s an important first step. Imagine, for a moment, that we could genuinely trust our elected representatives. That shouldn’t be a utopian ideal – and in the law, we have the means to make it a reality.

The US’s selfish war on inflation will tip the world into recession

Phillip Inman in The Guardian


As the Fed raises interest rates, dollar-denominated loans become an unsustainable burden to states around the globe

The Federal Reserve is planning a second interest rate rise in a year this month. Photograph: Chris Wattie/Reuters 


Later in July US interest rates are expected to jump for a second time this year, and that’s going to wreck any chance of a global recovery.

The Federal Reserve could push its base rate up by as much as a full percentage point, ending 15 years of ultra-cheap money, intended to promote growth.

This jump, to a range of 2.5%-2.75%, would take the cost of borrowing money in the US to more than double the Bank of England’s 1.25%. And yet the Fed could just be taking a breather as it contemplates even higher rates.

This column, though, is not about the US. It is concerned with the terrible impact on Britain and countries across the world of America’s selfish disregard when it decides to tackle high inflation with higher borrowing costs. Britain is already feeling the effects of the Fed’s pledge to tackle inflation until it is “defeated”, come what may.

Higher interest rates in the US make it a more attractive place for investors to store their money. To take full advantage, investors must sell their own currency and buy dollars, sending the price of dollars rocketing higher.

In July the US dollar increased in value against a basket of six major currencies to a 20-year high. The euro has slipped below parity with the dollar in the last few days. The pound, which has plunged by more than 10% this year to below $1.20, is losing value with every week that passes.

In Japan, the central bank has come under huge pressure to act after the yen tumbled to its lowest level against the dollar since 1998.

There are two important knock-on effects for those of us that live and work outside the US.

The first is that goods and raw material priced in dollars are much more expensive. And most commodities are priced in dollars, including oil.

Borrowing in dollars also becomes more expensive. And while getting a loan from a US bank is beyond the average British household, companies do it all the time, and especially those in emerging economies, where funds in their backyard can be in short supply.

The Bank of England interest-rate setter Catherine Mann recently said that her main motivation for wanting significant increases in the UK’s lending rates was her fear that the widening gap with the dollar was pushing up import prices. And higher import prices meant higher inflation.

If only she could persuade her colleagues on the Bank’s monetary policy committee that the devaluation of the pound was a serious issue, maybe they would push up the Bank’s base rate in line with the Fed rate increases. After the Fed makes its move, more may join her.

Until January this year, Britain’s inflation surge was on course to be short-lived. Now it seems the Russian invasion of Ukraine and a splurge of untargeted handouts by the Biden administration during the pandemic, which have served to push up prices in America, will keep inflation in the UK high into next year. 

Those governments that have borrowed in dollars face a double whammy. Not only will they need to raise domestic interest rates to limit the impact of import price rises, they will also face a massive jump in interest payments on their dollar borrowings.

Emerging markets and many developing-world countries will be broke when these extra costs are combined with a loss of tourism from the Covid pandemic. Sri Lanka has already gone bust and many more could follow.

For the past three decades, western banks have marketed low-cost loans across the developing world as a route to financial freedom.

Zambia’s government borrowed heavily before the pandemic to become self-sufficient in electricity. It is a laudable aim, but has left the central African state with a ratio of debt to national income (GDP) much the same as France’s – about 110%.

The problem for Zambia is not the same as for France, which pays an interest rate of 1.8% to finance its debts, measured by the yield on its 10-year bonds. The Zambian 10-year bond commands a rate of 27%. Now Zambia, like France and so many other countries, must borrow simply to live. To invest is to borrow more.

There is no sign that the US will change course. Joe Biden is in a panic about the midterm elections, when fears of spiralling inflation could favour the Republicans. This panic has spilled over to the Fed, which has adopted hysterical language to persuade consumers and businesses that higher rates are coming down the track and to curb their spending accordingly.

The Fed knows inflation is a problem born of insufficient supply that only governments can tackle. But that doesn’t look like stopping it from pushing the US economy, and everyone else’s, into recession.

Modi ke Acche Din

 

Discussing India's Unemployment Data

 

The political menu of food

Jawed Naqvi in The Dawn

EID in Pakistan leaves unwieldy quantities of carcasses to deal with. But the world’s largest festival of ritual slaughter is held every five years in Nepal’s Bariyarpur village, mostly of water buffaloes, for the propitiation of goddess Gadhimai. On the other hand, The Indian Express reported recently that more Indians are turning to meat eating than ever before, leaving vegetarian men in the age group of 15 to 49 — who had never consumed “fish, chicken or meat” — at a faltering 16.6 per cent in 2019-21. Indian gurus cite ancient texts to suggest that meat eating makes us aggressive and vegetarianism has a calming effect.

That’s not the way it always seems to play out though. Are people who kill people in a riot or a massacre vegetarians or meat eaters? It is probably the wrong question to pose. I once ordered a bowl of thukpa at a Tibetan restaurant in Manali. It is a meat dish with noodles popular among Tibetans who are nearly all Buddhist. In the meantime, I wondered if the owner could kindly swat away the flies. There was total refusal to do anything about the pests hovering over the table. “We don’t kill,” was the clear but polite reply. What about the thukpa? It has meat. “I didn’t kill it,” the man smiled.

Within meat-eating and vegetarian groups there are further subdivisions that can be equally needlessly misleading. Giora Becker and Gershon Kedar were Israeli diplomats I came to know in India. Becker was a free-spirited Jew and didn’t hesitate to put on his plate food that was forbidden in his culture. Kedar was an orthodox Jew who turned out to be the opposite of Becker in food habits. He was unprepared, for example, to have a meal anywhere other than the Dasaprakasa, once a popular vegetarian restaurant in Delhi. There was no chance of kosher requirements being violated at the restaurant where meat of any kind was neither cooked or served.

Their different approaches to food and indeed to their religion played little or no role in approaching the Palestinian question. If blood had to flow for their country, rightly or wrongly, it would be spilt, never mind the key commandment that forbids killing of humans as a sin.

Popular belief about food misrepresents men and animals alike. Indian gurus insist vegetarians are of a calmer disposition while meat makes one aggressive. A close look would find little or no evidence for the common claim. In a similar vein, the fact that snakes don’t drink milk caves before popular belief. Sample the faulty but commonly used idiom that refuses to yield to the compelling fact. It insists that feeding milk to a baby snake is to nurture an enemy.

The Express report on the increasing number of meat eaters in India struggles against the number of vegetarian leaders the country has elected, including the current one. The three from the Kashmiri Brahmin stock — Nehru, Indira, Rajiv — ate meat and practised yoga. The other meat eaters were A.B. Vajpayee, a Brahmin from the Hindutva flank. Chandra Shekhar and V.P. Singh, the two thakurs from Uttar Pradesh, and the two gentlemen from Punjab, Inder Gujral and Manmohan Singh were regular omnivores. Gulzari Lal Nanda, Lal Bahadur Shastri, Morarji Desai, Narasimha Rao, Deve Gowda, and now Narendra Modi bring up the vegetarian cluster. Shastri and Indira Gandhi fought wars adroitly despite their different food habits.

There’s another challenge to the vegetarian and non-vegetarian debate. You may be this or that, or, after today’s fashion, even a vegan; it will not take you away from your blood-caked past. If the late Prof Kailash Nath Kaul was right, Indian languages offer a glimpse into our cannibal origins, which we share with the wider world. The common threat to drink someone’s blood in a heated moment or chew somebody raw, or make mincemeat of one’s quarry may have an unaccepted origin in our early evolution as social beings.

Movie actor Dharmendra was more popular than his contemporaries for baying for the enemy’s blood in frequent climax scenes. He was applauded, not booed for using the north Indian idiom of bloodlust. The phenomenon is evenly distributed across many nations. Militaries carry on the tradition of our headhunting past. If one remembers correctly, there was this picture of a British soldier with a bunch of decapitated heads of Malayan communist guerrillas in the 1940s. Accusations abound of Indian and Pakistani troops periodically indulging in the gore.

According to Harikishan Sharma’s report in the Express, while the country is increasingly convulsed in the vegetarian-meat-eating dispute, the truer picture remains studiously aloof from the debate.

“More people are eating non-vegetarian food than ever before, and the proportion of Indian men who do so has gone up sharply in the six years between 2015-16 and 2019-21,” the Express quotes the National Family Health Survey as revealing. Women meat eaters too have increased, albeit glacially.