Tear-ducts are exhausted

One does not know whether to feel angry about the Congress party and its allies dissing the Public Accounts Committee. Mr. Murli Manohar Joshi, perhaps, gave them an opening. They seized it. This blog post in Wall Street Journal has it right.

Or, should one feel angry about Mr. Prashant Bhushan sharing a dais with Ms. Arundati Roy and calling the 1991 economic reforms the harbinger and fountainhead of corruption betraying lack of even a morsel of common sense, let alone economic wisdom?

This is from THE HINDU:

Speaking on the occasion, Mr. Bhushan said liberalisation had in its wake created opportunities for large-scale corruption that were not available earlier. “Liberalisation has given rise to a kind of business where the people in power can transfer public assets and natural resources worth several thousand crores to private hands in one shot and help create private monopolies through privatisation of water and electricity. It is exactly why we hear scams involving such huge figures today, though the Bofors scam in 1980s just involved Rs.64 crore.”

He was speaking at a at a “Public Convention Against Corruption” organised by the Coalition of Democratic Movements at Constitution Club here on Friday.

This is from Indian Express:

Liberalisation gave rise to the industry of privatisation. In the name of privatisation, and disinvestment, the government is now in a position to transfer thousands of crores of public money in the public sector undertakings to private hands. A similar thing happens when the government gives away natural resources, like oil or gas, to private companies. This has led to the creation of a corporate mafia,” Bhushan said. He claimed that futures trading, “speculative” market mechanisms and “non-transparent financial instruments” were all contributing to corruption.

This is from the Wall Street Journal:

He said contrary to the belief that the liberalization of the economy would help reduce corruption by doing away with License Raj, it has increased by leaps and bounds since the 1991 reforms.

“What you have done is create huge demand for corruption and monstrous corporations which have assets of tens of lakhs of crores [millions of rupees] in Swiss accounts. They have managed to corrupt the whole system,” he said. “Every institution has become puppets in the hands of corporations.”

Mr. Bhushan said that this demand side of corruption needed to be tackled first for the success of the Lokpal, which can only check the supply side of the corruption: “This is an issue which needs to be simultaneously tackled.”

“The reason why corruption has been proliferating in this country is because on the one hand we have adopted policies which have created huge incentives for corruption,” said Mr. Bhushan, who did not discuss the allegations leveled against his father or himself, in his remarks. “On the other hand, we have allowed all our anti-corruption institutions to wither away and be totally ineffective.”

Corruption stems from the concentration of power. The State in India has so much power still vested in it. In areas it has vacated post-economic reforms, corruption and economic rents its agents used to extract have fallen or even disappeared.

Whether it is land-grab from farmers, land mining rights to favourite industrialists, allocation of spectrum, conduct of Commonwealth games, procurement of defence and other goods, distribution of food-grains through the Public Distribution System or the distribution of wages under the MGNREGA programme, corruption grows and flourishes where the State is involved and has the levers firmly in its hands.

Pre-1991, was there no corruption? Of course, plenty of it because discretion with the State was plenty and pervasive. The size was small because the economy was small. Numbers did not register. In a few quarters, the Indian economy would be of the size of two trillion dollars in nominal terms. The purchasing power of this GDP is perhaps worth three times more. Hence, corruption numbers are bigger.

The biggest grouse against economic reforms is that it has not trickled down. It is incorrect. There is discernible difference for the better. Absolute poverty levels have declined, literacy levels have shot up, infant mortality has declined and life expectancy has picked up. Yes, a lot more could have been done. But, think. Who is responsible for delivering on all these – education and health, etc. It is the State.

World over – developed or otherwise – the challenge is to harness and tap the gains of economic growth and spread it across a wide swathe of the population. The agent entrusted with the task is government. If the government is both inept and corrupt, then this task is not only not accomplished but is accomplished in reverse. The gains are returned to those who created it – the moneyed and the well-connected – via licenses, government procurement and blocking of competition for the favoured incumbents.

This was all pervasive pre-1991 and selective post-1991 but bigger in absolute size. It is the pre-1991 world that Mr. Bhushan wants to see restored.

They would vest the government with more discretionary powers and they would create even bigger authorities to oversee the government. You thought the government was the problem in India.

Economic reforms and economic liberalisation are not about being pro-business but about being pro-market. To be pro-market is to be pro-poor. The solution lies in whittling down the considerable discretionary powers that governments still have and hold them accountable on the exercise of the remaining powers and responsibilities that only they can exercise or discharge.

Indian politicians have conveniently interpreted liberalisation to mean pro-business and give-aways to be pro-poor. Thus India has it wrong both ways. Its ‘elites’ seem to know no better or they could not care less.

Our Prime Minister is now neither championing a responsive administration nor economic reforms. If only I could hear what his conscience is telling him…

This blogger wrote earlier in the year about saving one’s tears for India. It is just four months into the year. The tear-ducts have been overworked to exhaustion and our rulers and ‘elites’ have barely begun their show.

Philips curve is alive at the Federal Reserve

At the conclusion of the two-day meeting of the Federal Reserve Open Market Committee (FOMC), the Federal Reserve Board has published the Economic projections of the Federal Reserve Board members and Federal Reserve Bank Presidents. In comparison to the projections made in January 2011, these wise men and women have now slightly lower growth expectations. But, they have significantly higher inflation and lower unemployment expectations now than in January 2011. Bingo! Philips curve – inflation vs. employment trade-off – is alive and kicking at Constitution Avenue, NW, Washington D.C

Krugman bashing

A member of a mailing group that I am part of sent me a link with a subject-header that said that Ms. Michelle Malkin had ‘destroyed’ Paul Krugman. That stirred my interest. I followed the link and read her ‘devastating critique’ of Paul Krugman and was considerably underwhelmed. Her critique of Paul Krugman’s stance on entitlement expenditures – social security, medicare – can be read here.

TGS is no particular fan of Paul Krugman nor holds any animus against him. TGS would like to deal with issues rather than personalities.  By and large, TGS has been more critical rather than less of Paul Krugman’s stances on many matters. For example, read these two blog posts.

Krugman’s constant advocacy of fiscal deficits based on the premise that interest rates are low and therefore that the market is willing to finance the US fiscal deficit is not wholly persuasive to me.

That said, taking a piece from 1996 on entitlement reforms and contrasting it with his comments today is a bit much. It is wholly unpersuasive.

In 1996, the egregious behaviour of the US financial sector, corporate stock options, executive compensation and the stagnation of middle and lower income America were yet to happen.

Now, given how the top 1%, 10% or 25% of Americans have benefited in the last several yearas, it is possible for some one to change their stance and argue against imposing further pain on the bottom 80% through cuts to Medicare and Social Security esp. when the same proposals extend Bush tax cuts and use spending cuts to lavish further tax cuts on rich Americans. The harsh line taken by Paul Krugman on Rep. Paul Ryan’s proposals have to be seen in this context.

Far from destroying Paul Krugman, Michelle Malkin has enhanced his stature.

Legitimate complaint

Professor Deepak Lal’s piece in ‘Business Standard’ on April 16th has the following blurb: ‘A more open financial sector is necessary for global financial recovery’. Unfortunately, history has provided ample evidence to the contrary and the Professor himself does not offer any evidence in support of his blurb.

He thinks that the world has no reason to complain about the US’ QE2:

With a free floating exchange rate and an independent monetary policy, the import of US-generated inflation could be tamed by tightening money and allowing currency appreciation, as Australia has successfully done during the mineral boom and the yen-Australian dollar carry trade.

This blogger disagrees with the Professor.  We need to be careful with judgements on economic policies and developments made in real time. History might compel us to revise our stance later (more on this topic in the next post). Australia might have allowed its currency to appreciate because booming global economy and the relatively essential nature of its exports (commodities like iron ore and coal) offset the drawbacks of an appreciating currency. Further, China might have kept buying these two items from Australia because it was able to offset the rising cost of these two import items through domestic productivity gains. China’s productivity growth might slow in coming years; its export price index is rising at an accelerated rate. Further, China might wish to produce less and consume more in the years ahead. It would be interesting to see how Australia copes then with a strong currency, with its dismal household savings rate and a housing bubble.

Even if these risks turn out to be minor for Australia, Australia is not a valid comparison for other emerging nations who are forced to cope with appreciating currencies, capital inflows and rising cost of living – all at the same time. In the first half of the last decade, interest rates in the developed world were low but not this low. Capital inflows into emerging economies are now turning into a deluge.

Developing countries would experience faster growth; the rates of return (interest rates) in growing economies must rise and hence their currencies must also appreciate. All this can happen over time. But, the developed world’s low interest rate policy – led by the US – is leaving them with very little time to adjust. That is politically difficult for governments – elected or unelected.

Second, Professor Deepak Lal gives a clean chit to the Fed monetary policy, from the American perspective. Perhaps, he should read Raghuram Rajan’s piece covered in this blog post at TGS.

Parliamentary democracy

BJP Leader Mr. Arun Jaitley makes some useful points on the importance, usefulness and effectiveness of parliamentary democracy in his Op-Ed. in Indian Express. One has to agree with them on the usefulness of standing committees of Parliament that do quiet and useful work on various legislations, ironing out the chinks.

He is also right to stress that the Parliament and the State Assemblies are meeting for fewer days than they should. I feel that the legislatures should sit for 100 days at least.

He is also right about the Prime Minister taking Parliament seriously and setting an example. There can be no two opinions on that.

On the part of BJP, how about creating a shadow cabinet, announcing portfolios and coming up with policy blueprints on many areas of public concern? Jan LokPal, NREGA, etc.

Many businessmen-friends from Tamil Nadu have told me in recent days that labour availability, attitudes and hence productivity  have seen a marked decline since the introduction of NREGA.

Even a Congressman-businessman is supposed to have told Minister Anand Sharma in TN that he would double his pay to workers if the government could give the NREGA subsidy to them and that would incentivise workers to join his firm. Right now, all pay and no work is too tempting.

How useful for the nation it would be if BJP were to commission, lead and publish a report on the social and economic consequences (such as the above) of NREGA and other such populist programmes of the UPA Government?

Now, that would be constructive opposition.

Truckers protest in Shanghai

I had sent the New York Times article on truckers in China protesting against their rising cost of operations. Both Bloomberg and NYT reports confirm that China has blocked local websites from publishing news of their protests and the local media has been largely silent on that.

One of my friends wrote back to me:

The US export of inflation via dollar debasement is wreaking havoc with social stability and by extension political stability worldwide.

Coming to think of it, has he stumbled upon the plot?

‘Kill’ the BRICS with inflation, overvalued currencies and all other consequences that follow from that. Further, the US might also know the true state of oil supply from their buddy – KSA – that wants to spend a hundred billion dollars on renewable energy (?!)

Reading links

While reading the Krugman blog post on how people on the Right and Left could be bonkers, I came across a link to this article on ‘How the Federal Reserve bought the Economics Profession’. Read the whole thing. It is time well spent. Even if there is no official gag order on contrarian views, it is not difficult to imagine how the perceived and real power of ‘The Firm’ encourages groupthink and perpetuation of conventional wisdom.

While reading this article, saw a link to this article by well-known academic-fund manager Rob Arnott on how the US GDP has been a misleading indicator of US economic health since 1998. The link has an embedded link to his monthly news letter. I am yet to read it.

This blog post in Harvard Business Review (HHBR) on Peru’s health care innovation made for interesting reading. Only thing is that it would have been good to see the impact of the innovation on some of the parameters – mortality rates, access to medical assistance – mentioned at the beginning of the article.

This story in Bloomberg on Mongolia building a rail link to Russia to export its coal makes fascinating reading. It has interesting geopolitical implications.

Good friend and fellow INI blogger Dhruva Jaishankar had drawn attention to this piece by Dani Rodrik in ‘Project Syndicate’ on his meeting with the son of Mr. Muammar Qadaffi of Libya. I like the piece for the ‘dharma dilemma’ question that it grapples with. There are no easy answers. Criticism from an outsider would be easy in such circumstances. I empathize with Dani Rodrik.

Agree or disagree, it is hard to argue that Nouriel Roubini is sitting on the fence in this piece on ‘China’s bad growth bet’:

Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium. [Full piece is here]

Nouriel Roubini’s predictions might not appear so dire if you juxtapose them with this post and the links therein.

The piece by Andres Velasco, former Minister of Finance in Chile, has written an understated piece on the enormous tensions that are building up in the economies of several developing countries. Something has to give and will give soon.

The triple trillionaire

This tongue-in-cheek commentary in ‘Economist’ on the size of China’s FX Reserves gets its message across eventually. It is a delightful irony (not-so-delightful, depending on the eye of the beholder) that even as China is trying to internationalize the use of yuan and also make its currency one of the global reserve currencies, its interests lie in preserving the value of its main and status-quo rival: US dollar!

I expect this piece in Wall Street Journal (subscription may be required) to be read and circulated widely. The human angle in this story is strong. It is about the political and policy headwinds that the People’s Bank of China faces in trying to cool an overheated economy. People’s Bank of China – the official central bank of the country – is, at best, a non-voting member and at worst, a mere passive spectator at the State Council meetings that determine monetary policy.

The message of the previous article is reinforced by a news story that Bloomberg/Business Week carried on China’s foreign exchange reserves. The PBoc Governor calls the level of foreign exchange reserves (more than three trillion US dollars worth) China is carrying as beyond reasonable levels.

There is a smell of policy discord in the Middle Kingdom.

US on downgrade watch

Standard & Poor’s breathed (registration may be required to access this link) new life and some excitement into financial markets that have been manipulated into stifling boredom lately. Their message is needed. I am not sure either Republicans or Democrats would heed it. There is animated discussion in a group that I am part of, on the merits of Paul Ryan’s proposal. The free-market cheerleader that ‘Economist’ claims to be had a positive leader article recently on his proposal. But, its news commentary inside posed some searching questions to Mr. Ryan. Superficial judgement from my side is that it would widen America’s inequality greatly and that it is too elitist while not doing much to support economic growth. Why? Read Tyler Cowen’s ‘The Great Stagnation’.

Dagong, the Chinese credit rating agency, would be smiling now. My piece in MINT today was written before the S&P Outlook downgrade on US Credit but after reading Sir John C. Bogle’s ‘Enough’.

Postscript: Alan Blinder’s piece in Wall Street Journal (subscription may be required for access) on the Ryan budget plan is hard-hitting and makes a lot of sense to me. What is amazing to me is how the Republicans have interpreted the November elections as a victory for their version of re-distribution and for rolling back financial regulation. Fantastic non-sense. Notice how quickly Greenspan showed himself to be a turncoat when he waded into Dodd-Frank Bill. BIS has published a working paper on how bank size is the most easiest back-of-the-envelope indicator of financial system stability. Yet, there is no restoration of Glass-Steagall separation.

Readings on Europe, US and the dollar

Looking at the government bond yields in the peripheral European countries that are in the spotlight for their debt, deficits and banking troubles, it is not clear to me how Europe is managing its problems better than America’s. Mind you, I am not saying that they are handling it worse but the superiority of their approach is elusive to this blogger. Clearly, there is austerity but restructuring of debt and long-term economic competitiveness are not being addressed by the strength of the Euro. This piece in FT by Victor Mallet provides a neat summary of  the situation in Spain. FT has this positive edit on Spanish PM Zapatero.

This blog post by Felix Salmon on how quickly the profits of the US Financial Sector have recaptured the pre-crisis peaks (as a share of the overall domestic corporate profits) neatly captures all that is to be said about the efforts (or the lack of them) of the US towards the financial sector in its place. One of Obama’s campaign managers said that a crisis is too good an opportunity to be wasted. The administration has precisely done that.

Of course, the reason for that is people like Alan Greenspan. Felix Salmon wades into the former Federal Reserve Chairman for his shameful Op-ed. in FT and I am glad he did that.  While you are at it, do read his more recent post on Larry Summers’ remarks on financial regulation in the conference organised by George Soros’ Institute for New Economic Thinking

Philip Stephens is rather clear on what he thinks of the banking sector in the UK and kudos to him for that. He faults the UK Independent Commission on banking for not skipping the logical next step in its recommendations. That is to recommend a formal split between retail banking and investment banking.

If he had known that the Bank for International Settlements had identified ‘Bank Size’ as a reliable indicator of a bank’s systemic importance (this is from the BIS Quarterly published in mid-March), he would have been more pleased with his assertive criticism:

We find that bank size is a reliable proxy of systemic importance, regardless of the perspective chosen.

Simply put, banks that are too big to fail are too big and hence should be broken up.

Lastly, I am at a loss to understand this last sentence from FT Alphaville’s post on the US dollar:

Remember that mentioning gold is a yellow-card offence on FT Alphaville

What sort of an attitude is that?

The post at the Free Exchange blog on the American economy’s sails going limp is useful inasmuch as it acknowledges the reality of the sustainability of the so-called American recovery. He concludes with a not-so-unreasonable observation that calls for fiscal and/or monetary tightening are premature at this stage of the US economic cycle. Fair enough (even if it is eminently arguable), if viewed solely from the American point of view. But, the problem is that the RoW has a problem with this and soon, America has to take cognizance of that. If not we are looking at international economic tensions.

Either out of hubris or out of domestic compulsions, America has conducted a unilateral monetary policy. Its ‘Exorbitant Privilege’ is about to be severely tested. Its indifference to the costs it imposes on the rest of the world is likely to provoke the rest of the world into retaliatory action and that might well be the cause of the US losing its exorbitant privilege and not its fiscal deficit.