Wages and profits in India

I had not realised that I last blogged on 31st January. It is indeed becoming difficult to dedicate time to blogging. Reading is happening somehow, even if not on the same scale as before. But, the ‘dereliction’ with respect to blogging is becoming more glaring. In any case, here goes.

One of my students in the class I am teaching sent me this useful link. Wages and profits are going in the other direction in India – i.e, good direction. Profit share of GDP has fallen but real wage growth has been brisk at 5.5% during the decade 2008-17. This raises doubts on whether some of the unemployment statistics touted by political opposition are as suspect as some of the government’s macro-economic numbers are.

The real wage growth numbers come out of the ILO global wage report which is available here. I am yet to go through it. The Executive Summary of the report is here. The ILO report was published in November 2018. Nikkei Asia Review had published a report on this already in November.

70% top marginal tax rate and other links for the weekend

Alexandria Ocasio-Cortez favours 70% marginal top tax rate to pay for climate change. Something to think about?

When Wall Street firms behave in this fashion, Alexandira Ocasio-Cortez’ proposal does not seem so outlandish or outrageous. The story is about Goldman Sachs with 1MdB in Malaysia and Credit Suisse in Mozambique:

According to the International Monetary Fund, the loans Credit Suisse and others arranged effectively doubled the cost of servicing the country’s debt. …

Mozambique defaulted and then restructured its debt. Last year, the country’s economy was due to grow at the slowest rate in 18 years — a burden that its citizens will be left to bear. 

Whatever the outcome of these cases — no doubt, risk controls will be tightened and new standards set — the bitter taste of these experiments with market capitalism will linger. [Link]

On climate change, these lines should strike fear in Indian hearts. It is about Yemen:

“The civil war in Yemen seems to be a politically-motivated competition for power among many actors with varying motives,” he wrote in his paper. “But underlying all other motives is the ongoing need by all parties to secure access to the diminishing water supply.” [Link]

Staying in the desert, let us read Noah Smith’s article on Saudi Arabia. The drastic fall in the fertility rate in the country is remarkable.

This FT article on how investors are pushing companies to look at all stakeholders’ welfare rather than maximise profits as Milton Friedman advised in 1970 was not impressive because it did not have any other name than Larry Fink, as the investor doing it. In other words, institutional investors are not exactly forcing companies to look at a bigger picture than shareholders, much as the FT writer would like to believe or have us believe.

But, it was good to see that the now-departed chairman and founder of Southwest Airlines walked his talk on profits and employee welfare too. Remarkable story, written well by Joe Nocera.

“Should a self-driving car kill the baby or the grandma? Depends on where you’re from.” That is the header of an article in MIT Technology Review. The article presents results of a voluntary survey in which millions participated from different countries. Responses varied from country to country.

This is a re-statement of the old trolley problem (I did not know about it although I had seen variants of it) in the era of artificial intelligence and self-driving cars.

Greg Ip begins the New Year with an optimistic take on how the world is getting relentlessly better. It is true but it is also true that it is a partial analysis.

Greg Ip has a more penetrating take on the US-China trade dispute. The observations by Senator Dan Sullivan, cited in the article, are pertinent:

Dan Sullivan, a Republican senator from Alaska, personifies these broader forces reshaping the U.S. approach to the world. Mr. Sullivan has followed the rise of China for decades—as a Marine sent to the Taiwan Strait in 1996 in a response to Chinese provocations; as an official in George W. Bush’s National Security Council and State Department; and for a time as Alaska’s commissioner of natural resources.

As companies moving goods from China to the U.S. face heftier tariffs, some have developed creative techniques to avoid paying them. The WSJ’s Steven Russolillo takes to the field to explain how some businesses sidestep import duties.

When Mr. Xi visited the U.S. in 2015, Mr. Sullivan urged his colleagues to pay more attention to China’s rise. On the Senate floor, he quoted the political scientist Graham Allison: “War between the U.S. and China is more likely than recognized at the moment.”

Last spring, Mr. Sullivan went to China and met officials including Vice President Wang Qishan. They seemed to think tensions with the U.S. will fade after Mr. Trump leaves the scene, Mr. Sullivan recalled.

“I just said, ‘You are completely misreading this.’” The mistrust, he told them, is bipartisan, and will outlast Mr. Trump.

The Guardian has an unsurprisingly condescending piece on the new Brazilian President. I think he is interesting and India needs to build its ties with him closely before China does.

This NYT profile article on Bob Lightheizer is a good one. More strength to him.

A colleague of mine pointed to this CATO Institute policy analysis titled, ‘Nostalgia and the Liberal Order’. Yet to read it. I like the sound of it, though. It was published in June 2018.

Roach and I agree

I have often found myself in disagreement with Stephen Roach in his cheer-leading of China. After I read Martin Pillsbury’s ‘100-year marathon’, I am all the more convinced that, as a Sinophile, Roach got China wrong. Never mind. I hope he is right on the Federal Reserve and he is right about this too:

The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values. [Link]

Similarly, I have had plenty to disagree with Martin Wolf too. On this one, especially with the header, he is right. The future might not belong to China. In fact, while I liked Martin Pillsbury’s book, I must concede that James Kynge gave us an excellent psychoanalysis of China (without really intending to do so) that accords with what Martin Pillsbury wrote some nine years later. Kynge’s ‘China shakes the world’ (published in 2006, I think) showed us clearly that we are not dealing with a normal nation.

For them, cheating, hacking, stealing technology secrets, redrawing boundaries unilaterally, accessing markets around the world but keeping theirs closed are all part of the statecraft and fair game. The only way to deal with them is to play the game ‘by their rules’.

That is why, this piece by Raghuram Rajan in FT, published nearly a month ago gets it somewhat muddled and wrong. The last paragraph begins correctly saying that America’s tough negotiating tactics brought China to the table. Then, why should America sound conciliatory now? What does it have to show for its toughness in terms of a more open China market?

Finally, I understand that Jeff Bezos and Bill Gates do dishes in their homes. As long as I lived in America and in Europe, I did them too. But, I did not become a billionnaire. Looks like doing dishes is neither a necessary nor a sufficient condition for becoming a billionnaire. H..mmm. What to do? I tried.

Bangladesh and Maldives

With Rahul Gandhi occupying the front pages with his exemplary ‘prudence’ on farm loan waivers, this news-story did not get the attention it deserved – India’s offer of assistance to Maldives. Well done.

While I am rather pleased and impressed with the progress that Bangladesh has made and I am very happy for them, I do detect signs of hubris when the Prime Minister talks of achieving 9% GDP growth, etc. I am sceptical of such claims. It is still largely reliant on garment exports. Impressive that the per capita income has risen to USD1750. But, the economy is not diversified enough to be able to achieve and sustain a growth rate of 9% per annum. Plus, the loans to China should cause concern.

More importantly, it is good for her to realise that the current status did not arrive due to a pre-meditated plan. That is how it usually is. The end of MFA, the rise of costs in China, India’s inability to up its game on textile exports, etc., contributed. Understated confidence would do no harm at all. That said, a good story to read. Happy for them.

Cannot learn, won’t learn

Robin Harding of FT wrote an article on why Japan should not withdraw its monetary policy stimulus and listed instances in which the Japanese economy went into recession when the stimulus was withdrawn ‘prematurely’. May be, true. But, if it is always the case that one has to increase the intensity of the treatment, when would one consider the possibility that the treatment was wrong, in the first place?

Is it possible to keep an economy on life support all the time? What are the costs of doing so? A reader had sent a good set of comments on the Harding column:

Japan’s central bank now owns bonds and shares equivalent to a full year of national economic output. Real interest rates have been negative for years, something not seen in 5,000 years of recorded debt history. The long-term effects of such monetary policies are quite simply unknown, but the asset bubble created by QE has been nothing short of obscene.

The results on Japan’s domestic economy have been, at best, unimpressive, and at worst, an absolute disaster for the country’s competitiveness. Why bother to adhere to good corporate governance principles if the government is going to prop up your stock price anyway? Or why bother to make money if you can borrow to pay back interests? Mr. Harding is actually calling for more of this madness. What has the world come to? The end of capitalism is in sight.

This comment correctly focus on many unintended consequences of policy decisions and actions.

IMF Asia Regional Outlook

Some highlights:

Pakistan is missing from the summary of the Regional Outlook. Bangladesh has grown faster than India in the last two years (2016 and 2017). In 2018, India and Bangladesh are projected to grow at the same rate. In 2019, India is expected to overtake Bangladesh in its growth rate. Other than Bangladesh, Nepal, Mongolia and Thailand have seen their growth rates revised higher. Everyone else has their growth rate revised lower.

The only thing that IMF could say is that countries should open up their Services sector. I think that they are running out of ideas.

You can find the summary here.

Policy tweak by Bank of Japan

Andy Mukherjee has a good piece on why BoJ might need a rethink. Its unconventional monetary policy is rendered ineffective by their effect on the banks that are supposed to implement the policy by lending aggressively! Bank profitability is at risk. They can make money only by taking on more risk in distant lands. There is simply no ‘Net Interest Margin’ at such ridiculously low interest rates. American banks’ RoA is far better, as Andy writes. Why would investors prefer Japanese banks?

Read Andy Mukherjee’s column here.

The Bank of Japan (BoJ) has released its monetary policy statement and it is here. As far as I can tell, it does not address the issue/risk raised by Andy Mukherjee. If anything, it reflects a foolhardy/brave ‘no mud on my face’ attitude after falling flat with its current policies.

It has basically tried to ‘reassure’ markets that there is no tapering of bond purchases – stealth or real. It has doubled down on its current policy stance.

That, despite all these years of powerful and persistent qualitative and quantitative easing, the inflation target remains as elusive as ever:

Prices have continued to show relatively weak developments compared to the economic and employment conditions…and it is likely to take more time than expected to achieve the price stability target of  2 per cent.

It is even possible to question if the appropriate price stability target for a population with negative demographic impulses and potential growth of 0.0% is something lower than 2.0%.

Of course, as Andy points out in a private change, there appears to be two tiny but may be significant tweaks. They may be deliberately underplaying them and overplaying continuity to ‘reassure’ markets:

(1) Yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

(2) The Bank (BoJ),  …., will reduce the size of the ‘Policy Rate Balance in financial institutions’ current account balances at the Bank – to which a negative interest rate is applied – from the current level of about 10 trillion yen on average.

Third, it has also agreed to increase the purchases of of ETFs linked to Topix stock index than Nikkei 225.

On the announcement of BoJ monetary policy decision, the US dollar spiked against the Japanese yen. Some profit-taking has set in now. On a one-year basis, US dollar is trading at the upper end of the range; on  a two-year basis, the US dollar is trading at the upper end of the range; on a five year basis, in the middle of the range (95-125) and on a ten-year basis; closer to the upper end of the range (75-125). The risk is that the USDJPY trades closer to the upper end of recent ranges at all horizons.

That may draw Trump’s ire and he may direct it at the Federal Reserve for doing the right thing (even if only gradually and belatedly) because others are persisting with their wrong and non-working policies!