Rupee on watchlist

I am grateful to MINT Edit for saving me the effort to write on the United States adding India to the watch list for its accumulation of foreign exchange reserves and for India’s bilateral trade surplus with the United States. One finds the American report here.

The report is all of 46 pages long and it is easy to read the portions pertaining to India. The data on India’a national savings rate is most likely wrong. India’s savings rate has stagnated, at best, and declined at worst. The change in the base year to 2011-12 in India and failure to provide a historical time series for the new base year renders comparisons impossible. Same goes for the comparison of growth rates over time. The report acknowledges that India has a rising current account deficit (chart on page 14) but it says elsewhere that India has managed to raise its national savings rate, post-2008 crisis. Untrue.

As per official Indian data, Gross Savings/GPD ratio had dropped to 30.0% in 2016-17 from 34.6% in 2011-12. This is as per the 2011-12 basis. As per the old basis, 2004-05,  the savings rate peaked at nearly 37% (36.8%, to be precise) in 2007-08. This is as per data from RBI Handbook of Statistics. In recent years, RBI has switched to report the savings rates as a percentage of Gross Domestic Income whereas the Government still provides the GDP ratio.

MINT Edit (ht Amol Agrawal of ‘Mostly Economics’) called the decision, ‘scandalous’. It is actually stupid. No one looks at bilateral trade balances to judge a currency’s under or overvaluation. India runs a overall trade deficit. In fact, the rate at which India’s trade and current acount deficits are running this financial year, it is possible that the current account deficit reaches 3.0% of GDP in 2018-19!

Of course, the US knows that no one looks at bilateral trade balances. It is yet another arm-twisting exercise except that when it came to China a much stronger case for twisting their arms existed and both Presidents Bush and Obama ducked the opportunity.

The question for India is whether letting USDINR depreciate is a good thing since the price of crude oil is rising. Will it make a difference to India’s struggling export performance? Or, will it suck in more imports? India is already on slippery ground with its external balances and this development does not help.

The Prime Minister should tell the MoF to take this up firmly with the US Treasury and get India off the watchlist. Pushing India to let Rupee appreciate for fear of ‘sanctions’ and seeing India facing a destabilising external balances situation is not in America’s interest. It goes against the geopolitical goals of the United States in the region. There is no co-ordination or consistency of logic in the American actions.


Stuff that happened

I was at the MINT Asia-HT Leadership Summit held in Singapore on Friday, 13th April. Found Chandrababu Naidu impressive in terms of presenting his views. Of course, he was selling too hard. Nitin Gadkari was disarming and had a smiling disposition. Wish the Indian Prime Minister copied some of that. Tony Blair delivered the keynote speech after lunch. He was impressive. Had a self-deprecating humour. He is partially responsible for the mess that Iraq still is. But, one has to admit that he did come across as a thoughtful guy.

He said that politicians enter office most popular and least capable and leave office least popular and most capable!

He also recalled how Bill Clinton deftly dodged a reporter’s question on whether he was speaking to the next British Prime Minister when he was meeting with Tony Blair, then the leader of the Opposition. Either a YES or a NO would have been bad answers. Clinton was facing his own re-election in 1996 in a few months when this incident happened. He deftly said that he hoped that Tony Blair was speaking to the next President of the United States! That is really on-the-feet thinking and diplomacy.

India’s former foreign secretary Dr. S. Jaishankar made some pertinent observations on the state of play between Asia and West. He said that if Asian nations favoured a multipolar world, they should work towards multipolarity in Asia, to begin with. Second, he said that it might be premature to write off the West. I quite agree with both.

That said, writing this on Saturday, after the ‘surprise’ America-led missile attack again on Syria, one year after the last attack and the last charge that Assad used chemical weapons on his own people, I find myself nodding in appreciation that China has opposed the Western air strikes. As the British MP George Galloway told a reporter, there is no due process. In any case, how can the Western media that criticses Trump at every opportunity suddenly finds something to appove of? In their eyes, how does this one become right? The response of the journalist in this interview to the former British General is simply stunning.

Tucker Carlson of Fox News is worth watching in these two videos.

MarkGB, in his blog, has this explanation as to the real motivation behind the missile attack on Syria:

Of course your government would lie to you, they are lying to you right now. This has nothing to do with saving lives – bombing kills people. This is about preventing the Syrian government regaining total control of the country. It’s about what it’s always been about – breaking the country up, taking the oil, putting the Qatari pipeline through Syria to rival Russia’s dominance of the European oil market. It’s about keeping the region de-stabilsed so that the Apartheid regime in Tel-Aviv can take more of the energy resources in the Golan Heights…and sooner or later…take the water resources in southern Lebanon. [Link]

The real bully in the America-China trade war – part 2

Earlier in the day, I read Professor Joe Stiglitz’ piece in ‘Project Syndicate’ on Trump and the tariff threat. Predictably, he has criticised President Trump heavily so much so that the ‘darling’ of the World Social Forum now bats for free trade – which is the pet project of his nemesis, the Fund! This is the comment I posted under his piece in ‘Project Syndicate’:

Ash Carter, in an interview to ‘Politico’ in February had said that economists had not provided real answers for dealing with China. William Galston, he served in Clinton’s first term in office, says that China is yet to ratify the Government Procurement Agreement that it agreed to do so when it joined WTO in 2001. it is about non-discriminatory opportunity in government procurement.

Joseph Stiglitz, who discovered a niche for himself, opposing free trade and all the other nice things for the Fund and for Wall Street, suddenly discovers virtue in free trade because Trump is now considering imposing tariffs on China.

One thing is clear: whether or not Trump wins, economists have both lost it are still losing it.

Later in the afternoon, I read Larry Summers in FT where he says that the world is rallying behind China and not behind Trump. My response to his piece was as follows:

Mr. Summers should worry that he is on the same page as Joe Stiglitz. He can then reflect on what binds them. Is it rationality or an irrational bias against whatever Trump does.  He should read up on what Ash Carter told the interviewer from Politico on how useful (or not) economists had been to America in dealing with China.  Here is the link.

Two, he can read papers by economists Peter Schott (Yale University) and Justin Pierce (Federal Reserve) on how much the conferring of ‘Permanent Normal Trade Relations’ (PNTR) status to China mattered, for the worse, for American manufacturing employment.

Three, he might do well to have a word with William Galston who served in the first Bill Clinton term. He wrote in WSJ in August 2017 that China agreed to sign the Government Procurement Agreement – a non-discriminatory government procurement regime – when it signed up to the WTO in 2001. Sixteen years later, it had not done so. Referring cases to WTO takes years for adjudication. China knows that. That is why it now pretends to have faith in the multilateral system when it had shown very little respect for its own commitments to the WTO.

Far from calling out the real bully and asking that country to make concessions such that the threat of a trade war is averted, American economists are busy running down their own President.  That is evidence, if it were needed, that elite interest are divergent from national interests.

If proof were needed for my last satement above,  he should check out the pages 108, 161-162 and 169-175 of the monthly Harvard-Harris poll for the month of March released late March.  Here is the link.

In a pre-Trump world when no one threatened tariffs on China, inequality rose, Brexit happened, 2008 crisis happened and Trump himself got elected.

After Trump but where Trump is not in office, in Italy, Austria, France, the Netherlands, Poland and Hungary swung Right and Catalonia voted to separate from Spain.

Summers and his ilk must find answers as to why their world of free trade had no answers for these people (including for Ash Carter!) that they decided to show their helplessness, anger and frustration in the above manner.

Postscript: Indian readers might be interested to check out pages 108 and 110 of the Harvard-Harris poll. Link given above.

The real bully in the America-China trade war

My interest in this story – always high – was heightened by the series of tweets issued by Prof. Richard Baldwin against Michael Pettis for saying that trade surplus countries have more to lose from trade wars than trade deficit countries. Frankly, as a matter of principle, it is no different from the statement that expanded trade is win-win for all trading partners. But, as always, the devil is in the details. I thought Richard Baldwin protested too much, making it sound almost personal.

For Prof. Baldwin, these were the offensive remarks:

“For political reasons, China has to respond,” said Michael Pettis, professor of finance at Peking University. “But China risks an escalation. There’s an asymmetry here: trade war is extremely dangerous for surplus countries.” [Link]

Of course, a cursory glance at his tweets suggests that he is like many commentators – viewing things through the prism of Donald Trump rather than through the prism of efficacy or desirability or, preferably, both.  In his tweets, Richard Baldwin drew attention to a NBER paper of his from 2013 on global supply chains and I have dutifully downloaded it. Not read it yet.

But, just as I had not read Baldwin’s paper and hence, reacting to his tweets, it is equally possible that Baldwin had not read Pettis’ previous works and been reacting to a one-line quote in a newspaper article.

In a long paper he wrote for Carnegie Endowment in 2017, Michael Pettis wrote thus:

Some economists argue that even if there are short-term benefits to American producers and workers, over the longer-term trade intervention is harmful for U.S. productivity growth. This argument, which seems more ideological than empirical, is based on standard trade theory in which there is an implicit assumption that any intervention will drive trade performance away from its optimum, so that the United States always gains from the further opening up of its own market, even if trade partners don’t reciprocate. There are at least two problems with this argument.

First, it doesn’t seem to conform to historical precedents, most especially American historical precedents, that suggest trade intervention has indeed been a successful part of many countries’ growth strategies. In fact, with the exception of a few, small trading entrepôts whose needs are radically different from those of larger economies, it is hard to think of a single advanced economy whose period of most rapid growth has not benefitted from, or at least coincided with, trade and industrial policies.

Second, the idea that any U.S. intervention necessarily pushes the U.S. economy from an optimum in which productivity is maximized simply does not make sense. It is easy to design models that show how mercantilist policies in one country, whether intended to be mercantilist or not, can push another country away from its previous equilibrium, so that if the second equilibrium is closer than the first to the optimum, trade policies can clearly improve productivity. And if the second equilibrium is not closer, trade policies just as clearly can improve productivity if they force a return to the first equilibrium. This is just logic.

The claim that trade intervention is always value-destroying or always value-enhancing cannot be other than ideological. We must develop a framework in trade theory that recognizes the conditions under which specific interventionist policies can enhance or undermine long-term growth prospects, after which we must apply that framework to current circumstances. – Link; emphasis mine

The senence above bold-faced, is a reasonable one. Ultimately, answers to predictions derived from eonomic theories have to be empirical/evidence-based.

Before we turn to that, there are two additional observations:

(1) It is true that the United States has undertaken unilateral trade liberalisation because other interests superceded impact on employment in industries affected by imports. Pettis cites this paper and the highlighted sentence is right there in the first page:

Freer trade has its costs. The record suggests that for diplomatic and national security reasons the U.S. government sacrificed thousands of domestic jobs to create employment and prosperity elsewhere in the noncommunist world. [Link]

(2) I seem to have forgotten what I wanted to write as the second point!

In reality, whether the policies help or hurt the nations practising trade restrictions is a tough one to answer. Take this delightful article on the ‘chicken tax’. America imposed tariffs on European trucks. That benefited Detroit. But, did it really benefit America? It is impossible to make out who won and who lost and over what time frame, whether we are evaluating trade liberalisation or trade protection. Further, what is the criteria? No one is sure. Each one sets up a criteria that would help them arrive at a conclusion validating their priors.

More importantly, even if one reached the conclusion, for example, that there was net employment gain to an economy arising out of trade liberalisation, there are doubtless winners and losers. Unless winners can compensate the losers, losers will become implacably opposed to trade liberalisation. That is what is happening to America.

In fact, Pettis makes that insightful point. America has probably grown tired of exporting dollars. Its debt to foreigners is rising. Two, American households have probably reached the end of their limits on borrowing to consume. Third, the losers from free trade in America are now probably more numerically than the winners and winners have not either been able to or willing to compensate the losers. The ‘inequality’ fact is too powerful now to be ignored by politicians.

So, who will win the trade war? Many have said that China is now co-opting the messy American democratic politics in its favour by targeting the products that are made in States that voted Trump. Two calculations here: one is that the American President will be forced to pay heed to electoral calculations since the November mid-term Congressional elections are at play and the second is that his constituencies would pile up pressure on him to withdraw.

But, there are dangers to this strategy. It makes an economic issue overtly political and the other side (American) can become ‘irrational’.

Also, notice two important facts mentioned in the Bloomberg Gadfly article linked just above:

Seven of the trade categories affected relate to beef, which China resumed importing from the U.S. only last year — in minute quantities — after a 14-year ban due to fears of mad cow disease. New 25 percent duties on wheat and corn won’t do much additional damage to a trade that’s minimal given the 65 percent import tariffs that China already charges on those crops. [Link] – Emphasis mine

So, did Trump start the trade war? The answer is a clear NO. John Pomfret thinks that China has lost America:

They noted that, in negotiations with then-President Barack Obama, China’s president Xi had agreed not to turn a series of manmade islands that China had created in the South China Sea into military installations. But then China did just that.

When it came to trade, they pointed out that for decades, China had been forcing American companies to hand over technology to China in exchange for access to the Chinese market. Massive Chinese espionage directly benefited the development of China’s automotive, aircraft, information technology and defense industries. For decades, Shirk noted in an interview, the American business community served as the ballast in the U.S. relationship with China. But after years of such treatment in China, she said, many American firms are “frustrated and disaffected.” [Link]

Note the comment by James Lewis that John Pomfret  cites:

China will not change its behavior absent external pressure, and pushing back against the constant drain from Chinese IP theft is long overdue. [Link]

But, of course, China betrays no nervousness on account of external pressure. A Reuter story is explicitly headlined, “China says it never backs down in the face of threats after trade salvos with U.S.” Clearly, the bully here is China and not America.

A NYT article from 5th April that is headlined, ‘Why China is confident that it can beat Trump in a trade war?’ concedes the following:

Missing in the bluster and the propaganda are the questionable methods that China has adopted to squeeze foreign companies out of key technology markets — and the fact that in the cold-eyed calculus of economics, China is more vulnerable to a trade war than officials admit.

Exports account for a big share of Chinese economic growth. Because the United States buys so much from China, Washington has many more ways to hit Chinese manufacturers. By contrast, the retaliatory tariffs Beijing has proposed already cover more than one-third of what China buys from the United States, leaving it fewer options to strike back. [Link]

Many in America, it seems, would rather see their country lose than see Trump triumph in his confrontation with China on an issue, in which the latter has been the overwhelming culprit for a long time. Just sample some of the headlines in ‘New York Times’, or ‘Financial Times’, for example: ‘America sends mixed signals’; ‘Threat to American jobs’, etc. It is a pity.

Such headlnes dominate notwithstanding this mildly worded FT Edit that calls up on China to do the right thing first.

Ironically, this attitude of the Western elite is one sign that China has understood well and exploited. That they are now more inclined to disregard larger interests for their narrow, ego-driven goals and interests. Surely, a sign of decaying society and civilisation.

They consistently fault Trump for not building an alliance against China. Well, the United States and Europe joined hands to deny China ‘market economy’ status. With respect to trade, Germany is a worse culprit these days than China with its massive trade surplus. In any case, we must remember that the issue is not so much about trade as it is about IP theft and non-compliance with WTO membership conditions on technology transfer, etc.

James Lewis anticipates the argument that Western nations routinely stole technology from each other and so why single out China?

Sometimes you hear the arguments that the United States stole technology in the nineteenth century when it was growing and that China is only doing the same. But these arguments are feeble, and those who make them are feebleminded. In the nineteenth century, it was possible to steal a book, but with digital technologies, you can steal the entire library.

The United States was a net contributor to the world stock of knowledge in the nineteenth century, and its innovations spread to other countries, given the absence of international IP protections.

In the nineteenth century, countries recognized that inadequate protection for IP hurt global economic growth and disincentivized innovation (people invest less in innovation when their work can simply be stolen). In response, they created a series of agreements to protect IP and trade in the international market. China routinely ignores these agreements, subsidizing its own growth at the cost of global innovation. China has become a country that can innovate, but it is unwilling to give up the crutch of economic espionage and will never do so unless it is pressed. [Link]

John Pomfret, in his column in WaPo, had cited the report of the Asia Society on US policy towards China, published last March (March 2017).  From the portions devoted to trade matters:

Since 2008, the business environment in China has become increasingly challenging for foreign enterprises, deeply frustrating executives with the slow pace of economic reform and official favoritism for Chinese stateowned companies and homegrown private-sector companies. As a result, China is consistently ranked far below its peers in terms of regulatory impediments and the ease of doing business.

While there have been some successes in US-China trade talks and enforcement, too many key US objectives remain unmet….

… What is more, WTO cases take years to adjudicate, resulting in critical and unfair competitive lead times for fast-growing (and often government-supported) firms. The end result is lost market opportunities for US companies. [Link]

Now, we know why China wants to go back to WTO. It would eat up precious time. In any case, if China respected WTO, it would have honoured the commitments made to the world trade body when it joined WTO.

In the final analysis, people like Richard Baldwin and the media in America and elsewhere that is happy to take potshots at President Trump and revel in his troubles – political or otherwise do not have any alternatives to offer.

Just sample what Ash Carter has to say in the interview that ‘Politico’ had with him. He was the U.S. Defence Secretary in the Obama administration:

I believe that we have no adequate economic playbook for competition with China. Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people. [Link]

Indeed, the interview itself is proof, if it were needed, that America and President Trump have to battle their own internal adversaries in their battle versus China. More than half the interview was dedicated to Russia, another 20% to 25% was dedicated to somehow getting Ash Carter to saying something negative about his successor, about the new administration and another 20% to 25% about North Korea. The comment on China was, kind of a suo moto comment by Ash Carter himself! So much for the priorities of the elites in America.

It is really Trump vs. China with Western elites on its side.

[postscript: We should remember that American tariffs do not take effect until June and China’s countermeasures will kick in only after that.]

Bangladesh shows the way and other links

Been a bit of a blogging hiatus due to too many visitors and grading commitments. Best way to get back is to identify articles recently read and ease back. In the meantime, thanks to the recommendation of Mr. TCA Srinivasa Raghavan, I finished reading the first of the trilogy of ‘House of Cards’ – the original.

Gulzar Natarajan drew my attention to the article in ‘The Economist’ which, in the process, rubbed India’s nose into the ground. Bangladesh had gotten a grip on diarrohea.

The ‘Wall Street Journal’ piece on Trump’s outburst against Amazon made for interesting reading. Different from the conventional response. Might be behind a paywall, though.

Manas Chakravarty has an interesting take on the philosophy behind the Modi Government’s policy initiatives. He calls it ‘creative destruction’.

A good article in ‘Business Word’ on the coincidental benefits that accrued to the venture owned by Chanda Kochchar’s husband after ICICI Bank extended a loan to Videocon. Videocon has defaulted. Investigations are on.

A good piece on how Cape Town is managing the water crisis because of three consecutive droughts. Is Bangalore ready?

Man Booker Prize changes the nationality of one of the nominees for the awards, since he hailed from Taiwan!

Jose Antonio Ocampo’s book, ‘Re-setting the international monetary (non) system’ is available for free download here (ht: Shri. Rakesh Mohan, former RBI Deputy Governor).

In the process, I came across this book. Gasp!

Why and how Finance sucked up (or, sucks up) engineering talent

I had posted the following comment in response to this article in FT:

Much of the comments on this article focused on the micro behaviour of individuals who chose to join financial institutions and hence were, for the most part, defensive about their behaviour and hence, critical of the article. But, that lens is the wrong one.

The article points to a paper that highlights the attractiveness of finance to engineers as opposed to other jobs that were more suited to their education. It is a social phenomenon and the responses have to be in the policy domain, if it is established that there has to be a policy response. As individuals, engineering graduates who joined the banking industry were doing the sensible thing for themselves and their families. This commentator and Andrew Hill would have done the same, in all likelihood. But, we need to move away from that frame.

Why did finance attract so much talent? A corollary question that poses itself is why was finance able to pay so much that talent flowed to it? Well, finance made so much of profits that it was able to pay. Actually, the attraction of talent, high wages and profits became mutually reinforcing trends later. But, what was the source of profits?

Finance, in modern times (post-1980s because that is when financial liberalisation, de-regulation and liberalisation of capital flows started in right earnest), has not been doing anything unique in comparison to the past.  It facilitated much secondary trading of financial securities. But, the compensation for it has come down considerably and the fees for active asset management have, for the most part, proven to be wasted and wasteful compensation. So, what was the source of it?

Andrew Haldane, in his contribution to the volume, ‘The Future of Finance’ published by the London School of Economics in 2010 (‘Contribution of the Financial Sector: Miracle or Mirage’) has pointed out that finance generated extraordinary profits because it wrote deep out of the money options (think Credit Default swaps and sub-prime securitisation). Deep out of the money options earns premium for the writer but once in a while these options get in the money and the writer has to pay up to the options owner. That is what happened in 2008.  Second source of profits was that much of the profits were risk-unadjusted. One source of risk is that many assets were valued as per models and hence shown at fair value. Second source of risk is high leverage ratios in investment banks’ balance sheets. The third arose out of creating products that, willy-nilly, drew the buyers into the web of financial leverage. In fact, that is where the engineering talent was needed.

High profits were required to maintain stock valuation in deference to the pressures exerted by institutional investors. Second, compensation of higher executives was linked to stock price performance. Hence, showing consistently rising profits was an obligation. That required generation of complex financial products which, though based on complex mathematics, were essentially built on unsuspecting clients assuming financial leverage. Developing these products required engineering talent. Ergo, the phenomenon that the paper and the article cover.

Now, the question for policymakers is whether any of this is welfare enhancing. Evidently, they are not. Their welfare-destruction was evident in the crisis of 2008. Have the policy responses changed the demand for engineering talent and the attraction of finance to such talent? Not much, if at all.

So, this is a socially negative phenomenon even though it is positive at the personal level, somewhat like the paradox of thrift that Keynes had discussed, in a different context.

In this context, it is worth noting that Bloomberg reported last evening that bonuses in Wall Street reached their highest level since 2006.

Getting off the arm-chair

These two articles remind us of where our utility as public policy commentators lies.  Real (intellectual) discoveries (epiphanies, in a way) await us when we dig deeper. The first article tells us of the author’s discovery that gun control is probably not the answer to the United States’ gun related violence.

The second story is about a Harvard Medical School study that looked into U.S. health care that is much derided.

It is a coincidence that these wo articles came into my space on a day when my column in MINT dealt with the real issue behind India’s declining Gross Fixed Capital Formation to GDP ratio. It is not, as we think, because of businesses not investing. It is because, as per official data, household capital formation has stalled. Household capital formation has stalled because household savings rate has really dropped from 25.2% in 2008-09 to 16.3% in 2016-17.

That does merit a proper investigation as to the causal factors. In my column, I allude to one: failure of the governments to provide public goods necessitating private expenditure on them. So, household savings and GFCF failure is governance failure and not ‘jobs’ failure. The column is here.