The Asian prescription

Vivek Dehejia and Rupa Subramanya wrote:

Caving in to industry pressure for sops, such as reduced GST rates, would be little better than applying a bandage to a deep wound. What is needed is Schumpeterian “creative destruction”, which is greatly magnified within a vigorously contested market.

And, this requires that the government hold fast against industry lobbying, and move toward reducing import tariffs, as well as completing the country’s unfinished economic reform agenda, especially the liberalization of labour markets. [Link]

My friend reminded me of the following passages from Joe Studwell’s ‘How Asia works?’

The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers.

The message is: sops and subsidies are not bad; but lack of accountability and quid pro quo for exports, for quality and for scale are. So, the government can support the auto industry now but for reciprocal export obligations.

Call Centres or Casinos and why Hastie was not hasty

Philippines is discouraging the emergence of more call centres in Manila in the name of helping other regions grow. A great public policy study on how to come in the way of a good story.

Iceland is staring at the prospect of running out of ice. [Link]

Russia finetunes its tax collection mechanism. Some would pray that Indian Income Tax does not get wind of this. [Link]

Andy Xie’s thoughtful piece on what Hong Kong didn’t get right. Commentators take snapshots. Historians observe the flow of events over time.

Revisiting Chris Balding’s twitter handle becomes essential now. He points to this interesting thread.

Chris Balding’s twitter thread on why US and China are not engaged in a trade war but something else much bigger. Clarity.

Australian politician Hastie sounds the alarm not about China but about Australians themselves. It can apply to several other nations:

Right now our greatest vulnerability lies not in our infrastructure, but in our thinking. That intellectual failure makes us institutionally weak. If we don’t understand the challenge ahead for our civil society, in our parliaments, in our universities, in our private enterprises, in our charities — our little platoons — then choices will be made for us. Our sovereignty, our freedoms, will be diminished. [Link]

This is a good perspective on how and why Hastie wrote what he wrote.

Rather shallow stuff from Yasheng Huang on Huawei. Just wondering why.

Big, big rumour. Must remember to follow this.

Two good pieces from South China Morning Post’s Karen Yeung – one on China’s dollar shortage and the other on China’s social ills reaching a tipping point.

More on why China cannot afford to let the yuan slide too much:

According to analysts at Nomura, the amount of offshore dollar bonds issued by Chinese corporations has more than tripled since the end of 2014, rising to $841.6 billion at the end of June. [Link]

What a time we are living through

Almost back-to-back shootings in the US – in Texas and in Ohio in the weekend prompts the American President to condemn racism, bigotry and white supremacy. Is it or is it not a tad too late? WSJ article linked in line 1 says that it was the 251st mass-shooting in 2019.

From 2006 to 2016, the number of public mass shootings each year was relatively flat, with about four or a five a year, according to the AP/USA Today/Northeastern University Mass Murder Database. That number has risen in recent years, with seven public mass shootings in 2017 and 10 in 2018.

The Government of India has abrogated Article 370 of the Indian Constitution that conferred special status to the state of Jammu & Kashmir. Useful links to read/listen are here, here and here.

On the face of it, the BJP had done what it promised in its election manifestos both in 2014 and in 2019. Many Indians have questioned the special status for the state of Jammu & Kashmir in the past. After all, the decision integrates the state with the rest of India. Of course, the Government of India has also divided the state into two Union Territories.

The fact is that Article 370 begins as follows:

Temporary provisions with respect to the State of Jammu and Kashmir

Also, Article 370 (1) (3) states the following:

(3) Notwithstanding anything in the foregoing provisions of this article, the President may, by public notification, declare that this article shall cease to be operative or shall be operative only with such exceptions and modifications and from such date as he may specify:
Provided that the recommendation of the Constituent Assembly of the State referred to in clause (2) shall be necessary before the President issues such a notification.[16]

There is no constituent assembly in J&K. The Government of India in the past has substituted it with the words, ‘Legislative Assembly’ and since the Legislative Assembly in J&K has been suspended, the recommendation of the Governor of J&K has been deemed sufficient.

A friend raised the question of whether Article 370 has indeed been abrogated. The Government of India appears to have done it indirectly (?) through amendment to Article 367 of the Constitution of India. But, in the gazette notification published in ‘Economic Times’ should clause 4(c) have come before clause 4(b)? See here.

The Presidential order issued on August 5, 2019 extends the Constitution of India, in its entirety, with all its amendments, to the state of J&K. Thus, it effectively neutralises Article 370. There is no direct reference to Article 370. However, the Presidential order, by superseding the Constitution Order 1954, directly abrogates Article 35A since that Article was inserted as per the Constitution Order of 1954, as per the Wikipedia entry.

It is interesting that the Wikipedia article mentions that the President of India has issued a series of orders since 1950 under clause (1) of Article 370. There have been at least fifty such orders extending the applicability of the Constitution of India to the state of J&K.

But, a few questions will remain for which no clear answer will emerge for a long time: the timing of this decision (why now?), the long-term consequence of this decision in the state of J&K, Pakistani reaction, the impact of incidences of terrorism in the state and in India and the legal admissibility of the decision if someone chooses to challenge it in the Supreme Court.

The Chinese yuan has weakened to over CNY7.00 per US dollar. This is seen as China’s retaliation to the latest round of tariffs levied by the American President. President Trump calls it a major violation.

If China uses the yuan as a lever against the American trade war, two questions arise: will capital not flee China somehow?

Second, has America (acting in concert or not, with the UK?) the Hong Kong lever? See here and here.

In the meantime, late in July, News that Huawei helped build the mobile phone network in North Korea, carried by the Washington Post, was cited by CNN here. A very long article from the Wall Street Journal published in May 2019 on how Huawei grew and the methods it followed is well worth a read.

This Reuters article on the 5G fight also published in May is well worth a read, for how Australia blew the whistle on Huawei. Two points from the article are worth noting:

The United States and its allies were derelict in not developing a 5G supplier, former Australian Prime Minister Malcolm Turnbull said in a speech in London in March. “With the benefit of hindsight it beggars belief that the countries which pioneered wireless technology – the United States, the UK, Germany, Japan and with wifi, Australia have got to the point where none of them are able to present to one of their own telcos a national, or a Five Eyes, champion in 5G,” he said.

What is 5G all about?

5G isn’t only about faster data. The upgrade will see an exponential spike in the number of connections between the billions of devices, from smart fridges to driverless cars, that are expected to run on the 5G network. “It’s not just that there will be more people with multiple devices, but it will be machines talking to machines, devices talking to devices – all enabled by 5G,” said Burgess, the Australian Signals Directorate chief, in his March address.

This configuration of 5G networks means there are many more points of entry for a hostile power or group to conduct cyber warfare against the critical infrastructure of a target nation or community. That threat is magnified if an adversary has supplied equipment in the network, U.S. officials say.

Lastly, Japan and South Korea are bickering more bitterly than they did before.

In short, my article in Mint published on July 26 appears to have been timed well, by sheer coincidence.

STCMA on August 1, 2019

Pakistan rolls back the increase in cooking gas tariffs for roadside roti/naan outlets. [Link]

Ruchir Sharma’s piece in Times of India on July 31 echoes what I wrote for Mint on July 26:

Japan showed that central banks can print all the money they want, but can’t dictate where it will go.

Authorities in the Chinese capital have ordered halal restaurants and food stalls to remove Arabic script and symbols associated with Islam from their signs, part of an expanding national effort to “Sinicize” its Muslim population. [Link]

OF course, none of these seem to matter for Stephen Roach who sees nothing ‘red’ in China.

His tally of assets at a broader universe of Chinese lenders in “distress” is 9.2 trillion yuan, or about 4% of the commercial banking system and nearly 10% of gross domestic product. [Link]

The UBS analyst, cited above, is being careful, to sound positive (if you read the full story) so that he avoids the fate that befell his economist-colleague

I think what Raghuram Rajan is saying here is that central bankers have become the fall guys because they set themselves up to be supermen and women. It is time for a confession.

Business Today carried an useful article on tech. applications that are considerate to our privacy concerns [Link]

A friend had flagged this. It is indeed nuts. See Ruchir’s piece above too.

The analysis by S&P Global Market Intelligence found unrated entities in China, the U.K. and the technology sector in Asia Pacific are among the most at risk of a sudden spike in defaults. [Link]

Jeffrey Frankel is not sure whether inflation targeting really works because we still do not know, after all these years, how inflation expectations are formed. At least, one interesting link to a paper in his piece. [Link]

Finally, Google gets rid of another employee who is a conservative Republican.

Is it a Japan tragedy?

Early on Tuesday morning, read this interesting (and sad, to an extent) piece in the Nikkei Asia Review on Japan’s scenic golf courses in rural parts. But, the story is interspersed with narratives of dwindling populations and innovation.

Sample this:

The town of Nemuro lost its only obstetrician last year since its birthrate had fallen so low. Its fishing industry may be strong — global tennis star Naomi Osaka’s grandfather once served as chairman of the cooperative — but nobody new is moving there.

The lament is not particularly constructive but I doubt if any reconstruction is possible:

Somehow Japan has lost its will to innovate, to develop new technologies and to compete with the rest of the world. A pervasive conservatism has infected much of working and social life, leaving regional Japan a museum-like landscape of rural beauty and Asian culture. Buddhist temples of astonishing grace, Shinto shrines of perfect simplicity, small fields of rice or vegetables, and orchards of flawless fruit decorate the countryside. Yet behind it all are dying towns, shuttered shops, and unending road projects or concrete barriers piled up along island shores to protect against typhoons.

Abenomics works to preserve the tranquil beauty of rural Japan and sustain its culture. but what is going to save rural Japan from the hollowing out that you can see, hear and feel? The digital economy is barely discernible here, stunted by too many large corporations whose overweening presence in national policymaking makes the startup sector a minor sideshow instead of a pathway to the future.

Demographics are long-term and slow-moving trends in motion. They have impact on innovation and investments, etc.

Somehow, I feel that Buddhist Japan will and is handling its aging better than the Christian West would do or is doing. The swing towards relative and growing intolerance of strangers amidst dwindling economic prospects could be traced not just to a financial crisis but also due to demographic transition towards a greying population in the West.

The crisis pulled the economic rug from under the feet of millennials. More debt in America and youth unemployment in Europe. The older generation is reacting to the economic loss (networth wiped out by the decline in asset prices and having to work into old age) and the social aspects of globalisation.

Each and everyone of us who have crossed 50 can reflect on how their own attitudes towards many things have shifted and are shifting with age, slowly, imperceptibly but surely.

At a policy level, to counter this with even more forced immigration is a policy disaster which is what ‘liberals’ would want governments to do. One has to accept the costs of the economic crisis and demographic trends and work with them rather than seek to overturn the consequences forcefully. That ends up feeding the resentment.

‘Has Asian dominance arrived’ and other links

This Bloomberg story tells us that global debt rose ‘only’ USD3.3trn in 2018 to around USD243trn, about three times the global GDP. If you want to know the background to this news, the link is there in the Bloomberg news-story. It is a research note by the Institute of International Finance.

Despite that, President Trump is not happy with Fed Chairman Jerome Powell. He says he is ‘stuck’ with Powell. This is quite wrong and dangerous. I am surprised at US dollar’s resilience in the face of such gibberish.

According to ‘What we are seeing’ (Edition: 22.03.2019), for the first time, globally, the number of 65-year olds has exceeded the number of 5-year olds.

One has to do more detailed work on the claim that Asia has become the world’s largest economic bloc and that its GDP now exceeds the combined GDP of the rest of the world, in PPP $. My simple response is ‘So, what?’. Of course, I could be very wrong here but the obituatry of Western dominance is being written too prematurely. Asia is at very high risk of internecine warfare and the West has a good track record of ‘divide and rule’. I would like to recall my MINT column from nearly four years ago that the 21st century would belong to the West or to nobody.

This blog post from ‘Bank Underground’ (Bank of England blog) says that rising interest rates increase labour share of GDP because productivity might fall faster than wages do. Or, we can add that capital’s share declines faster in an environment of rising rates due to correction in asset prices. Very interesting and important empirical evidence in this. It shows that a reflexive opposition to higher interest rates by the likes of, say, the Economic Policy Institute is wrong.

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.