Economic growth is not an entitlement

That is the title of my column in MINT today. I call the downward revision to global growth forecasts by the International Monetary Fund good news. Spontaneous economic growth ended after about twenty five years since the end of WW II. After that, it has been mostly sporadic. But, financial leverage has propelled economic growth. That is why there have been so many attendant problems  – climate change, environmental and ecological damage, workplace stress, mental health issues for individuals and for families, income and wealth inequality, etc.

Hence, a period of sub-par economic growth for the world economy would be a bitter but necessary medicine for the world economy. Yes, it won’t be easy. But, when the body has become dysfunctional and unhealthy, how can any medicine cure it without side effects and painful and long side effects, at that?

Elsewhere in the column, I wrote that India needs an adult-like conversation on its economy but that it lacks a quorum. It is true of global economy too.

Read my column here.

What did America do between 2014 and 2016?

My column in MINT on Tuesday 9th October:

Bloomberg Business Week broke the story of the “Big hack” — how a tiny chip (the size of a pencil tip or a grain of rice) was embedded in servers bought by America’s big technology companies on 4 October. A week earlier, The New York Times wrote that the Chinese government had issued instructions to stop the reporting of negative news in print media and online forums, etc. The directive sent to journalists named six economic topics to be “managed”. Two of them carry interesting implications. One is “local government debt risks” and the other is “the risks of stagflation, or rising prices coupled with slowing economic growth”. It is reasonable to assume that these two remain live issues or risks in China. However, China is not alone in wanting to suppress reality.

I have long been puzzled by the turnaround in the global economy and asset markets in 2016 when it appeared that the bottom was about to fall off for the global economy and asset markets. Everyone assumed that China’s credit taps were opened and that the world was saved. The truth is slightly trickier than that. There are reasonable grounds to suspect that the US had fudged data from 2014 to 2016 to prevent official data from showing an economic recession and that the stock market too was manipulated. The supporting arguments follow.

Between the summer of 2014 and spring 2016, stock prices in many markets declined sharply. Stock indices developed by Morgan Stanley Capital International for the European Monetary Union, Asia-ex-Japan, Japan, Switzerland and emerging markets had declined anywhere between 20% and 40% in that period. Emerging market bond spread doubled. However, the S&P 500 stock index traded sideways. Was it because earnings by S&P 500 companies were stellar? No. For about seven to eight quarters from December 2014 to September 2016, year-on-year (yoy) growth of earnings per share’ (EPS) of S&P 500 companies was negative. Quite how the S&P 500 stock index remained stable in the face of a global sell-off in risk assets and contraction in earnings remains a mystery to be solved.

What happened to the real economy in the US? In the same period, industrial production and manufacturing recorded more months of negative change than positive change—both on a month-on-month and on a yoy basis. Capacity utilization declined. Consumer confidence—University of Michigan consumer confidence indices—declined. Import prices—from China and Mexico—recorded declines on an annual basis. Consumer price inflation came down from 2% to around 0%. All these indicators suggested a recession in America. Real gross domestic product (GDP) growth slowed, but there was no recession.

The price of crude oil declined sharply in this period. It must have helped Asian stock indices and corporate earnings since Asia is largely an oil importer. But, as mentioned above, Asian stock indices fell sharply. The balance sheet troubles of oil producers and companies in related industries eclipsed the positive effects of lower oil prices. None of this showed up in American stocks. In fact, excluding oil stocks, the S&P 500 would have been up. Of course, excluding profits of oil companies, S&P 50 EPS might have experienced growth. That might explain the resilience of the index. However, this does not sound right because the rest of the economy was reflecting the strains that the oil industry was facing. But, not the stock market. Why did the US have to do this?

By 2015, had official statistics reflected the slowdown in the economy fully, it would have been a big indictment of the policies pursued since the crisis of 2008. Short-term interest rates at 0% and three rounds of quantitative easing and repurchase of maturing treasury assets could not produce a recovery that lasted longer than six years. It would have been a huge embarrassment to the Fed and would have emboldened the likes of Ron Paul to demand drastic changes to the charter of the Fed and the trimming of its sails. The other motivation is political.

An economic recession and a stock market decline would have sealed the verdict on the Barack Obama presidency and would have effectively nullified the chances of the election of a Democrat as president in the 2016 elections. Perhaps, a Republican victory coming on top of an official economic recession and stock market collapse would have made Democrats unelectable for a long time to come. In the end, they did not succeed because public sentiment could not be manipulated. They were hurting because of the sham recovery. Hence, apart from the traditional Democrat bastions along the coasts, the rest of the country voted Donald Trump to the office of the president.

What are the implications of this? By not allowing the American stock market to correct meaningfully in that period, policymakers have not allowed the pressure valves to function. Pressure has built up as the stock market then began to climb from 2016 onwards. So, the “bottled up” pressure is now immense. Stock market stability followed by a steep ascent since end-2016 means that excess risk had been taken by companies, funds and investors. We cannot pinpoint before the fact where they are. We will all be wiser after the fact as we were, after 2008 only to forget the lessons in short order. Recently, the chief economist of the European Central Bank expressed fears about the degree of leverage in the financial system because of shadow banking. It had taken just 10 years to come back a full circle. A truly bizarre world.

V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at


First Published: Mon, Oct 08 2018. 09 09 PM IST

Finance-neutral potential growth

There is a very interesting MINT Street Memo from the Reserve Bank of India which tries to estimate the ‘Finance-Neutral’ or ‘Credit-Neutral’ output gap whereas conventional analysis uses ‘Inflation’ as the basis to estimate the output gap or, by implication, potential growth.

Like the ‘Non-Accelerating Inflation Rate of Unemployment’ (NAIRU), this one is the Non-Exuberant Asset Prices Rate of Growth (NEAPRG) or Non-Excessive Credit Offtake Rate of Growth (NECROG). According to the authors, it is 7% in India. India’s economy has closed the output gap two or three quarters ago and the output gap may even be positive, according to the authors. On this basis, the Reserve Bank of India may be justified in raising the policy rate at its next meeting! Not that they are short of reasons for doing so.

Indirectly, this underscores the point that Gulzar Natarajan and I made in our book, ‘Can India grow?’ that India’s sustainable growth rate is far lower than most of us would like to believe.

When I shared the details of this Mint Street Memo with my friend Srinivas Thiruvadanthai, he said that the ‘Balance of Payments’ or ‘Current-Account Neutral’ potential growth could be closer to 6% in India! Sobering.

The Mint Street Memo No. 14 can be accessed here.

Socialism defined by rage to replace Capitalism defined by greed?

I think it has become important to re-interpret Adam Smith or interpret him correctly. About eleven days ago, this blog had posted about an article in Aeon on the visibly famous Adam Smith for his ‘invisible hand’. It turns out that he was not a big fan of ‘Invisible hand’ and certainly, not in isolation or independent of social norms and values. The blog post had also referred to a review by John Kay of a book by the British Conservative MP Jesse Norman.

It turns out that a good summary of his book is provided by Jesse Norman himself in an article he had penned for FT in June this year (ht: Gulzar Natarajan).

He wants to dispel five myths or point out five facts about Adam Smith and his famous work, ‘The Wealth of Nations’ (a short hand, no doubt):

(1) ‘Wealth of Nations’ is important because Smith is the first person to put markets at the centre of economics.

(2) “Markets are living institutions embedded in specific cultures and mediated by social norms and trust.” (verbatim quote from Jesse Norman’s article)

(3) What matters to a market economy is not empty rhetoric but the reality of effective competition and its most important feature is that companies internalise their costs. Something that banks are terribly adept at passing on, for example. Privatisation of gains and socialisation of losses is the anti-thesis of free markets.

(4) “Markets constitute a socially constructed and evolving order that exists and must exist not by divine right but because it serves the public good”. Again, a verbatim quote. This is important because once imperfections – that exist – are allowed, many of the supposed benefits of free markets (for public good) disappear.

(5) “Both individual markets and the free market order itself rely on the state.”

These five key aspects or elements of a market order are very important for its very survival and existence. Slowly,  the ‘capitalism defined by greed’ is being replaced by ‘socialism defined by rage’. It will be hard to choose between the two as to which is the bigger evil. Very hard.

Bagehot has a timely warning on the leftward lurch in British politics:

The compensation of the average boss of a FTSE 100 company increased by 11% in 2017, to £3.9m, while the pay of the average worker failed to keep up with inflation. Banking in Britain is a game played by insiders who enjoy a large implicit subsidy from taxpayers, who have to bail them out if they get into trouble. The same banks have little connection with the real economy: only about 10% of their lending is to businesses outside commercial property. Global companies such as Amazon and Google get away with paying little tax by the ruthless use of tax havens and transfer pricing.

No political party or leader in the world is able to convince or persuade businesses to understand that capitalism without conscience is a crime. By the time they realise it, it may well be too late. The world is responding or reacting, accordingly.

Reuters has a story out on the popularity of the incarcerated Brazilian leader Lula da Silva. It is unlikely he will become President. But, his party candidate might win, under his blessing or on ‘imported popularity’. But, PT, unlike in 2002-08 will be clearly Left-oriented.

In South Africa, there is fear about takeover of land from white farmers. Most of the media report might be slanted and that the South African government might be pursuing reasonable policies. Or, may be not. But, it may well be impossible to divine the truth for quite some time. Headlines mention the Zimbabwe parallel, of course. See here for the issues at stake.

Summary: Land can be taken over without compensation but such takeover can be challenged too in courts.

In America, Bernie Sanders and Elizabeth Warren are the most popular Democratic party leaders. Alexandria Ocasio-Cortez, the young democratic socialist firebrand ousted established Rep. Joe Crowley in the New York House Democratic primary in June.

These are enough warning signs. Capitalists must admit to their follies and reform themselves.

Higher taxes for higher incomes and for capital gains are in order. Higher wages are in order too. The march of artificial intelligence that takes away jobs and psychological security must be slowed and reversed, if possible. Eroding self-worth lowers life expectancy and the living begin to live unhealthily too.

If capitalists fail to read the tea leaves correctly and ignore warning signs, it may be too late. They may be swept away and the world will have replaced one form of lawlessness with another.

India’s aspirational bottleneck: its private sector

This is one of Shri. Ninan’s best and most thoughtful columns. India’s private sector is part of the problem. I had said so more than once in my columns. It always has been and it still will be. He does not have answers nor do I. But, some of these things are probably evolutionary and that there are no external interventions or neat/magical solutions
that can be applied.

It is a fact, world over, that in the new millennium, cronyism, corporate malfeasance and short-termism had grown exponentially. India is not only not an exception but has also been prominent in displaying such a trend. In the West, we had the financial services industry, predominantly. From Brazil to South Africa to China, businesses have been mired in controversies.

Shri. Ninan mentions the House of Tatas. Accounting and auditing firms and consultancy firms like McKinsey have also been found sorely wanting in their conduct in several parts of the world.

Governance by global (think EU) bureaucrats from remote locations – unaccountable and unelected – combined with brazen short-term greed at the expense of public interest on the parts of businesses have created a governance vacuum that has been filled by politicians that the mainstream is quick to characterise as ‘populist-nationalist’.

But, that glosses over the problem of fixing accountability for the circumstances that created them in the first place. Indeed, to be blunt, that is dereliction. That is why Shri. Ninan’s piece stands out. It is an important first step in identifying and calling out the source of the problem.

But, answers are not straightforward. Clearly, in the Indian context and, may be, in the global context too, a better answer to political funding is the urgent need of the hour. But, we are no closer to it than we were, five years ago. That will break the nexus and dependence of the political class on businesses that make them discriminate between businesses unfairly and discriminate in favour of narrow and private interests over public interests.

Competent and unbiased regulation, regulators and consistent application of those by regulators are necessary conditions but not sufficient conditions. But, that too appears more conceptually sound than being practical because regulators are also gamed by the
same private sector participants. It is a universal problem.

There is a third answer which not many would want to see. Revolutions by those who are shortchanged it by all will be destructive, chaotic and disorderly. Revolutionaries too do not have answers. They know how to overthrow and destroy but not to replace and construct.

Come 2019, India does run the risk of what has happened to Brazil in recent years. That country has lost its way for now. In a way, the combination of the pre-crisis boom, the post-crisis uncertainties combined with the fallout of cronyism have brought them to this pass.

Same is the story with China except that the news is not prominent as in the case of Brazil, India and South Africa. Indeed, it is a travesty and tragedy that the mainstream global media is holding up China as the paragon of so-called liberal values, liberal trade and governance!

So, like these countries, India had a pre-crisis boom which was mistaken to be permanent. The boom covered up the cronyism that was very much in play then. The post-crisis growth stasis was the withdrawal of the tide that exposed the cronyism in the Indian economy. Its most visible manifestation is the banking bad debt crisis that shows no signs of ending.

In the next twelve months, politicians will hardly be focused on addressing this issue. Indeed, if anything, these unholy ties and practices will be more in vogue and invoked more often than during normal times.

Post-2019, depending on the dispensation that comes to office, either the situation gets much worse almost beyond the point of redemption or that there is an acceptance and acknowledgement of the problem leading to concerted, concrete an sustained efforts to move towards a better and fairer governance regime.

It is hard to bet on the latter outcome right now.

GDP and welfare index

In 2016, two economists created a welfare index. GDP growth and that index correlated well. Recently, IMF economists had extended that welfare index to include environmental sustainability. Again, GDP growth correlates well with this expanded welfare index too.

GDP growth is the best welfare policy and the best redistribution policy too.

A succinct blog post by IMF Research. Links to the underlying papers are there in the post.