India: The Bungling Democracy

I have argued on this blog here and other posts that India and China represent a natural experiment that will help to answer the question about the place of democracy and authoritarianism in longer term development. In short, my claim has been that in spite of a slower rate of growth and a smaller economy, India is bound to catch up soon and will over time become a large economy owing to its more open political system. In sum, the argument is that democracy is not necessarily a hindrance to India's long term growth and that China will of necessity have to go through bumps that may derail it substantially.

In spite of my being bullish about India, reading stories such as this in the NYT makes me really frustrated at India's political leadership. Granted that the Congress party has to navigate in order to keep its coalition in place, I cannot avoid the argument that India's growth is slowing and that it does not show any signs of catching up with China at all. Indeed, in spite of China's own domestic political and economic difficulties, India's leaders still have an inferior record of economic management. In many respects, the benefits that India gained from the bold economic reforms initiated under Manmohan Singh two decades ago are exhausted now and he lacks either the courage or the ability to make another long-overdue round of reforms to open up the economy. 

Given the state of affairs, it is just possible that India's catch up period will be unduly extended because of the delays in cutting back red tape and substantial regulatory and tax reforms. On the political side, India's bungling, in spite of the fact that it has an indubitably bright man as prime minister will embolden those who consider democracy as a liability for fast growth. Please get up and sprint!

 

Contrasting Income Growth for Africa and Asia

Keen observers of the growth trajectories of countries cannot help noticing that apart from the larger economies in Asia, sub-saharan africa has registered unprecedented growth levels in the last decade. The argument is relevant because one of the major problems that the latter region has had is the inability to hold on to an upward growth momentum for meaningful periods of time. Instead, Africa's example has been fluctuations of growth rates that coincide with commodity price changes. The summary of this experience from the mid-1970s is that dependence of petroleum and agriculture-based commodities is not a reliable path to growth and improvement of welfare. 

And that's why the contention is that it is yet not possible to state with confidence that sub-saharan Africa has overcome the mix of economic and political problems that it faces. That brings me to this fascinating article in the East African which makes the credible and well-based claim that the countries in the eastern region of africa will be leaders in overall growth in the coming two decades. It is an article worthy of reading because it is based on a complicated but sensible method for assessment of the complexity of an economy and concludes that the countries of the region under reference have economies that are more complex and diverse in production than is warranted by the incomes today. 

The author of the article concentrates on a list of manufacturing firms to illustrate the claim derived from the index of complexity. it is less clear to me that all these firms confer a comparative advantage to the region because it is unlikely that all are able to compete internationally. My view is that given the fact that manufacturing industry is a smaller proportion of the overall GDP of these countries, there is scope for growth but not necessarily for all existing firms. A final point that is worthy of note is that in spite of the prediction that the region will lead in GDP growth, it will still fall behind India and China in respect of per capita income growth. I think the reason is that this region has a large and youthful population and is expected to maintain strong moderately population growth for a few more decades.  

Is China Really As Powerful as the US?

Judging from the immense trouble that president Obama of the United States is having in getting politicians to work behind a coherent and mutually agreeable plan, one can safely assume that the country is bound to delay recovery and have its preeminence in the world eroded. This state of political discord has not only led to concern about the functional health of that political system but that this undermines the nation's ability to deal with big problems related to large deficits and long-term problems in financial undertakings.

In spite of the undoubted disfunction in the political process and its effects on the economy, I maintain that the US still has some time before any economy, china included, can get to surpass it in factors of material economic and military dominance. Simon Johnson, writes in this article that a book that is due for publication later in the fall suggests that China may have already surpassed the United States in world dominance. To be clear, the author of that book, Arvind Subramaniam, is a vey competent academic and his views ought to be given serious reflections before reply. That notwithstanding, I still applaud China's very successful development experiment over three decades but it is unlikely that it has surpassed the United States yet.

Looking at the World Bank's latest data on Gross National Income (GNI) on  a per capita basis still leaves China at one tenth of US equivalents in nominal terms. to my mind, given the extreme importance of total income in determining dominance in scientific, commercial and cultural affairs, I think that China's dominance may be real but it is not yet close to the United States today. I will read the book after its publication and comment on the claims and data deployed to support the claim.  

Yasheng Huang Tells The India Vs China Story

Many comparisons of the development experiment between China and India and pitch conveniently on the side that commentators favour. As a result, there is very little clarity of thought about why China has indubitably raced ahead of India in economic growth, notwithstanding the absence of liberalization on the political affairs in China. Many people therefore readily assume that India's main problem seems to be its extremely open political system which makes it a disadvantage in terms of quick execution of development plans. Yasheng Huang's presentation to explain the differences is a tour de force in the TED talk below on that subject in which confusion and cliche's have endured.

 

As Huang maintains, it is a fact that India has not done so poorly but has been compared with a ver successful China. It is equally instructive that the slow reform in social policy that would register achievements for India's women is a critical barrier to its ability to compete.  

Nobel Peace Prize 2010

I knew very little of Liu Xiaobo when the committee announced that he would receive the award for the year's Nobel Peace Prize. And while I am completely impressed by China's achievements in some respects,  Sarah Lyall of NYT wrote about the ceremony that should have been a celebration but was more melancholic on account of the unoccupied chair reserved for the laureate. And while I still do not much about the recipient, the diplomatic response of the government has educated me about Mr. Liu Xiaobo's country and why his work is important.

Currency Manipulation Has Limits

Reading many analyses of China's export performance today, I always wonder that everyone has an opinion on the merits maintaining a low exchange rate as part of trade policy. to my mind, many people are probably misreading China's export competence as entirely driven by currency manipulation and this may lead to a policy disaster before long. Ttrue, maintenance of a low exchange rate vis-a-vis the US$ has allowed China to maintain a trade surplus for a long time. Opinions are understandably divided whether the US should try and coerce China to revalue its currency appropriately or whether as Anatole Kaletsky states in the NYT here, this is part of the new Asian model of growth and development that the US would be well advised to learn to accommodate.

While I have not studied currency pegs much, it is clear to me that the copy cat tendency of mostly Asian countries in competing in currency manipulation so as not to lose export opportunities can only work for so long. For all China's capabilities, it is unlikely that a low currency alone will ensure all anticipated growth for all time because of the ability of other competing nations to engage in the race to the lowest currency. Tim Webb of the Guardian newspaper states that Brazil has already thrown out an alert to the possibility that further aggressive manipulation could result in a "currency war". Brazil may not be China but given the copy cat effect of currency manipulation and the rush to ensure exports, this policy will not be effective for most of these players for long because it is far too easy to copy.   

Motorized Bikes in China

I still maintain that the world's largest experiment in human and economic development is going on in Asia and squarely involves the Chinese and Indian people. To my mind, these two countries are placed to prove to the rest of the world that large-scale human development is possible. By no means do i think that the success of either is inevitable but China in particular has done much better.

As recorded in this post a long while back, China's main cities have faced the problem of traffic congestion and opted to ban motor bikes and motorized bicycles ostensibly because they encouraged crime. It seems that in spite of the ban, motorized bicycles are still the rage in China and that there is public preference for this mode of transportation in urban areas. To my mind, this story in the Economist magazine demonstrate how difficult it is to completely kill and industry. Chinese firms are not only exporting large sums of bicycles throughout the world but local consumption and preference for them is growing.

Adding to the preference for bikes is the fact that they are perceived to contribute less to pollution in comparison to automobiles. The moral of the story is that controlling congestion requires a far more complex cost-benefit calculation than was envisaged.

Can India's Democracy Sprint?

In the last couple of days, two pieces in the NYT have drawn me to consider my contention about how a large democracy manages the messy business of governing effectively. Reading this story covering the political economy issues facing the privatization process in India reveals the difficulty of making a definite transition from a socialist orientation towards a more market driven economy. I have no doubt that India needs to deepen economic reforms by undertaking privatization in order to ensure that resource allocation in that economy occurs through the market mechanism. No country could maintain efficient resource allocation where enterprises owned by the government collectively contribute 45% of GDP.

And yet the divestiture programme that has raised nearly US$ 3.5 billion in the last ten months alone still faces the hurdles because of the strength of political parties and monopolies that benefit from the high degree of government influence in the economy. That story suggests that in spite of the obvious success and the good timing, opposition to privatization may delay government divestiture programme. To my mind, while India is large and finally growing at impressive levels, it is unlikely to match china's growth levels unless the second generation of deep economic reforms are undertaken and the divestiture programme substantially advanced.

A second piece here tackles the related issue of large deficits and the need to curb expenditure by the Indian government. While it is clear that controlling high debt situation demands either the reduction of expenditure or hike in taxes, the Finance Minister in India seems to be at pains to sell these alternatives to politicians who are opposed to both alternatives. This situation too highlights the general frustration that people have with democracies because decision making requires wide consultation during which populism often takes over and delays sensible economic policy.

In earlier blog posts, I have often stated that my long term bets are laid with India because of the overall value that democracy confers. I maintain that bet though it is clear that given the speed of economic policy making in China, India is very slow and chaotic.

Keep the Pyjamas At Home

Together with the general interest in the great development achievements of the People's Republic of China, I have maintained an interest in the odd and freedom-inhibiting regulatory provisions that countries maintain. Some of these blog posts such as this, have commented on the ingenuity of China's local bosses in designing laws and provisions with interesting outcomes. I have just stumbled upon another story which confirms that city officials in Shanghai have started a campaign to dissuade Chinese citizens from wearing their pyjamas in public.

This is interesting to me for two reasons. First, my libertarian instincts lead me to ask so what if a person chooses to wear pyjamas on the side walks. Indeed, they would probably look quite odd though it is possible that they may start a fad which is helpful for a major manufacturer and exporter of textiles. As a second point, this is worrisome because while there is no law yet, it suggest that some bureaucrats are obsessed with creating impressions to foreigners and are less mindful of the implications for individual choices.

Noting that the samples of pyjamas worn by the two men in the picture accompanying that story are quite decent, I still contend that a drive to impose behaviour on individuals just because the country is hosting an international event betrays a bureaucracy that is filled with busy bodies. Given Shanghai's place in the continuing economic development miracle achieved by China, one would think that bureaucrats in that city understand the opportunity costs of raising a campaign to stop people going about the sidewalks in clothes of their choice. With tongue in cheek, would one face the same scrutiny if the choice of pyjamas was from this Piero Galante store?

Will Google Leave China?

I confirm that I am one of those who has been implacable about Google's decision to accept the compromise of its pure search engine by adjusting it in order to make China's politicians comfortable and thereby gain entry into that country. To start with, this flexibility displayed a betrayal of Google's longstanding and declared principles so that it may have a chance to introduce a dedicated search engine in that large market. With that background, I was quite pleasantly surprised to learn that in a statement issued on the official Google blog here, Google declared that it intended to adopt a new approach to China. The genesis of this rethink relates to a serious of stealth attacks on its corporate servers and the loss of unspecified intellectual property. Of equally great concern is the fact that the privacy of some Gmail users was compromised by persons in China. the seriousness of this public information is the statement towards the end that Google China will shortly cease to censor any searches conducted through the service and that it would shut down Goggle.cn if an amicable settlement with the government does not obtain.

As a starting point, I would think that Google and China are examples of how small corporations and a large country could build deserved success by doing things sensibly and obeying a number of laws that respect markets. However, in the approach to freedom, it is clear to me that in spite of its success, China could do a lot more to expand individual freedom to complement the many things that it has done right over three decades.

Many cynics see Google's uniquely bold action as a desperate move for a corporation that is leader in search almost everywhere save in China. I think that this reasoning is a rather naive because even a second place in a fast growing China is still a good position for Google. While I am disappointed with the political risk analysis that Google received in trying a failed placatory approach, it is important to note that Google seems to think that as business with a commitment to some ethics, it may still withdraw and forgo the market even in a large economy as China's. While I hope but would not bet that Chinese leaders would consider this issue clearly, I am obliged to agree with Nicholas Kristof that Google's exit would be China's loss in the long term. To my mind, it would reflect the fact that China's leaders are frightened by the fact that its citizens may use Gmail and the search engine. That would not provide confidence for managing an increasingly growing and complex society.

China's Ingenious Local Bosses

As a curious watcher of the development experiment going on in China, I have found the ingenuity of its public sector officials quite illuminating. I stated this here on the tendency to introduce rules and regulations without much forethought or careful design. The thought that came to my mind after reading this story in the NYT relates the immense power that local bureaucrats wield in that large country. As the story states, most of these rules are arbitrarily issued by local officials who bear substantial local power and often with very little oversight and external accountability. It is therefore not surprising that the a local official in Huangping has instructed pupils to salute all passing cars while on their way to school.

Notwithstanding the fact that it is possible to ensure traffic safety in other less intrusive ways, the officials who introduced this rule are defending it as a mechanism for instilling good etiquette and for road safety of the school children. I just wonder whether road signs, some speed bumps and training on road safety for kids is insufficient. As various instances of strange regulations show, this state of affairs merely manifest the extreme levels of discretionary powers that local party officials wield. It does not occur to them to consider equally effective and less risible ways for managing public affairs.

This state of affairs is largely consistent with claims stated in a book titled, "Will the Boat Sink the Water?", which I read a couple of months ago. Its metaphorical title aside, its authors have crafted a series of stories illustrating the level of exploitation and harassment of China's peasants in one of its provinces. In all, it tells the state of affairs that many people fail to see when they merely visit Beijing and the main industrial cities. And the poignant question in my mind is that despite the unprecedented successes that China has made, it shows that very tight and accountable authority undermines the development process. Such wide and unaccountable discretion leads to regulatory overreach and silly rules that school kids like to make fun of.

The Vanishing Envelopes of China

Looking at Chinese progress throughout the last two decades, it looks as if it has a very competent government and public service generally. Now, this story in the NYT is one that reminds about the ridiculous things that happen in that otherwise impressive economic growth story. It chronicles the life of Xue Longlong and the loss of his certificates due to what officialdom describes as misplacement and which increasingly looks like something really corrupt. As the story states, it appears that the ability to validate academic qualifications rests entirely with public sector workers and that records throughout a student's career are kept in a single file kept throughout one's life. The risk associated with these seem to escape the bureaucracy or perhaps some in its understand that once all the records are in one place, then it is easier to purvey them corruptly.

To my mind, this suggests a simple lesson that should be clear to any bureaucracy. Highly centralized systems may appear effective in getting people to do big building projects but it is not necessary to keep the record of millions of students in one place and in a single institution. I am at a loss when I consider China's population and imagine that any one person's records can only be verified through a single office. This is a failure of centralization taken too far because academic qualifications should be verifiable from the institutions that offered the courses. In which case, there would be a distributed network of offices bearing different records that could be used to build a composite picture. To my mind, there's good reason for the rise of a number businesses that would reliably verify academic qualifications.

The most surprising bit is that the China's private sector continues to rely upon the public officers to confirm individual capability when it ought to be clear to them that these are corrupt. The best way out is for them to show less respect for the brown manila envelope an ask Mr. Xue Longlong's University to verify his academic qualification. To continue to insist on the production of that Brown envelope allows the corrupt market to thrive.

Africa Finds that Looking East is not Enough

In the area of international trade and cooperation, the language in Africa is heavily accented with the phrase, "Looking East" meaning that many African nations consider that China is a better trade partner in comparison to high incomer countries of the West. Apart from the slogans, a proper investigation of Chinese involvement in Africa revealed that this was majorly concentrated in nations with huge natural resource endowments. Seeing in this a strategy, it is clear that China's quest was to ensure that its rapid growth rates are not slowed down or halted by the huge demand for petroleum and other commodities that selected African countries have had in abundance.

Thus it appears that African countries and China had found a perfect diplomatic and commercial fir for their relations as China eschewed demands for democratic reforms and high standards of public sector management. In the last decade, the total volume of growth between China and countries in Africa grew phenomenally. In general terms, the structure of this trade represented commodity imports for China with development assistance to facilitate infrastructure construction coming with ,manufactured exports flowing into Africa.

This issue was addressed in this blog post in response to the assumption that China was emerging as Africa's new colonial power. That post is now vindicated as it is clear from this article in the NYT that Guinea, the Democratic Republic of Congo and other resource rich countries from Africa are facing a pull-back from China due to the instability of these countries and the collapse of the commodity prices worldwide. More than ever, it is evident that China's engagement was not a special bond but was driven by pragmatic concerns to construct infrastructure that allows for the extraction of petroleum, bauxite or Iron ore. To its chagrin, Africa will realize that it is not special at all and must conduct its international affairs more rationally than to try and play China against the Us and Europe. For as the referenced blog post states, China definitely needs the US and Europe more than it needs Africa.

Is China Africa's New Colonial Power?

Africa is the second largest continent in the world and together with south Asia indubitably the ones with the most indigent people. There are a number of preposterous and sensible arguments trying to explain the hopelessness in the continent. Without attempting to identify a singularly important factor, it is clear that African countries collectively and individually have been receiving very little Foreign Direct Investment. And where such FDI is available, it is often directed to select countries that are largely endowed with natural resources and therefore not sufficiently diversified.

China has attracted interest by investing quite heavily in Africa over the last decade. Indeed as argued in this piece in the Irish Times, the value of trade between China and Africa has grown nearly sevenfold from €6.75 billion to more than €47 billion between 2000 and 2007. As expected for a continent that is bereft of proper infrastructure, most of the the Chinese investment is in resource rich countries such as the Democratic Republic of Congo, Nigeria, Sudan, Angola and Zambia. There is also expansion in construction of roads and railways but it is clear that infrastructure makes it easier for the extraction to occur by connecting to the ports.

The controversy arises from the concern that China appears to be particularly friendly to some of the most corrupt and brutal regimes in the continent. Chinese investment, while it appears to take the form of mercantilism, should be welcome even if the justification from African leaders shows poor understanding of the ingredients for sustained growth. It is certainly wrong-headed to believe that China on its own will drag the entire continent into growth through its investment principally because China is itself still a lo-income nation. Secondly, the thinking that China is either a counterweight or alternative to the West is completely false because China has benefited immensely from export markets in the west and will continue to need that to maintain its growth. For all its endowment with natural resources and business opportunities, China needs Africa's markets less that it needs those in the EU and North America. Africa's best bet is to expand investment opportunities with both sides.

One must understand Africa's desperation for new investment and the benefits of trade with China. In spite of this fact,sub-Saharan African countries are well-advised to consider opening up as China did to other investors too. China is neither an African country nor is it capable of leading to Africa's economic development and diversification all on its own. The pattern of its trade and investment together suggests that these are driven by the need to expand its markets and to secure natural resources. More importantly though, African countries should recall that they are not a monolithic whole and the benefits from trade and investment with China will require domestic political and economic reform. The former of which China will not insist upon but is indispensable for sub-Saharan Africa's leap.

Many Hands Contributed to Olympics Success

As I stated earlier in this blog post, my visit to Beijing early in the year led me to the the conclusion that China would be a wonderful host for the Olympics games this year. During the very brief visit confirnmed to the host city, I understood that the government generally and most of the Chinese people I spoke too considered the hosting of the games as an opportunity to present a face of competence and national confidence in spite of the controversy in Tibet and the demonstrations that accompanied the torch relay in some cities and countries outside China.

For that reason, articles such as this by Christie Blatchford in the Globe & Mail are merely rehashing the obvious. In choosing to highlight the attention accorded to the bathrooms during the games, the piece fails to understand that China merely chose to leverage on its advantage in a huge labor force. This is unsurprising for a person with a minimal understanding of factor prices because China's huge population necessarily means that labor is comparatively cheap hence it is possible to deploy between 3 to 6 people in charge of a single bathroom block. I noted during my visit that even small shops tend to be manned by a large number of people in the city and this is a reflection of that endowment. It is unlikely that with the higher costs of labor in London, that the same number of people will be available to perform the same tasks.