Populism and America

Populism is one tool which is expensive for every government. Not every government in the world can afford it, but many indulge in it without realizing the dangers and hazards that will surface in the future because of exploiting this tool. The picture of every government with a huge fiscal deficit is similar to that of a farmer who is caught in a quagmire of debt. The obvious difference is that unlike the government which is bailed out by the IMF and World Bank and other such “kind” and “noble” organisations, nobody bails out the farmer.  The farmer is left to fend for himself and eventually he commits suicide. After the IMF bails out the government, despite being bailed out, the government still commits suicide, guess why? Because after the bailout package the government is forced (by IMF) to reduce expenditure and increase taxation, and this is political suicide isn’t it, because that almost ensures that the present government might not come back to power.

It’s interesting to note that in the last 30 years, if there has been one factor which has been largely responsible for major economic restructuring and introspection by democratic governments; it has been a rising fiscal deficit. This is what we saw in the 1980’s in the Latin American countries, who wanted to adopt an import substitution industrialisation program, which needed them to develop their domestic manufacturing and industrial capacities. Around  the same time oil prices had sky rocketed, the petroleum exporting countries were making huge money and all this money was deposited with the international banks. These banks recycled this money to the Latin American countries in the form of loans for their industrialisation program. Soon Mexico declared that it couldn’t pay back the loans, and had a huge current account deficit, because the foreign money was flowing in the country and now they couldn’t pay it back. The other Latin American Countries soon followed in similar fashion. IMF typically intervened, gave a bailout package and made the government change its plans from an import substitution industrialisation program to export oriented industrialisation. A complete change in policy, also not to mention that the governments had to reduce expenditure and raise tax collection.

Similarly the Indonesian countries in the late 1990’s went through a similar crisis. Thailand, Malaysia had huge deficits, which they were unable to pay back. These were countries that had a growth rate of more than 8% for about a decade and they enjoyed the confidence of most foreign investors, this phenomenon was called by the IMF as an “Asian miracle”. It dint take time for the miracle to become a mess, and soon these countries were unable to return the money which was flowing in from abroad, all that money had come in with a short term profit in the mind of the investors. Once again the Noble IMF intervened and bailed out the country with austerity measures as the condition and that lead to change in policy.

Similar story in India, in 1991 when the fiscal deficit was high and the current account deficit was high, and the country had foreign reserves which could barely take care of the expenditures of the next few weeks. The then Finance Minister and Prime Minister decided to take the help of the IMF before they offered it themselves. And the result of that help is what we see today, the liberalization of the economy and the removal of the license raj system.

Therefore it is very clear that if there is one major factor which leads to restructuring of the economic policy, it is a rising fiscal deficit. Currently the US and Europe is faced with the same crisis.

The Debt/GDP ratio of many of the western countries has gone above 100%. It is but obvious that the US government has to reduce its debt. Let’s look at their possible options: (A) They raise the taxation, but for that to happen effectively the GDP has to rise which seems difficult in the near future. (B) Reduce expenditure, which seems to be the most sensible thing to do. Currently 40% of the expenditure of the government is from borrowed money. And (C) is to print so much money that they blow the debt away, at the cost of huge inflation and the reduction of the value of the dollar. The option of reducing expenditure seems to the most viable.

It’s very clear that US can no longer afford to keep low taxes while giving high social security benefits and wage wars on foreign soils.

 

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Underdeveloped-Developing-Transforming-Third World-New South

In an article in the ‘Hindu’ by Jorge Heine from the Balsille School of International Affairs, the subject is very interesting, the author speaks of the World Bank President Robert Zoellick now officially stating that the term “Third World” is now made redundant. This term was coined by Peter Worsely  in his book “The Third World: A vital force in International affairs”. The author of this book had spent many years after World War 2 in Africa and India, he had the first hand experience of how these post colonial countries were emerging. The author was particularly impressed by seeing how Nehru, Castro, Nkruhma, Nyere left behind the debris created due to colonialism and started the work of nation building.

Going by this perception of Mr. Worsely the term Third World seemed appropriate at that time, many other people at that time gave other terms like Underdeveloped, Developing, lower income each more disappointing than the other. These terms only tried to suggest that these Post Colonial countries only were a mere footnote to the real history.

In the sixties and seventies many nations in Asia, Africa and the Carrribbean were economically weak and were dependent on trade from the north, hence they created groups like Non Aligned Movement (NAM), UNCTAD, and forwarded proposals in the U.N  like New International Economic Order, sometimes these proposals got passed but very often they were not backed by any concrete reasons, they had little power apart from the voting rights in the U.N.

But over the last 10 years this scenario has changed substantially, countries like India, China, Brazil who are some of the fastest growing economies now “speak from strength not weakness”, they do not ask for aid but they want to trade. They expect a stronger say at the IFI, high table of global economic governance. Also another trend that has been observed is that these countries are not dependent only on the north countries for trade, they also trade among themselves.

Noted historian Ram Chandra Guha in a recent lecture spoke about why India is not and should not be a super power. The lecture was a kind of refutation to the media’s favourite headline “The Global Indian take over”, when there exists so much tension, conflict and disparity in our own society the take over in the world is “premature”. India’s domestic challenges and the situation with the immediate neighborhood demands more of settling immediate issues than any take over.

Therefore concludes the author the New South in the new century is going to be a strong force to reckon with. And the term Third World has been done away with.

Inflation, government and the people

The current phase of inflation seems to have undone much of the good that the UPA government created for itself through a “revolutionary budget” as Sonia Gandhi put it. The ‘Times of India’ describes this whole process as ‘pollonomics’. The government obviously wanted to showcase itself as a magnanimous organizing body which was compassionate enough to call of all the money which was due from the farmers, which was actually anyway lost, but calling it of at the most propitious time when elections are due would have resulted in electoral and political gain for the government. But now all that ‘good work’ (of a few weeks!!) may not ultimately give the government the edge that it needed for the next election. The BJP and CPI (M) are already threatening a nation wide agitation in second week of April if prices are not under control by then.

Whether the government will still win the election or not is a different matter, let us look at the phenomena of inflation that we are facing at the moment. First of all it is a global phenomenon; there is a jump in the food prices in the world market. Let us compare our inflation rate with the country we always like getting compared with for every reason, China. Currently China is growing at 11.4% and the inflation has hit a 12 year high of 8.7%, now that’s something to scream about, “inflation nearing 9%” almost sounds like “I have put on 20 kgs in one month and I have to lose the same in 15 days!” There is no doubt that bringing down the inflation rate from such a high rate not only takes a little time but it also affects the growth rate. We have already seen a drop in our economic growth rate to 8.7% from the high of 9.4% in 2007. Basically there is a clash between these two objectives of growth and maintaining price stability, but with both these figures going to their worse end we might have to face stagflation. Stagflation was a term employed by the supply side economists in the 70s, to describe the then existing economic crisis, and moreover they(supply side economists) held that these crisis had resulted because of neglecting aggregate supply in the economy and only focusing and framing demand managed polices which were advocated by Keynes. However, stagflation is not a properly defined term in economics, we know that when there is negative growth in two quarters continuously it is called recession, but there is no so such barometer which you plan plug in an economy and determine whether stagflation exists or not.

Now let’s look at the measures taken by the government to tackle the problem of inflation. First and foremost it must be mentioned that this problem will not be short-lived, as the latest report of the Asian Development Bank says that inflation will be a regular problem with the Asian countries. But the government undoubtedly has to do something for two reasons:

a) To ensure the welfare of the people

b) To win the next election (I can’t stop talking about it!)

So lets see what the government has done, first it has banned the exports of various commodities including rice, next it has abolished import duties to increase imports and increase supply of goods in the domestic market, then it has banned forward trading and recently it was reported that it is also taking measures to control prices of cement along with food articles by importing cement from Pakistan at Rs150-175 for a bag of 50 kg (it is sold at 225-240 in the northern states). Now all of these measures consist the supply side polices, along with that there are some monetary and fiscal polices also that he government might undertake, like increasing interest rates (it’s actually done by the RBI) tight money supply to prevent demand pull inflation and appropriate fiscal management. Apart from this the government also considers increasing food subsidies to bring about temporary stability in prices. However, while all these policies are being implement it is interesting to note that currently many countries are facing the problem of inflation, therefore they are also implementing similar such policies if not identical, what happens then?? If our government decides to ban exports and abolish import duties to increase supply, it can happen that other countries are doing a similar thing; Saudi Arabia is already implementing these policies. So how then does the government proceed with this problem? Im not saying this is happening per se at the moment, but currently with many countries facing a similar problem this is a theoretical possibility.

It is needless to say that the above policies will affect growth and in turn the stock market but this is inevitable, controlling inflation at the moment is of utmost importance, all the national newspapers can wait for a few months to write their favorite headline “Growth back on track” and “Sensex like never before”.

 

Union Budget and the Common man

I recently read a quote about the union budget, “The common man can’t understand the union budget, and the union budget can’t understand the common man!!” Although our current finance minister would like to contest the second part of the phrase, there is still no doubt that the common man can’t understand the budget. First of all the budget is prepared in complete isolation and secrecy. It is kept a big secret until ‘budget day’ for mysterious reasons. When every issue of national importance is discussed in a transparent and open manner in the parliament, why should the budget be an exception? Why is it that the finance minister straight away comes to parliament and reads out his speech and how he and his assistants have planned things for the entire year. The point that Im pressing here is that of transparency in the budget making process. Now let us see why the common man can’t understand the budget or why is it that he is not much interested in it, which in my view is the real reason behind his not understanding it. It is lack of interest not intellect which determines this. When Nani Palkhivala eminent jurist and economist delivered a lecture on the budget in brebourne stadium in Bombay, thousands of people used to come to attend the program, and were interested in knowing what is in store for them in this budget. Palkhivala could actually make a dry and boring subject like the budget interesting and enjoyable and moreover could simplify it from the technical economic language, which drove people to listen to him. His budget speeches finally ended in 1994. Today there are many people who deliver a similar lecture on the budget, lawyers, Charted Accountants, tax consultants; financial experts all express their opinions and views about the budget and its implications for the various segments of the population. But these people cater to a very niche audience. These are lectures where, businessmen, management experts, industrialists go and attend. It is difficult to find the common man here, who once sat in brebourne stadium and intently listened. After interest comes knowledge of economics or atleast elementary economics. Arindham Chaudhuri says “Economics is complex, mathematised, pseudo intellectual, quite unfit for the common man, around whom economics should actually revolve”. Reading and understanding the budget definitely requires good understanding of simple macro economics nothing more. And finally comes the role of the media in spreading the analysis of the budget far and wide. The print media does a very good job in analyzing the budget. ‘The Times Of India’ made a good presentation of the budget, simplified most of the provisions, especially the ones related to income tax and other taxes. They even showed how various sectors are affected by the budget. But the problem is with the electronic media. On the day of the budget, I saw 4 programs on television, on CNN IBN, TIMES NOW, NDTV and CNBC. All these programs were good but the problem is that they were only and only in english, the hindi news channels dint seem to cover the budget as extensively as the english channels did. This straightaway means that only the english speaking urban people will be able to understand what the panelists are saying. The panel members were almost the same in all the programs. Why dint some of the eminent panel members like Sitaram Yechury, Kapil Sibal and other financial gurus go on to atleast one hindi channel where they can explain the details to a much larger audience.

Economic growth a global trend……………

 

MS Swaminathan wrote an interesting article in the Times of India on 16/3/08. The article basically spoke about the high growth rates that India and many other countries experienced for about a year or so. He argues that the sudden high growth rate that we experienced is not only because of the government’s economic policies and efficiencies; it was actually a global trend which was originating from America. We know at the moment most Americans are living beyond their means, this is reflected in the sub prime crisis, the housing market slump and the mounting losses of financial companies due to increasing number of loan defaulters.  The demand for goods and services had tremendously increased for the past 2 years, which resulted in America having a trade deficit of $700 billion. China being the biggest exporter of electronic goods to America and India exporting various other goods and mainly services, thrived because of this one factor of excessive consumption in America. And because there was huge demand for goods there was automatically a huge demand for raw materials and semi finished goods which came from Africa and other less developed countries.  Hence even these countries immensely benefited. Therefore Swaminathan says that every country remotely associated with America enjoyed high economic growth, the African countries which were growing at 3% also started growing at 5%, similarly in India economic growth was 6% to 7% for many years it suddenly became 9%. If the above reasoning is true, then we have to ponder over a very important question, what is going to be the state of the Indian economy if there is a recession or slow down in the US economy which is very likely. There has already been a dip in the industrial production rate for the last 3 months. And the industrial production also determines the government’s collection of the excise duty. As it is as per the Union budget 2008 excise duty has been reduced from 18% to 16%, combine this with a fall in industrial production and it results in a loss of revenue for the government.   

 

Roaring corporate sector and a booming economy!! But what about the last man standing on the street??

“20000 points on the sensex, the economy growing at 9% have a good weekend” wrote economic times on one Saturday. It is indeed great to have a booming sensex and it’s equally good to know that we are one of the fastest growing economies of the world. But does it end there?? Is a booming sensex and a roaring corporate sector all we want for our country, where millions of people still sleep on the road. In the history of our country this is truly one of the most important eras because on one hand we are the front runners in economic growth and global investments. In fact in the Presidential debate of 2004 between President Bush and Senator Kerry, Senator Kerry assured the people of America that if he becomes President then he will prevent American jobs from being “Bangalored” and sent to India where a booming IT sector awaits the best talent on the globe. On the other hand we are also known to be the front runners in mal nutrition and poverty and illiteracy. Do these people who are mal nourished and illiterate even know why their country is respected globally? They don’t, and why should they?? When the hyped growth and the boom that Economic Times raves about has not gone even remotely close to them.

Therefore the time has come when we need to make economic growth more inclusive. The current pattern of economic growth is only favoring specific sectors of the economy. And therefore people associated with those sectors are also benefiting. But the people who do not come under the purview of those sectors are experiencing stagnant growth. An article recently published in the Navbharat Times pointed out that the present government or for that matter any government has a tendency to start worrying about things only when a worrisome situation gets created. While the situation is gradually going from bad to worse they are indifferent. The economic policies being followed by the current government have undoubtedly increased foreign investment, boosted economic growth and made India one of the preferred destinations on the globe for any kind of business and financial activities. But at the same time as a result of all of this, the government is forced to reduce the fiscal deficit as per the terms and conditions of IMF and WTO. Reduction in fiscal deficit results in declining expenditure for essential services like health and education. According to the Kothari commission led by Dr Vijay Kothari in 1966 expenditure on education has to be minimum 6% of the GDP but for the last several years it has remained between 2.5% to 3.5%. In the eleventh plan it is estimated to be at around 4%. Recently it was reported the IITs don’t have enough funds to pay proper salaries to its professors. IIT Bombay made a request to the government to give a grant of 20000 crores, so it can look after its basic expenditure. This is one of the implications of reducing the fiscal deficit that even the premier institutes are down in the dumps. IMF tells our government to reduce the fiscal deficit to control inflation. According to an article on the Indian economy, when the government borrows money from the RBI it tends to increase the quantity of money and hence it results in inflation. This argument has two flaws one that the new quantity of money doesn’t chase the same goods conventionally perceived. While the quantity of money circulating in the economy increases the production and output also increases. But apart from these technical details and principles, it is important to note that if the government reduces its expenditures on health and education then any significant development for the masses is not achievable, and then it’s meaningless to merely float on the fact that sensex is on 20000 and economy is growing at whatever percent when it is of no consequence to majority of the population.

Retail sector in India and corporate houses

Entry of the corporate houses in the retail market or for that matter into any sector is popularly perceived to be a part of economic growth. The increasing participation of the private sector is considered as one of the instruments of economic growth and job creation. Economic growth by itself creates jobs says Lord Desai a professor of economics at the London school of economics. But this I reiterate is a popular perception, whether the entry of corporate houses into every market and field is justified or not is a different matter. In my view it is incorrect to make general statements about economic growth and job creation, one has to be very precise when dealing with this subject. Economic growth I agree does create jobs; it does push the economy to a more productive stage. As the economist Rosenstein Rodan has said in his theory the “Big push” that for a plane to take off it requires a certain minimum ground speed, anything less than that and the plane wont take off, similarly to pursue economic growth we need to mobilize a certain minimum amount of investment, anything less than that is inadequate. And investment mobilization happens through the corporate houses or the private sector. So Im not against the private sector per se, but for the government and people to jump to a conclusion that the corporate houses no matter what they do and where they go will bring beneficial results certainly comes under a cloud of suspicion. To prove that the entry of the corporate houses into the retail market is beneficial we would have to rely on the theory of trickle down effect, but the trickle down effect is simply another way of saying that what is good for the business houses is good for the country, which is obviously not true. Trickle down effect has been named the horse and sparrow theory by JK Galbraith “if you feed enough oats to the horse, some will pass through to feed the sparrows.” Unfortunately today the horse is the corporate sector and the sparrow is the working class.

When we speak of the retail market we are primarily dealing with a section of society where the people are not economically privileged. Retailers at the lower end, like the vegetable sellers, the fruit sellers basically are the underprivileged section of the society, and when the government permits the corporate houses to enter this field with their attractive pricing strategies the government is practically wiping these 4 crore middle men out. And the justification given is “growth will create jobs for them as well”. For people who say my question is can you give a guarantee that those very 4 crore people will get their jobs back. And they are 4 crore human beings not ants who can be trampled under the feet of men.

Entry of the corporate houses into the retail market is a part of the de licensing policy which was started in 70s. Before the 70s most of the industrial production was handled by the public sector. In the 70s it was realized that the participation of the corporate houses is also very essential if we have to be on par with the rest of the world in terms of technology and capital. For this reason the license policy was scrapped out. Only industries of national importance like defense, railways, atomic energy were to be kept in the control of the public sector. So the purpose of the de licensing policy was to increase productivity. Today in 2007 if we analyze the repercussions of this policy we find that the corporate houses have increased productivity no doubt, but have also increased the divide between rural areas and the urban areas, between the bourgeois and the proletariat. This divide has very unfavorable social consequences which need to be settled first than increasing productivity for only a certain class of society.