Demonetisation update 38 – pre-dispositions

Prasanna Viswanathan of Swarajya had shared a good article from Economic & Political Weekly (December 30, 2017) on the impact of demonetisation in rural Tamil Nadu. It was a survey based article. What came out well was the fact that people found a way around the cash ban and yet stuck to cash. That came out well. The second thing is that informal networks got strengthened. The authors strangely note that as a failure of the demonetisation exercise. Far from it. The authors of the demonetisation exercise in the government did not wish to disturb social networks in India!

The other thing that came out – the authors mention it twice – is that there was widespread support for demonetisation. That makes us wonder if the inconveniences and difficulties faced by the public are exaggerated by those who were not well disposed towards the government. If it had caused huge hardship to people, the measure could not have remained popular for too long.

The paper is ‘Insights on demonetisation from rural Tamil Nadu’ – understanding social networks and social protection, Economic and Political Weekly, December 30, 2017, Volume 52.

If the authors of the article were not pre-disposed towards judging the demonetisation as a failure, it would have made for a scholarly article. Pre-disposition makes scholars look silly.

You do not have to look far from this FT article by Larry Summers on the American economy for a classic example of pre-disposition or prejudice making for poor scholarship. If my students had written it, they would have scored very low marks indeed. Just one example: for America, a weak currency is not a reflection of its economic weakness at all. Mr. Summers knows it well but mentions it all the same as reflecting economic fragility because he cannot get himself to say something good about the U.S. economy under President Trump.

While on the subject of the U.S. economy, it was amusing to read that President Obama was claiming credit for the improved performance of the economy in 2017. Well, debatable but would he then take the blame for its sluggishness up to 2016 in almost all parameters of the economy?

Coming back to pre-dispositions, we had one on the other side – this time from Surjit Bhalla. He wrote in ‘Indian Express’ that tax buoyancy had picked up in the current financial year 2017-18, despite the demonetisation. Well, he says, it was because of the demonetisation’s impact on black money that tax buoyancy (more like elasticity- % change in tax collection for a % change in GDP) picked up.

This is problematic. GDP growth slowed down in the first three quarters following demonetisation. That does not establish causality but it is reasonable to think that demonetisation had at least a partial impact on economic growth. If, on top of the growth slowdown, there was increased tax collection, then one has to wonder if it was a good or bad thing. Vigorous tax collection in the middle of an economic growth slowdown might have aggravated the slowdown.

So, I am not sure if improved tax buoyancy in the context of an economic growth slowdown that might possibly have been aggravated by demonetisation (if not caused by it) is cause for celebration.


China and globalisation – part 2

Hardly a minute had passed when I received an email from a friend with the following queries with the clarification that they were not rhetorical statements disguised as questions but genuine questions seeking answers:

So… The $ 11 Trillion question is… Why did the US do it?

At what point did they realise they were enabling some bad habits like currency manipulation and debt addiction and IP theft?

And what have they done about it beyond bluster?

And holding the mirror to oneself is not easy! So, I would like to ask…

How has the US gamed the openness of the international trade and finance regimes in order to secure profit for its corporations… And to push its foreign policy agenda?

I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US. But how do I explain this in a calm, logical and data-driven  manner?

Actually, the last question is a genuine question, not rhetorical. Any insights would be appreciated.

My responses:

I understand your questions and I did not think that it was rhetorical.

Indeed, I hold no brief for American behaviour. I was stating it as a matter of fact. Before Americans, European powers, including the UK, have resorted to such selective patronage of nations and policies, garbed in the rhetoric of open markets.

On currency manipulation too, Western nations are not paragons of virtue. Raghuram Rajan is correct that zero or negative rates too are a form of currency manipulation.

Post-1980s United States is all about capital at the expense of labour and therefore, trade deficits and financial openness were instruments in aid of boosting returns to capital. Combination of lazy and predatory capitalism. Have written on numerous occasions on it and a book is coming out later this year, I hope.

That is what emboldens nations like China to cock-a-snook at the international order because its guardians and creators have turned unilateral and unfair exploiters.

>> I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US.. But how do I explain this in a calm, logical and data-driven  manner? 

Fair question. My responses:

(1) The United States did play by international order for at least two decades, that it helped craft after WW II.

(2) The UK lived up to the rules of the Gold Standard before it demanded others countries do so. It tolerated a painful and long period of deflation to restore competitiveness instead of resorting to devaluation (19th century)

(3) Despite a valid and cynical evaluation of U.S trade imbalance, the fact that it has run persistently large (and even increasing, on occasions) trade deficit is a valid testimony to its relative trade openness. Its M&A track record on foreign companies acquiring American companies is far better than that of China.

(4) After 2008, barring the propping up of SIFI, it did allow its banking sector to restructure. That is why its banking system is arguably more resilient than that of Europe or China’s.

(5) Paul Volcker risked two recessions in two years to control overheating and inflation.

>> ​Why did the US do it? 

I do not think I have answered it. I doubt if John Pomfret too answers it convincingly.

Boils down to several factors:

(1) Japan was becoming too successful for its own good. A counterweight. The U.S. does ensure that its potential rivals balance each other. (Example: Bet on India but make sure that Pakistan is there to keep India checked.)

(2) ‘Capitalising’ China will help neutralise the Soviet Union and also remove the long-term threat of communism

(3) Taiwan was too small to be of benefit to the United States economically – for its financial interests.

(4) Not to leave out a certain naive idealism or hope that getting a potential ‘rogue’ nation into the system will make it a responsible stakeholder and it cannot be a threat to a system (that still largely served Western interests) that it is part of.

Finally, all these are open to debate and different interpretations and weights.

China and globalisation

David Lipton (IMF)’s tweet:

China’s leadership in support of globalization also means addressing its own restrictions on trade and investment, including protecting intellectual property rights. [Link]

Dani Rodrik’s tweet (in response):

As the leading beneficiary of globalization by far, perhaps China has a few things to teach the rest of us on how to do it, including the IMF? [Link]

Chris Balding’s (tongue-in-cheek) tweet:

He has a point. I propose everyone become mercantilists and run 5% of GDP surpluses to increase savings. [Link]

Dani Rodrik’s ‘clarificatory’ tweet:

And in case people misunderstand, my point is not that others should replicate specific Chinese policies (patents, CA surpluses). It’s that each country needs its own domestic policy space to leverage globalization. [Link]

In spite of this ‘clarification’, several others have pushed Dani Rodrik back and correctly so.

Globalisation had many dimensions. In the main, it was about free trade, free capital flows and a bit about immigration. Asian societies were never hot on immigration. They were mostly beneficiaries of the on-off immigration policies of the West. I do not blame them. Many historical wrongs, etc., are involved here. Just a matter of fact.

On financialisation, well, the record of China is mixed. It has relied on debt finance even if it did not take the Wall Street route on other matters. Further, its infamous and blatant interventions in 2015 summer to shore up the stock market are not worthy of emulation at all.

Specifically, with respect to globalisation, China was the biggest beneficiary and not a contributor. So, it is an entirely valid criticism of his remarks that, on globalisation, the IMF should look at China and recommend the template to other developing countries. That is utterly infeasible and incorrect too.

IMF policies on capital flows, financial sector liberalisation and on the effectiveness and transmission of monetary policies with a failure to recognise asymmetry, etc. are undesirable. Clearly, China with respect to globalisation is not to be held up as an example.

I am not even sure if China could be held up as an example for several things in economics. Their sheer size, brazen unilateralism, beggar-thy-neighbour exchange rate policy, debt addiction have played no mean part in their economic growth. Their emphasis on primary education, technological openness, execution efficiency, mindfulness on scale are worthy of emulation.

Last but not the least, the United States was China’s biggest benefactor. That is a fat and that made a huge difference. John Pomfret’s book is a MUST READ on this. Without the support of the USA, there may not have been much to emulate about China.

Utterly confused lot

A quick glance through the blog posts in the website of the Economic Policy Institute (EPI) suggests that they are barking at inequality and yet baying for a loose monetary policy.

Loose monetary policy does zilch for good old inflation that they are hankering after. It does a lot for asset price inflation that contributes immensely to the inequality that they are opposed to.

She would, in short, be doing America’s working families a big favor. If she does decide to stay on after losing her chair position, we should all thank her. [Link]

The good folks at the EPI want Yellen to continue as a Governor in the Federal Reserve Board even if she were not the Chairperson! She supposedly tightened interest rates and financial conditions eased considerably, creating asset price inflation that favoured the rich and she had nothing to show for her efforts in generating inflation in goods and services.

EPI is doing a disservice to the workers whose cause it claims to espouse.

Trickle-down hypocrisy

The Keynesian Fed economists who were dismissive of Reagan’s trickle-down theory still don’t appear to see the irony in the fact that they applied trickle-down monetary policy in the hope that by giving a boost to asset prices they would create wealth that would trickle down to the bottom 50% of the US population or to Main Street. It didn’t. [Link]

Well said, John Mauldin. The link is almost two months old. Does not matter. The observation is very relevant even now.

China trade surplus and other links

In absolute dollar terms, China’s trade surplus with the United States reached USD275bn in 2017. The previous high was USD260bn in 2015. Clearly, the United States matters to China. If the United States monetary policy remains loose in the guise of supporting economic growth and employment, because inflation is not showing up and if financial instability risks are disregarded, clearly it is to China’s benefit. Just saying.

A fascinating and even somewhat frightening report on China’s appetite for commodities. The geopolitical influence that this buys China will be hard, if not impossible, to match.

I read a piece by Mohamed El-Erian in FT. He is permitting himself economic optimism and less discomfort with asset prices. I wonder how he would react to this story about the ‘shocked’ market reaction to the tiny shift in the asset purchases by the Bank of Japan. In other words, how durable is this so-called global recovery?

This page gives details on the asset purchase programme of the European Central Bank. The 10-year Greek bond yield is at 3.75%. There has been no big improvement in its unemployment rate or in its debt ratio. This table gives the youth unemployment rates in European Union countries. Check out the statistics for Greece, Spain, Italy, Portugal and France. This is annual data up to 2016. This table gives you the figures as of August 2017. You can compare the numbers for the above countries and figure out the improvement, if any and decide for yourself whether this is the stuff of a sustainable recovery that justifies Mr. El-Erian’s optimism.

India’s consumer price inflation data for December 2017 was a bit of a worry. JP Morgan finds the momentum in core CPI (headline minus food and fuel) surprising and concerning. Among States, Tamil Nadu and Kerala contribute quite a bit to the inflation rate with their 7% inflation rate and a combined weight of 11%. That means nearly 80 basis points of inflation out of an inflation rate of 5.2%. That is nearly 16% contribution. Inflation in Uttar Pradesh is well behaved. Is hoarding by intermediaries an issue in Tamil Nadu and Kerala? Just asking.

Industrial Production data for November, notwithstanding the outsized contribution by the Pharma sector (and that too, antacids!), was more encouraging than that of the inflation data because motor vehicles, other transportation equipment and basic metals constitute 20% of Industrial Production. They are growing nicely. Pharma with a weight of 5% was growing at an annual rate of 40% and that gives you a contribution of 2% to the annual IP growth rate of 8.4% – almost 25%.

The rather poor growth in textiles and apparels must be worrisome for a country that is looking to light manufacturing to create jobs. It is not that they command a high percentage in the index. In fact, their should increase and they should be productive.  There is a role for policy action here?

Speech by Liu Qibao

On October 26, 2017, Andrew Batson had blogged about the low-key celebrations of the October revolution in the modern day Russia. He had recommended that readers go through the speech by Liu Qibao made in September. I did and it was time well spent. It is a fascinating speech for its innate contradictions. See the highlighted phrases, for example.

Some extracts:

Communists should take enough “spiritual calcium” to strengthen their minds so that they can consciously resist corruption by decadent ideas.

History and reality have incontrovertibly proved that only socialism can save China, only socialism with Chinese characteristics can develop China and realize the great renewal of the Chinese nation.

Because of the increasingly manifested superiority of the world socialist movement and the socialist system, many capitalist countries had to make constant adjustments in their ruling strategy and seek improvement through the introduction of some measures from the socialist system so as to mitigate the increasingly sharp basic contradictions in the capitalist system.

The reasons behind the Soviet breakup are many, including rigidity and conservatism; yet, the root cause was its turning away from Marxism-Leninism and from the socialist path created by the October Revolution.

The whole Party should have strong political staunchness in ideals and convictions, consciously become firm believers and faithful practitioners of the exalted ideal of communism and the shared ideal of socialism with Chinese characteristics.

We must further improve and develop the socialist system with Chinese characteristics, promote the modernisation of the state governance system and capacity in governance, all of which are aimed at continuously accomplishing, safeguarding and developing the fundamental interests of the overwhelming majority of the people. We must unswervingly hold high the banner of reform and opening up, and strive to promote innovations in theories, practices, systems and in other aspects of innovation, continue to liberate and develop social productive forces, emancipate and enhance social vitality, make socialism with Chinese characteristics more efficient than capitalism, make it more able to stimulate enthusiasm, initiative and creativity of all the people, more able to achieve social justice and common prosperity, and more able to gain competitive advantages on the international stage.

General Secretary Xi Jinping said firmly, “In today’s world, if we want to point out which political party, which country and which nation can be confident, the answer must be: the CPC, the People’s Republic of China and the Chinese nation have the best reason to stay confident.”

The full speech is here.