Yuan prospects

Read this in John Authers’ missive:

On the yuan, I found this point from Michael Howell of CrossBorder Capital very interesting:

The China currency is getting traction and could displace the USD in Asia (China’s stated aim). What is not well understood is that China still has an immature financial system which forces it to accumulate USD (from trade which is USD denominated) and manage them centrally via the State. Domestic institutions, unlike in the West, have predominantly Yuan liabilities and so cannot afford to take this forex risk. China initially used forex reserves to buy US Treasuries, but now invests via FDI, e.g. Belt and Road. This external infrastructure programme will help to establish the wider use of the Yuan across Asia and get China off the US dollar hook. Do not underestimate the value of this seigniorage for growth.

He could even back it up with an anecdote:

I attended the LSE launch of George’s book. There I met an ex-Central Bank Governor from Central Asia who shared my scepticism about George’s Yuan point. “I will show you,” she said and pulling out her iPhone she shared a photo of her at a formal signing ceremony for a several billion Yuan swap line with the Chinese Finance Minister. Proof she claimed that this underlying use of the Yuan is already the reality across Asia.  [Link]

Let me now do what my good friend Amol Agrawal of ‘Mostly Economics’ usually does.


Postscript to India’s GDP growth controversy

Had a good chat for half an hour with a good friend. He drew my attention to the remarks by Pronab Sen, former Chief Statistician of India. Pronab Sen had said that Arvind Subramanian’s estimate of annual average 4.5% GDP growth was based on volume indicators and the ‘unexplained’ 2% to 2.5% growth could be due to productivity, quality, etc. Or, it could be an error, of course. That would be a fairer statement to make than to call it an overestimation categorically.

You can read the article in ‘Business Standard’ that carries the comments by Pronab Sen.

These further comments by Pronab Sen are interesting:

“The paper’s finding means that there has been an equivalent improvement in productivity,” he told Business Standard. “But this would also mean that the older series underestimated growth in the years prior to 2011-12,” he added, since it was more robustly based on volume indicators.

That is the problem. The debate over India’s GDP growth calculation would have remained apolitical and technical but for the latest revisions in the last six months that bumped up growth estimates for 201-17 and for 2017-18 and lowered the growth estimates for the period from 2004-05 to 2011-12 in a ‘backcasting’ exercise.

Those changes – which defied logic and did not conform to anecdotal evidence – have what pushed the debate into the political arena.

That is why it is all the more important to take the debate back to the technical realm.

Arvind’s work smells right

There are two people whose timing has been questioned recently. No, this is not about timing of cricket strokes by the batsmen – the timing of the impact of ball on bat. If it is perfect, there is no need to apply force. The ball speeds to the boundary. But, this is about the timing of their announcements.

Yuvraj Singh announced his retirement from cricket even as a World Cup cricket campaign was on. Sharda Ugra who had helped him write his story gently hinted that legitimate questions could be asked of his timing. One can say that he wanted a fraction of the attention on himself. Let us leave it there.

Our interest in this blog post is on someone else.

The other person whose timing has been questioned is that of the former Chief Economic Advisor, Arvind Subramanian. Earlier this week, he wrote an article in Indian Express summarising his findings on the econometric work he had done on India’s GDP growth estimates. His results suggest that, on average, India’s GDP could have been overstated by a magnitude of about 2.5% points every year since 2011 amounting to a cumulative 19-21% during the whole period: 2011-18. However, for estimation, he excludes data for 2017-18 and 2018-19.

He has been criticised by commentators on both sides of the political divide in India. Those who are opposed to BJP and Modi criticise him because he did not publicise this before the election. It might have strengthened their hands. Or, so they think. Unlikely. But, that is their grievance.

The pro-BJP and pro-Modi commentators are upset that this paper has spoilt the ‘feel-good’ air that they are basking in, post-election victory. There is also the unstated anger that AS’ results suggest that the over-estimation of GDP growth, if broken down on an annual basis, is more in the post-2014 years than in the pre-2014 years (up to 2011) because official growth estimates between 2011 and 2014 are lower than the annual growth estimates post-2014.

Since both camps are unhappy, he must have done something right.

In fact, one must applaud his timing. By releasing his study after the elections were over in India, he had shown himself to be apolitical. The only politically somewhat loaded statement he has made in the paper is this: “that also requires us to reject the more recent estimates for the post-2011 period because they may not simply reflect the technical changes.

The statement put out by the Prime Minister’s Council of Economic Advisors does not indicate an awareness of the spirit and the discussion that are needed. In the interests of the credibility of the government and that of the Indian Statistical System, the data and the methodology need to be put in the public domain, instead of hiding behind technical arguments.

The other charge that is laid at AS’ door is that he didn’t he do this when he was in CEA. Now, we don’t know, honestly, if he did not do this exercise inside the government. He might have given the output to them and it might have been rejected. That could be one reason why he left six months earlier than he needed to. Who knows?

But, let us accept his statement that he did not have the time and space to do so when he was the CEA. I assume that by ‘space’ he means ‘mental space’ and nothing else.

To a large extent, I can vouch for that, even in my limited experience of being the Dean of a Business School. One simply does not have the energy at the end of a long day to write serious blog posts. It is hard to catch up even with one’s reading let alone writing. My blog posts came down drastically since October 2018 – when I took up my assignment – for no other reason but that I did not have the time and energy to be as productive as before.

If some were to attribute it to political correctness, I can point out that even my private emails to my mailing lists came down dramatically let alone public blog posts.

So, I am prepared to take him at his face value that he did not have the time and space to engage in a serious data analysis and investigation. It is one thing to write casual op.-eds., and it is another thing to undertake a serious investigation of data and do some statistical analysis on them. After all, the Chief Economic Advisor was engaged in multiple other projects – planning for the introduction of the Goods and Services Tax, annual Economic Surveys, etc.

I have gone through Arvind’s paper carefully more than once. His conclusions appear reasonable. He has merely invoked the spirit of ‘difference in difference’ approach. The estimation method is simple statistical regression. Did the difference in methodology adopted since 2011 make a difference only to India? That is ‘two differences’ there.

His first two pictures – Figures 1 and 2 – are specific to India. They do no invoke cross-country analysis. In other words, he has not just engaged in an ‘unusual exercise’ of cross-country regressions. He has also analysed India independently.

I had done a similar exercise in 2016 itself. See here and here. These two papers show that the GDP growth figures do not accord with growth in many other indicators of the real economy. The analysis was done using several indicators and the conclusions were clear. I did not undertake an econometric investigation. So, my result was not quantifiable. It was descriptive in nature. I concluded – without any statistical estimation – that India’s real GDP growth rate – might be overstated by 1.0% to 1.5%. In other words, the new GDP growth data did not pass the smell test. They still do not.

Arvind’s points about import and export growth and GDP growth in the post-2011 period and the import elasticity of demand are as important as his point about growth in manufacturing not being correlated with growth in manufacturing exports.

One could ignore his cross-country and panel regressions and undertake a ‘India-only’ exercise but there is not simply enough data, if one used annual data and tried to estimate a structural break in the data either by splitting samples or by introducing dummy variables. But, the evidence is clear in his Figures 1 and 2 and in my works cited above. There is no point in being in denial about it.

Pre-2008, India experienced an economic growth boom due to massive capital inflows, credit growth, capital investment boom and export growth. Many other nations did so too. Post-2008, global trade volumes have slumped. Countries – developing and developed – briefly recaptured their growth rates of pre-2008 years due to stimulus. Some of the stimulus was unsustainable as India found out in 2013.

That is why most of the countries have struggled with economic growth since then. In fact, post-2014, leading emerging economies have suffered lower growth than pre-2014. Only India has been an exception in spite of the introduction of many potentially growth-unfriendly and demand-unfriendly structural but long-term positive and essential structural reforms. Does not pass the smell test.

Harsh Gupta has written an interesting and thoughtful op.-ed., in Indian Express drawing attention to the fact that India’s tax collections have grown robustly since 2014 and if Arvind’s growth estimates (mid-point of 4.5% between the range of 3.5% to 5.5%) were accepted, the tax/GDP ratio would be much higher. He is right unless the tax data were fudged too. Rather unlikely. Tax collections are realised in cash and the government has to transfer a portion of it to States too.

My responses to Harsh Gupta’s article are as follows and not just to his argument on Tax/GDP ratio:

(1) The tax collection could well be the problem. That the tax collection mechanism became so active and coercive might be one of the contributors to the private sector uncertainty and investment funk. Indeed, even many sympathisers of the BJP and the Modi-led government were of the view that ‘tax terrorism’ was pursued with greater vigour post-2014 than it was in the pre-2014 years.

(2) For example, between 2014 and 2016, when the price of crude oil slumped, the Government did not pass on the decline in the price of crude oil to the Indian public. Instead, it loaded up additional taxes on the crude oil and ensured that the final retail price of petroleum products was only marginally lower, if at all.

(3) Productivity improvements would show up in profitability data. They have not. Second, export growth would be better if there is a renaissance of productivity. That is why despite the slump in global trade volumes, countries like Bangladesh and Vietnam have done better than India with export growth.

Some friends have pointed to articles such as this and have asked rhetorically if these improvements are captured in GDP data. Two responses are in order:

(1) They should be captured in profitability data, eventually.

(2) Ceteris is not paribus:

(i) Even as GST related improvements are happening to the movement of goods in India, the power sector (Independent Power Producers) has gotten into trouble due to lack of raw materials availability and at the expected prices and due to low price realisation from buyers or non-evacuation of power at agreed prices.

(ii) Then, the non-banking financial sector has gotten into trouble and has stopped lending.

(iii) What has grown rapidly even amidst overall tepid bank credit growth is growth in credit to households including credit card or revolving credit. That is for consumption purposes. That is not the stuff of productivity improvement.

Only if other things remained equal and then GST-triggered productivity gains occurred at the margin, one can speculate on their positive impact on growth.

In the final analysis, it is important to note two things from Arvind’s analysis (and mine):

(i) Post-2008, emerging economies are not the same. It is futile to keep talking about the 2008 crisis as the North-American or the Atlantic crisis. Emerging economies – including India – are as, if not more, worse off as developed nations are. It is not just about India and about economic growth in the UPA or NDA years.

There is a need to rethink the facile conclusions about the momentum of economic activity and the balance of economic power shifting inexorably towards the East and prepare accordingly to negotiate and deal with the West.

Such realism is also necessary to tackle the impact of Artificial Intelligence and Robotics on employment, the challenges of climate change and the looming water scarcity. All of these threaten both economic growth and economic and social stability.

(ii) This cannot be viewed as a partisan political battle. There is much at stake. Instead of arguing about it, it is far easier and more effective (lasting effect) to make available the CSO data and methodology to independent statisticians for verification. Only then will the controversy end.

(iii) It is quite possible that some concerns were raised in the government by some about growth numbers. But, that they were not either heeded or smothered. That should not be the case. The lone dissenting or a different voice deserves all the respect, if not more, as the conforming voices.

The government could have easily asked the CEA or the Department of Economic Affairs to come out with such an exercise as soon as the controversy about GDP growth estimates erupted in 2015. That would have made both monetary and fiscal policies more responsive and reasonable in the last four years. The failure to accept a lower growth rate has actually prolonged the growth stagnation and even resulted in the previous government taking a chance with demonetisation, perhaps at the wrong time.

In short, Arvind Subramanian has done a rather useful service to the discourse on India’s official economic data. It is better to pay heed to the message even if its specifics are open to challenge. It is wrong, self-destructive and counterproductive to shoot the messenger.

Monetary policy transmission in India

In its monetary policy meeting last week, the Reserve Bank of India’s Monetary Policy Committee cut the policy rate – the repo rate – by 25 basis points. This is its third rate cut since December 2018 and it was unanimous. The Committee also unanimously decided to move to an ‘accommodative’ stance indicating further easing down the road. So far, so good.

Transmission from RBI policy rate to the lending rates fo banks remains the big challenge in India. See this article in ‘Business Line’, for example. Some banks have even increased their lending rate since the last RBI policy rate cut!

Everyone – including my friend Gulzar Natarajan – points out that Indian banks have a much higher share of their liabilities in bank deposits. These deposits are fixed in nature. Therefore, interest rates on them are payable at a fixed rate regardless of the movements in the policy rate. Since they cannot come down with cuts in the policy rate, the lending rates too cannot be lowered. Ergo, there is no transmission.

Gulzar even shared a chart with me that showed that Indian banks’ deposits as a % of overall liabilities is higher compared to other developing nations.

But, the truth is that Current and Savings Accounts (CASA) are more than 40% of overall deposits. 41.3% to be precise. The last data point available – in a easy to retrieve manner, that is – is from February 2019. See here.

Current accounts pay no interest and the interest payable on savings accounts is 4% – at the lowest balance between the 11th and the end of the month. That is as low as one can get, in terms of savings account balances. In the first ten days, the balance could be higher due to salary deposits. That is why they are excluded!

Therefore, the argument is somewhat unconvincing. Not untrue but not the total explanation.

The explanation lies in lack of competition with the central bank prescribing a floor for lending rates via its formulaic Marginal Cost of Deposits based Lending Rate (MCLR). I wrote about it in my MINT column last Tuesday.

If one went through the RBI Internal Working Group Report on the MCLR and the previous base rate, published in October 2017, one would realise that these are not MCLR (i.e., not marginal) but that they are also binding floors for lending rates.

Note a key sentence in the report:

One bank included a negative spread under business strategy due to market competition, which was in contravention to regulatory guidelines. (PAGE 47)

Indeed, that should be the case. Banks should have the freedom to take the basic of decisions for a commercial entity – the pricing decision. But, they do not.

India needs genuine competition in lending rates between banks. Neither the owner nor the regulator must intervene. It will also enable the owners to figure out which of them are worthy of further capital infusion, growth and which of them deserve to be merged, consolidated or weeded out.

Of course, the second thing is the Small Savings Interest Rate. Check out the table in page 26 of the said report (Table II.8).

Interest rates offered on bank deposits are lower than that of the interest rates on small savings and these interest incomes are tax-free too. The Government-announced interest rates on these Small Savings Schemes are higher than that of the rates that would be offered if the government sticks to the formula that it promised – linking the interest rate to the 10-year Government bond yield. It has not. On top of it, there are tax benefits.

That is the second (or, even the first) biggest hindrance to transmission. That is why I felt that the usually meticulous Indira Rajaraman quite did not get it right in her column on the topic of transmission. She is right with her conclusion, of course. The multiple strands that link the funding of government budgets (of the States and the Union) to the National Small Savings Fund (NSSF) need to be broken. She is right on that one.

But, more than that, the idea of offering a higher interest rate on a product that is even safer than a bank deposit and with tax benefits is a sure-fire killer of the banking system profitability and of transmission of monetary policy.

Some politically unpopular decisions need to be taken. They will be unpopular in the short-term. But, a government with its back to the wall on the banking system and with such low actual economic growth (more on that in a separate blog post) has to take some decisions and face up to the tradeoffs. There are no costless choices here.

Surjit Bhalla had got this one right. One of the most important decisions ever taken by a FM was taken by Yashwant Sinha when he lowered the interest rate on Small Savings Deposits. That did play a big role – among many other things – in India’s post-2002 economic boom.

Surjit Bhalla had got this one right. One of the most important decisions ever taken by a FM was taken by Yashwant Sinha when he lowered the interest rate on Small Savings Deposits. That did play a big role – among many other things – in India’s post-2002 economic boom.

It happens during the day

Chanced upon the review of three books by Quinn Slobodian in ‘Boston Review’. The three books are ‘dark’ in his view, especially the first one, he reviews: The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power by Shoshana Zuboff.

He takes exception to her comments on how media influences behaviour:

One could ask whether her description doesn’t flunk the Cultural Studies 101 test by failing to acknowledge that the media’s designers don’t dictate directly its use and consumption. We hear a great deal about what companies “aim” to do through baroque projects of “behavioral modification,” but, as with the Cold War brainwashing techniques she references, we have little evidence that these efforts work—except for generating ever greater contracts for those pronouncing their own effectiveness. [Link]

But, let us listen to the testimony of Jim Balsillie, former CEO of ‘Research in Motion’ (remember Blackberry?):

Second, social media’s toxicity is not a bug — it’s a feature. Technology works exactly as designed. Technology products, services and networks are not built in a vacuum. Usage patterns drive product development decisions. Behavioral scientists involved with today’s platforms helped design user experiences that capitalize on negative reactions because they produce far more engagement than positive reactions. [Emphasis mine]

Third, among the many valuable insights provided by whistleblowers inside the tech industry is this quote: “the dynamics of the attention economy are structurally set up to undermine the human will.” Democracy and markets work when people can make choices aligned with their interests. The online advertisement-driven business model subverts choice and represents a foundational threat to markets, election integrity and democracy itself. [Link]

Indeed, the comment about on-line reminds me of advertising itself. I just did a blog post on it yesterday.

More importantly, very powerful lines above. The point to note here is obvious: it is not the subversion of the tech. platforms by populists, demagogues, far-Right and other extremists that is the issue. The platform is the subversion.

That is why it was disappointing to read that Stanley Druckenmiller, otherwise an intelligent man, criticise the Trump Administration’s consideration of anti-trust investigations of the tech. companies in the USA.

So, Zuboff is not exactly wrong. It is ‘dark’ for the rest of us because we don’t know (or cannot be bothered to fathom) how the ‘rich’ and the ‘connected’ operate. Looks like that is the stuff of the second and, even more so, the third book reviewed.

The second book he reviews is Darkness by Design: The Hidden Power in Global Capital Markets by Walter Mattli. A key paragrph from the review:

Mattli shows how the shape of financial governance—and lack thereof—was pushed by a small elite of investment entities. The advantages gained by those able to make costly investments in computerization began to concentrate wealth at the upper end of exchange’s members, including the “national commercial and non-U.S. ‘universal’ banks” that deregulation had allowed to enter. By 2000, the twenty-five second-tier firms had less than 10 percent of the market capitalization of the top ten. Household name titans such as Barclays, Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, and JP Morgan dominated. 

The third book he reviews is Katharina Pistor’s The Code of Capital.

In fact, he summarises it very well:

Katharina Pistor’s The Code of Capital is also an urgent tract. The difference, in her telling, is that the law doesn’t always ride a white horse. It comes as often to perpetuate injustice as redress it.

Further, the following statements are both profound and true. In other words, the State is the protector – or it ought to be – and the villain. The problem is, in other words, the State is captured and hence, aids the evasion of taxes by the rich whom it supposedly has to now bring back into its tax net!:

The concentration of wealth and its evasion of state attempts at its capture through taxation also do not happen by escaping law or the state, but through the law and the state—through projects of legal “encoding,” to use Pistor’s dominant metaphor.

Quinn Slobodian highlights a few things from Pistor’s book that ought to be of interest to those in Finance. Very few would even be aware of them:

Pistor introduces us to new sites and conventions created to offer protection for capital mobility and insulation from democratic states, places with their own acronyms, where PRIME Finance (Panel of Recognized International market Experts in finance) protects PRIMA (the Place of Relevant Intermediary Approach convention).

So, the point is that it is not about shining light on people operating covertly, in darkness, outside the pale of law. There is collusion. There is capture. State and the law have facilitated it.

Perhaps Pistor’s book is similar to the one by Brink Lindsey and Steven M. Teles: ‘The Captured Economy‘. I have begun reading it.

A response to Martin Wolf

Mr. Wolf wrote:

The US focus on bilateral imbalances is economically illiterate. The view that theft of intellectual property has caused huge damage to the US is questionable. The proposition that China has grossly violated its commitments under its 2001 accession agreement to the World Trade Organization is hugely exaggerated.

Response #1

“A landmark study by the MIT economist David Autor attributed the loss of 985,000 manufacturing jobs in the United States from 1999 to 2011, or about 20 percent of the total job losses in the sector during this period, to the so-called China shock of exposure to increased competition from China.” (Source: https://www.theatlantic.com/international/archive/2018/08/china-trump-trade-united-states/567526/)

Response #2

“When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened. As a first step, the Trump administration should demand that the Chinese government sign the GPA without further delay. But down the road, the administration may be forced to ask Congress for additional authority. If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.” (William Galston, Wall Street Journal, 9th August 2017)

Response #3

“This paper links the sharp drop in U.S. manufacturing employment after 2000 to a change in U.S. trade policy that eliminated potential tariff increases on Chinese imports. Industries more exposed to the change experience greater employment loss, increased imports from China and higher entry by U.S. importers and foreign-owned Chinese exporters. At the plant level, shifts toward less labor-intensive production and exposure to the policy via input-output linkages also contribute to the decline in employment. Results are robust to other potential explanations of employment loss, and there is no similar reaction in the EU, where policy did not change.” (Source: ‘The Surprisingly Swift Decline of U.S. Manufacturing Employment’ by Justin R. Pierce and Peter K. Schott – https://www.aeaweb.org/articles?id=10.1257/aer.20131578)

Response #4

“This paper examines the relationship between county-level mortality rates and exposure to an important economic shock, the trade liberalization associated with the U.S. granting of Permanent Normal Trade Relations to China. We calculate exposure to PNTR as the employment-weighted average exposure of the industries active in each county. We then estimate the relationship between PNTR and mortality using a differences-in-differences framework that nets out any time-invariant county characteristics, as well as annual shocks that affect counties identically. We find that exposure to PNTR is associated with an increase in mortality due to suicide and related causes, particularly among whites. These results are consistent with that group’s relatively high employment in manufacturing, the sector most affected by the change in trade policy. We find that these results are robust to various extensions, including an alternate empirical specification that places no restrictions on the timing of the effects of the policy change as well including controls for changes in state health care policy and exposure of other counties in the surrounding labor market.” (“Trade Liberalization and Mortality: Evidence from U.S. Counties” by Justin Pierce and Peter K. Schott, Federal Reserve Board, November 2016 – https://www.federalreserve.gov/econresdata/feds/2016/files/2016094pap.pdf)

Martin Wolf #2

“the best way for the west to deal with China is to insist on the abiding values of freedom, democracy, rules-based multilateralism and global co-operation. These ideas made many around the globe supporters of the US in the past.”

“This is the most important geopolitical development of our era. Not least, it will increasingly force everybody else to take sides or fight hard for neutrality. But it is not only important. It is dangerous. It risks turning a manageable, albeit vexed, relationship into all-embracing conflict, for no good reason.”

Response #1:

“the West’s 25-year bet on China has failed.” (‘The Economist’ March 1, 2018 – https://www.economist.com/leaders/2018/03/01/how-the-west-got-china-wrong).

Response # 2

“in negotiations with then-President Barack Obama, China’s president Xi had agreed not to turn a series of manmade islands that China had created in the South China Sea into military installations. But then China did just that.” (John Pomfret, Washington Post, 23rd August 2018)

Response #3:

“I believe that we have no adequate economic playbook for competition with China. Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people.” (Ash Carter, Defence Secretary in the Obama Administration, Interview to ‘Politico’, February 19, 2018 – https://www.politico.com/magazine/story/2018/02/19/ash-carter-defense-global-politico-transcript-217023)

Advertising and the paradox of prosperity

It was a pleasant surprise finding these lines in the ‘Free Exchange’ blog in ‘The Economist’:

It is a funny sort of prosperity that depends on people never being satisfied with their lot. [Link]

The header does not accord with the article. The emphasis is mischievously inverted. This is the article header:

Advertising may make people miserable, but it still has its uses

Given the tone and the conclusion of the article, the header should have been this:

Advertising may have its uses but it leaves people feeling miserable.

But, that is a very different message. In my view, the header is a tell-tale encapsulation of the seduction of unhappy, unsatisfied prosperity of modern capitalism: “more is preferred to less”.

So, the statement featured at the top of this post is a paradox and it is ironical that it appeared in ‘The Economist’ but it is entirely unironical that ‘The Economist’ gave it the heading that it did!

Postscript: the article provides the reference to an important study which motivated the article in the first place. The study finds and inverse relationship between ad. spend and citizens’ welfare. The authors apparently do provide all the standard disclaimers but the conclusion is unsurprising.