Vijay Mahajan on loan waivers

At a MINT sponsored forum on ‘Financial Inclusion’, these were the parting words of Vijay Mahajan of BASIX:

On top of all of this we need a national consensus that anybody who stands in a football field and announces a loan waiver goes straight to jail because it’s public money and there are studies which show that every time there is a loan waiver, legitimate credit dries up for the next three to five years. Today in Andhra Pradesh there is a 43% reduction in school education for poor households after microfinance was stopped, 17% reduction in food consumption, overall 19% reduction in their standard of living. All because microfinance was stopped. The going rate of interest is 10% per month. The microfinance act of AP has been a gift to moneylenders of AP—Rs.10,000-Rs.12,000 crore every year given to them.

I fully agree with him. Check out this paper if you had not done so yet on the harm done by the loan waivers that the UPA government had announced in December 2007. I had written about it here in the context of my observations on the public-sector dominance of Indian banking system.

FSLRC in India

The RBI Governor has spoken on the recommendations of the Financial Services Legislative Reforms Commission (FSLRC) today. He has spoken well and spoken with restraint. I read his speech.

I wrote a column in MINT in April 2013 as soon as the FSLRC report came out and a detailed one for Pragati (a publication of the Takshashila Institution, of which I am a co-founder).

I was far less restrained than the Governor because I could afford to be so. Of course, several others have noted that he had used the adjectives, ‘faddish, impressionistic and schizophrenic’ to describe some of their recommendations.

Well, the Governor had pulled no punches, in that case. I am pleased.

The real Kurukshetra

I wrote this column – focusing on personal health, sanitation and water availability – just to stress the importance of sequencing. I neither want nor expect the government or the party to ignore some of its needed but controversial agendas. But, they can be sequenced. It is good to enlarge the common space first. Who knows? Some of the more contentious issues might disappear or pale into insignificance, in the process.

Dr. Somanathan has an interesting comment on the article which he has posted on the MINT site. I am reproducing it here:

Without in any way disagreeing with your overall message, I have just a few ‘cultural footnotes’.

The attribution of open defecation to ‘culture’ is a little suspect in my mind. 18th and even 19th Century England, for all its Protestant work ethic was a place of utter filth and open sewers and at one time the problem was referred to as the ‘Great Stink’. India–with its then lower population densities, was cleaner at that time despite ‘open defecation’. Lack of open defecation in the west had more to do with weather–try open defecation at sub-zero temperatures.

Open defecation is not ipso facto unsafe if practised in wide open spaces where the land-man ratio is such that there is enough time for natural bacterial processes to act and if excrement is covered with sand, if defecation spots are far from wells etc. as was the established norm in villages. In this situations, bacterial pollution is not a significant risk.

Open defecation is much more ‘user friendly’ than a DIRTY OR UNCLEANED TOILET OR A TOILET WHERE THE WASTE IS NOT DISPOSED OF. Thus open defecation, in economic jargon, may sometimes be ‘rational’.

Bold and correct

Prof. Arvind Panagariya deserves to be congratulated for writing a piece critical of the lack of fresh and bold ideas in the President’s address to the Parliament which outlined the new government’s priorities. His piece is bold and correct. While it might be too early to make statements such as whether the government had turned cautious now that they are in the office, pieces such as this are required to keep it on its toes.

Usually, some of the most original and innovative thinking that we employ when we have nothing to lose are abandoned when we achieve or acquire something. Of course, social psychologists have explained this before: loss aversion. When we have nothing to lose, there can be no loss aversion. When we have something to lose, then we turn cautious. Sometimes, that very caution turns out to be our undoing.

Of course, addressing the BJP workers in Goa, the Prime Minister has talked of tough and unpopular measures. One hopes that he follows through. Although he does not have 400+ seats as Rajiv Gandhi got in 1984, this mandate belongs to the Prime Minister. He has enormous credibility right now to take on vested interests in several sectors – whether it is labour or business. There will be enough number of people – some well meaning and some not – who will caution him against bold measures. But, sentiments such as ‘it is dangerous’, ‘it is not possible’, etc. did not bring him to where he is, today. He will do fine as long as he does not forget that simple fact.

ECB Express

You have two statements available on the website of the European Central Bank – one that mentions the monetary measures announced by the ECB – LTRO and intensification of preparations for purchase of asset-backed securities. The other is the introductory press statement by the ECB President.

In pursuing our price stability mandate, today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy. This package includes further reductions in the key ECB interest rates, targeted longer-term refinancing operations, preparatory work related to outright purchases of asset-backed securities and a prolongation of fixed rate, full allotment tender procedures. In addition, we have decided to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme.

ECB has not announced outright asset purchases yet. They are trying to induce banks to lend more to the real sector. My friend said that it was the equivalent of Bank of England’s ‘Funds for Lending’ (Fund to lend). But, the law of unintended consequences will work in Europe as it did in England. London has another housing bubble. Europe will face other issues.

German media is not happy. German think-tank ZEW is not happy either.

This is what Ed Conway, the Economics editor of SKY News wrote in his blog, in conclusion:

However, it’s difficult to get escape the conclusion that the one thing markets didn’t get today – outright Eurozone quantitative easing – was the one thing they really wanted. QE is doubly tricky in the Eurozone, where there are countless legal obstacles, but if markets remain sceptical for much longer, Draghi and his colleagues may have to find a way of circumventing them.

Having thrown everything but the kitchen sink at investors today, it looks like the kitchen sink was precisely what they were after. [Link]

Finance and free-markets

The story captioned ‘Barclays Fine Spurs U.K. Scrutiny of Derivatives Conflict’ in Bloomberg attracted my atention. There is no conflict here. It was plain fraud. Faced with a situation of having to make payment on a Gold barrier option (knock-out option?), the Barclays trader played around with the fixing of Gold price the next day. The ‘fixing’ is an anachronism in an age when many seemingly intellectual types working for investment banks argue their case with practised consummate ease and sophistication (or, sophistry) for a market economy. Then, the second is a case of not honouring a contract through manipulation. This is the problem that many who argue passionately argue for a market economy fail to recognise.

One, when ethics and honesty are abandoned, market economy fails. Second, market economy means that there are producers/suppliers of services and consumers. Usually, the latter are dispersed and are not organised. They lack the concentrated clout of the former. The deck is loaded against them, to begin with. In theory, barriers to entry and exit can be eased to allow competition to play its part in keeping players well behaved. But, absent sufficiently large numbers of players, cartels can be easily formed. We have seen that in several industries – steel, aviation, mining, shipping, etc. The upshot: whether you are a developed nation or a developing nation, the State cannot simply leave things to the market.

Two related links are here and here.

Hayek and Keynes

When some one writes that Hayek and Keynes are two sides of the same coin, you shrug your shoulders and move on. But, these guys need to be taken seriously. They do prove Hayek right:

  • There is a very strong positive correlation between our measure of capital over-accumulation prior to a recession and either of our two measures of the subsequent severity of the recession.

This evidence provides support to the first premise of the liquidationist view. It shows that severe recessions have generally been preceded by periods of very high investment relative to the economy’s needs, as measure by the economy’s level of productivity (TFP).

  • Severe recessions were generally preceded by high accumulation of all three classes of capital: housing, durables, and physical capital.

This pattern would be consistent, for example, with over-accumulation caused by periods of excessively lax credit. However, these ‘Hayekian’ facts do not necessarily imply that liquidation without public intervention is desirable.

They also find that Keynesian intervention might minimise the pain of liquidation that is necessary but it comes with a cost – it does prolong the recession:

We find that during liquidation periods, stimulative aggregate demand policies are generally socially optimal, as the laissez-faire economy produces a recession that is excessively deep and painful. However, the cost of this intervention is that it prolongs the recession, as suggested by Hayek, rather than stimulating a quick recovery, as some Keynesians may want to believe.

Their full paper is here.

The key is to minimise the pain (and that too only for those segments of the society that cannot handle it without assistance) without impeding the liquidation or adjustment process. Of course, it is easy to write all these but these are political economy questions. Those who do not need the pain relievers will be the most vocal in demanding them and influential in getting them.

More important, it is good to avoid getting into such excess capital accumulation. That calls for a broader remit for monetary policy than pure inflation targeting. It calls for explicit consideration of credit growth, asset bubbles in the monetary policy framework and in responding to ‘excess’ (decisions involving judgement, of course) in all of these. That is, central banks really have to remove the punchbowl when the party gets going. Again, easier said than done, even in democracies. Forget about less democratic governments, unless they are, otherwise, visionary, far-sighted and understand the value and virtue of delayed gratification over instant gratification.

All of the above assumes that central bankers believe in withdrawing the punch bowl. Fanciful thinking on my part, given the preponderantly neo-Keynesian mindset that is prevalent in Washington, D.C and in Frankfurt these days.



Capital Controls

Just caught up with this interesting piece by Barry Eichengreen and Andrew Rose titled, ‘Capital Controls in the 21st century’. As I read the brief note, I got the impression that they were highlighting the costs and difficulties of implementing capital controls and hence, trying to dissuade governments from engaging in them in the first place. Their conclusion, however, was a pleasant surprise:

The lesson here is that countries anticipating having to resort to controls for purposes related to macroeconomic or macro-prudential management should hesitate before dismantling their control apparatus. Having done so and moved all the way to capital account convertibility, it can be difficult and costly to go back. [Link]

Related to this paper was a paper on Brazilian controls on capital inflows. The author could not find and hence could not present evidence that controls on capital inflows achieved their intended measure: reining in the Brazilian real. But, the absence of proof does not mean proof of absence. Finding direct cause and evidence in these matters is hard. But, here too, his final advice is good:

Brazil has a very low domestic saving rate (only 16% of GDP), and needs to complement it with foreign savings in order to enable an investment rate compatible with the aim of sustaining GDP growth. There is a risk that the capital controls may have a lasting impact on the capital inflows that could leverage the growth potential of the Brazilian economy. [Link]

This is the point I had stressed in my latest MINT column presenting insights from Ha-Joon Chang’s ’23 things they don’t tell you about capitalism’. It is one thing to reclaim policy space from international and foreign agendas but it is another thing to use that policy space to get things right and moving in the domestic economy. Sceptics and critics of the neo-liberal agenda must be as harsh on these failings of developing economies as they are on the neo-liberal agenda itself.

Hasan Suroor and the ‘Saffron’ Strawman

Just about a week ago, I had written an article for Pragati titled, ‘In Defence of Smriti Irani’. You can find it here. In that piece, I had mentioned that the Central Board for Secondary Education (CBSE) in India has already introduced an elective course for Grades XI and XII of the CBSE titled, ‘Traditional Knowledge Systems of India’. One of the persons who worked hard to put this together was Michel Danino, a well-known Indologist, for his work on the Indus-Saraswati Civilisation (‘The lost river’).  The elective course has ten modules. I have gone through a few of them and they are good.

On June 1, the ‘First Post’ reported that the HRD Ministry is considering including ‘ancient texts’ in the syllabus. Actually, the first paragraph of the news-post and the second paragraph do not match. The first para appears to be the reporter’s version of what the second para means. There is a gulf between the two. You can decide for yourself:

Even as controversy around Smriti Irani’s educational qualification dies down, recent reports claim that the newly appointed HRD minister has started working towards including ancient Hindu texts in the education system, possibly part of school syllabus.

The Deccan Chronicle reported that Irani has directed HRD officials to develop material which shows the contribution of ancient India to various fields like science, philosophy, language and mathematics, while material being considered includes Hindu texts like Vedas and Upanishads. [Link]

She might well have had in mind some ideas to boost the popularity and acceptance of this Elective course already introduced by CBSE during the UPA regime and nothing more. No precise policy decision is taken or measure announced. The Ministry has also promised to engage in consultations. There may be a period of ‘public comments’ before any official change is made.

So, right now, all that we have is an imprecise news announcement. So, why is Hasan Suroor in a tearing hurry? This is where one has to be wary of the cleverness of the ‘Left-liberal’ brigade. He is not criticising the policy because there is none yet. He wants to set the agenda for the HRD Minister as to what she can or cannot do, in including new material in the syllabus. The header for his article is also provocative: ‘Return of Saffron text books’. His point is not about the merit (or, otherwise) of the Ministry’s decision because there is no decision yet. His goal is to preempt her and define the boundaries of what she can and cannot do.

This is exactly what I had in mind when I wrote the following in my MINT column two weeks ago (May 20, 2014):

If you were to take these actions, you will be tagged anti-Muslim. If you shy away from them simply to prove your detractors wrong, you will be implementing their agenda and not yours. [Link]

The script is playing out as I had anticipated. The question is how the government is going to respond to these clever attempts to set its agenda. I am not going to sketch a detailed prescription. I shall just stop with enunciating two principles that the government’s response has to keep in mind: one is purpose and the other is public relations.

More headlines

After the United States charged some officers of the People’s Liberation Army with cyber-espionage, China has been reacting with anger and fury. Here is one link from FT and here is another from Reuters.

The changing political climate in Turkey. Professor Dani Rodrik has been writing and tweeting on it extensively. Read Dani Rodrik + 1 on Erdogan’s coup here.

Thai military coup – 12th in eight decades – is going strong.

There were rapes and savage honour killings in India, Pakistan and in Malaysia.

In the meantime, financial markets inhabit another solar system altogether.