India’s Demographic Dividend is Collapsing

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Sometimes we get accused of being a stuck like a broken record. But then how else does one follow an issue of utmost importance to a nation, without saying the same things over and over again.

A few days back, The Economic Times reported that the Indian Railways had received a record 1.5 crore applications for 90,000 vacancies. This is the highest number of applications that the Railways has ever received. These are vacancies in Group C and Group D categories, with salaries ranging from Rs 18,000 to Rs 60,000.

Of the 90,000 jobs, around 63,000 jobs are in the Group D category, which includes the job of a gangman. Around 26,500 jobs are in the Group C category, which includes jobs of loco pilots and assistant loco pilots.

The last day of the application is March 31, 2018.  “The number could cross even two crore as there’s still a lot of time to file application,” a senior railway ministry official not willing to be identified told The Economic Times.

Around 167 individuals are competing for one job. If the number of applicants goes up to 2 crore, then 222 individuals will compete for one job in the Indian Railways.

This is India’s demographic dividend, competing for a government job, when barely any are going around. Nearly two million people cross the age of 14 every month in India. Potentially, all of them can join the labour force to look for a job. But all of them don’t. Some people continue to study. A bulk of the women do not look for a job. After adjusting for this, and folks leaving the workforce through retirement, nearly a million Indians join the workforce every month i.e. 1.2 crore a year, which is around half the population of Australia and two and a half times, the population of New Zealand.
A recent estimate made by the Centre for Monitoring Indian Economy suggests that in 2017, two million jobs were created for 11.5 million Indians who joined the labour force during the year.

Of course, the Indian Railways example cited earlier is just one example which shows the lack of jobs for the Indian youth entering the workforce every year. A random Google search will tell you that this is not an isolated example. A late January 2018 newsreport in The Times of India points out that, engineers, law graduates and MBAs were among the 2.81 lakh people who applied for 738 peon posts in Madhya Pradesh.

Another newsreport which appeared in The Indian Express in early January 2018 pointed out that at least “129 engineers, 23 lawyers, a chartered accountant and 393 postgraduates in arts were among 12,453 people interviewed for 18 Class IV posts — in this case, for jobs as peons — in the Rajasthan Assembly secretariat.”

Imagine, if 12,453 individuals were interviewed for 18 posts of peon, how many people would have applied in the first place?

Another newsreport in The Telegraph points out that 1,000 people turned up for three data entry posts that the Odisha University of Agriculture and Technology (OUAT) had advertised for. As the newsreport points out: “While the required qualification for the post was graduation with mandatory knowledge of computer, candidates with BTech, MCA and law degrees turned up for the job interview.”

These are not isolated news stories. Such stories have appeared in the media regularly over the last few years. They are the best example of the fact that there aren’t enough jobs going around for India’s youth, the country’s demographic dividend.

As the Fifth Report on Employment and Unemployment points out: “The Unemployment Rate for the persons aged 18-29 years and holding a degree in graduation and above was found to be maximum with 18.4 per cent based on the Usual Principal Status Approach at the All India level.” Also, the Usual Principal Status Approach considers anyone working for a period of 183 days or more during the course of the year, as employed. Hence, a person could be unemployed for 182 days, and still considered to be employed.

In fact, in a recent answer to a question raised in the Lok Sabha, the government basically pointed out that the more educated an individual is in rural India, the more difficult it is to find a job, in India. Take a look at Table 1.

Table 1:

Educational classification Unemployed
Not literate 2.3%
Primary 3.3%
Middle/Secondary/ Higher Secondary 3.7%
Graduate & above 23.8%

Source: http://164.100.47.190/loksabhaquestions/annex/14/AU1385.pdf
As the 12th Five Year Plan (2012-2017) document pointed out: “One hundred and eighty-three million additional income seekers are expected to join the workforce over the next 15 years.” This essentially means that a little over 12 million individuals will keep joining the workforce every year, in the years to come. This works out to around one million a month. And at this rate, the Indian workforce is expected to be larger than that of China by 2030.

And this is India’s demographic dividend. As these individuals enter the workforce, find work, earn money and spend it, the Indian economy is expected to do well. This will put India on the path to faster economic growth, which will eventually pull millions of Indians out of poverty.

The demographic dividend is a period of a few decades in the lifecycle of nation where the working population expands at a faster pace than the overall population. As the working population gets into the workforce, finds a job, starts earning and spends money, all this creates rapid economic growth, which pulls millions of people out of poverty. At least that is how it is supposed to work in theory. In India’s case it isn’t.

How have things been with other countries been in the past? Have countries which were expected to benefit from the demographic dividend benefitted from it?

As Ruchir Sharma writes in his new book The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The trick is to avoid falling for the fallacy of the “demographic dividend,” the idea that population growth pays off automatically in rapid economic growth. It pays off only if political leaders create the economic conditions necessary to attract investment and generate jobs.” This has clearly not happened in India, with the investment to GDP ratio constantly falling over the last decade.

Sharma then talks about the Arab world which despite being poised to, did not benefit from a demographic dividend. As Sharma writes: “The Arab world provides a cautionary tale. There between 1985 and 2005 the working age population grew by an average annual rate of more than 3 percent, or nearly twice as face as the rest of the world. But no economic dividend resulted. In the early 2010s many Arab countries suffered from cripplingly high youth unemployment rates; more than 40 percent in Iraq and more than 30 percent in Saudi Arabia, Egypt, and Tunisia, where the violence and chaos of the Arab Spring began.”

So, what is the way out for India? The answer as we have said over and over again in our previous columns, is the export of low-end manufacturing goods. This is something that India has missed out on. As Sharma said in a recent conference: “If you look at the success stories across the world, their key to success was all the same thing which is they all exported their way to prosperity. They exported their way to prosperity by producing low end manufacturing goods. It is low end manufacturing goods where you end up getting a huge amount of employment growth as well.”

Given that India has missed the manufacturing bus, jobs are hard to come by. As Nobel Prize winning economist said in a recent conference: “India’s lack in the manufacturing sector could work against it, as it doesn’t have the jobs essential to sustain the projected growth in demography. You have to find jobs for people.”

All this leaves us with the question, what does the future have for India? Pakodas we guess.

This column originally appeared in Equitymaster on March 19, 2018.

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Mr Stiglitz, India’s Obsession with Inflation is Correct

DAVOS-KLOSTERS/SWITZERLAND, 31JAN09 - Joseph E. Stiglitz, Professor, Columbia University, USA, at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 31, 2009. Copyright by World Economic Forum swiss-image.ch

 

Joseph Stiglitz, a Nobel prize winning economist, had some advice for Indian policymakers last week. Speaking in Bangalore, Stiglitz said: “Excessive focus on inflation almost inevitability leads to higher unemployment levels and lower growth and therefore more inequality.”

The point that Stiglitz was making is that the government of India should spend more than it currently plans to. Further, the Reserve Bank of India(RBI) should cut interest rates further and encourage people to borrow and spend more. Of course, all this extra spending will lead to some inflation, with more money chasing the same quantity of goods and services. But that will be a small price to pay for economic growth. This economic growth will lead to lower unemployment and in the process lower inequality.

This is precisely the kind of argument that was made during the Congress led United Progressive Alliance(UPA) regime, to justify the high rate of inflation that prevailed between 2008-2009 and 2013-2014.

The trouble is that there is enough evidence that suggests otherwise. Over the last five to six decades, countries which have grown at a very fast pace, have had very low rates of inflation.

As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The miracle economies like South Korea, Taiwan, Singapore, and China, which saw booms, lasting three decades or more, rarely saw inflation accelerate to a pace faster than the emerging market average. Singapore’s boom lasted from 1961 to 2002, and during that period inflation averaged less than 3 percent.”

The same is the case with China. As Sharma puts it: “In China, the double digit GDP growth of the last thirty years was accompanied by an average inflation of around 5 percent, including an average rate of around 2 percent over the decade ending in 2010. China saw a brief surge in inflation in 2011, and economic growth in the People’s Republic has been slumping steadily since then.

The point is very clear, inflation is not good for economic growth. There is enough evidence going around to show that. The same can be said in the Indian case as well, when the inflation surged between 2008-2009 and 2013-2014. It ultimately led to economic growth collapsing.

Year Inflation (in %) Economic Growth (in %)
2007-2008 6.2 9.32
2008-2009 9.1 6.72
2009-2010 12.37 8.59
2010-2011 10.45 8.91
2011-2012 8.39 6.69
2012-2013 10.44 4.47
2013-2014 9.68 4.74

 

In 2007-2008, inflation was at 6.2 per cent and the economic growth came in at 9.32 per cent. In the aftermath of the financial crisis that started in 2008-2009, the union government increased its expenditure in the hope of ensuring that the economic growth did not collapse.

The government expenditure budgeted for 2008-2009 was at Rs 7,50,884 crore. The final expenditure for the year was at Rs 8,83,956 crore, which was around 17.8 per cent higher. The expansive fiscal policy led to inflation, which in turn led to lower economic growth in the years to come.

The increased government spending led to high inflation in the years 2009-2010 and 2010-2011, but at the same time it also ensured that economic growth continued to stay strong in the aftermath of the financial crisis. Nevertheless, high inflation ultimately caught up with economic growth and it fell below 5 per cent during 2012-2013 and 2013-2014.

The point being that extra spending and lower interest rates leading to inflation might help bump up economic growth in the short-term, but over the longer term it clearly does not help. What made the situation even worse was that RBI did not get around to raising interest rates as fast as it should have.

As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “Since fiscal policy was expansive, the job of demand-side inflation control was left to the RBI. Given the strength of both demand and cost-push forces, monetary policy would have had to be tough to be effective. Put bluntly, the RBI muffed it. It took a softly-softly approach to raising interest rates. While this may perhaps have been understandable because it feared hurting investment and growth, it is surely no surprise that inflation proved to be persistent.”

High inflation also leads to a situation where the household financial savings fall. This is precisely how things played out in India. Between 2005-2006 and 2007-2008, the average rate of household financial savings stood at 11.6 per cent of the GDP. In 2009-2010, it rose to 12 per cent of GDP. By 2011-2012, it had fallen to 7 per cent of the GDP. In 2014-2015, the ratio had improved a little to 7.5 per cent of GDP.

 

Household financial savings is essentially a term used to refer to the money invested by individuals in fixed deposits, small savings schemes of India Post, mutual funds, shares, insurance, provident and pension funds, etc. A major part of household financial savings in India is held in the form of bank fixed deposits and post office small savings schemes.

A fall in household financial savings happened because the real rate of return on deposits entered negative territory due to high inflation.

 

This led to a situation where savers have moved their savings away from deposits and into gold and real estate. As RBI governor Raghuram Rajan said in a June 2016 speech: In the last decade, savers have experienced negative real rates over extended periods as CPI has exceeded deposit interest rates. This means that whatever interest they get has been more than wiped out by the erosion in their principal’s purchasing power due to inflation. Savers intuitively understand this, and had been shifting to investing in real assets like gold and real estate, and away from financial assets like deposits.”

If a programme like Make in India has to take off, low household financial savings cannot be possibly a good thing. This hasn’t created much problem in the recent past, simply because bank lending to industry has simply collapsed. Banks (in particular public sector banks) are not interested in lending to industry because industry has been responsible for a major portion of bad loans in the last few years.

But sooner or later, this situation is going to change. And then the low household financial savings ratio, will have a negative impact and push interest rates up. In this scenario, it is important that inflation continues to be under control and the real rates of return on deposits continue to be in positive territory. That is the only way, the household financial savings ratio is likely to go up.

As Joshi puts it: “In today’s world of low inflation, India’s long-run inflation target should certainly be no higher than 4 or 5 per cent a year.” And that is something both the RBI as well as the union government should work towards achieving and maintaining.

The column originally appeared in Vivek Kaul’s Diary on July 12, 2016

Of Venkaiah Naidu, Air India and Privatisation by Malign Neglect

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Yesterday afternoon something weird happened on Twitter.

An irate flyer sent out four tweets against Air India. No it wasn’t me. Here are the four tweets:

1) I had to travel to Hyderabad by Air India AI544 which is to depart at 1315 Hrs… was told on time…reached airport by 1230 Hrs.

2) was informed at 1315hrs that flight was delayed as d pilot had not yet come.Waited up to 1345 Hrs, boarding didn’t start. returned 2 home.

3) Air India should explain how such things are happening. Transparency and accountability are the need of the hour.

4) Hope Air India understands that we are in the age of competition. Missed an important appointment.

The tweets were sent out by senior BJP politician and the Union Minister for Urban Development, Housing & Urban Poverty Alleviation as well as Parliamentary Affairs, M Venkaiah Naidu. Naidu is a heavy weight in the Modi government. The fact that he took to Twitter to criticise the government owned airline means he must have been extremely irritated by the airline’s failure to depart on time.

Air India replied in true government style saying that the pilot was stuck in a traffic jam and an enquiry had been ordered. (I wonder why pilots of other airlines do not get stuck in traffic jams?)

Minister Naidu got a feel of what happens when people travel Air India. This is a good thing where the politicians and the bureaucrats get a feel of how the system they help build and run, actually works.

As Reserve Bank of India governor Raghuram Rajan, had said in a speech sometime back: “A lot of officials, including myself, learn the difficulties of working in India as an ‘aam aadmi’ only once we leave office, lose the assistant, the assistant to the assistant, and the assistant to the assistant’s assistant. Post retirement, and I have seen this with all the people I know, they realise the system is much harder to deal with.”

It was Naidu’s opportunity yesterday to have that kind of day. The sad part is that those who run Air India still don’t get it. The airline has managed to accumulate huge losses over the years and continues to survive on borrowing as well as equity infusion by the government (i.e. basically the taxpayer).

Anyone in their right mind, stopped traveling Air India a while back. The airline now runs simply because of government employees who when travelling officially have no other option (in most cases) but to travel in the airline and pay the full fare.

The airline now has 14.7 per cent market share. This has been a huge fall from the days when it had 100% of the domestic market share given that no private airlines were allowed to operate. (The domestic airline back then was called Indian Airlines. There was also Vayudoot, another government owned airline, which travelled to smaller locations).

This is nothing but what Ruchir Sharma calls privatization by benign neglect. As he writes in his new book The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “India…has adopted a de facto policy of what I can only describe as privatization by malign neglect. The political class can’t bring itself to sell off the old state companies, or to reform them either. Instead, it simply watches as private companies slowly drive the state behemoths into irrelevance. Thirty years ago state-owned Air India was basically the only way for Indians to fly, but the rise of agile private airlines including Jet and Indigo, has reduced its share of flights to less than 25 percent.” As mentioned earlier Air India now has 14.7% of the domestic market share.

The business flyer who is willing to pay a premium and for whom time is of utmost importance, has more or less abandoned Air India and moved on to other airlines. Guess, it’s time that minister Naidu also does that, the next time he has to reach on time for any meeting outside Delhi.

Air India is not the only example of the government not being able to withstand competition. Sector after sector has seen the government companies being decimated wherever they have had to face competition. As Sharma writes: “The same goes for telecommunications, where former state monopolies like MTNL and BSNL have been allowed to slowly wither in the face of more nimble private telecom companies, and together they now account for less than 30 million of India’s 900 million telecom subscribers.”

But the government (this government as well as the ones before it) have kept these companies going. Of course, a lot of taxpayer money which could have been better utilised elsewhere has been lost in the process. Air India has lost close to Rs 35,000 crore between 2010-2011 and 2015-2016. Last year it managed to make an operational profit primarily because of lower oil prices.

The point being that it would have been better for the government to have sold off these companies long back. As Sharma writes: “The state would have done a lot better to simply sell of these companies when they were still valuable, but now it is losing money on them hand over fist, and they are worth a pittance. This approach—refusing either to privatize or protect state monopolies—is the worst possible combination for government’s finances.”

And that is precisely what the previous governments did. The Narendra Modi government continues to run on the same principle. One doesn’t expect radical decisions from a government which couldn’t even push through a five basis points interest rate cut on the Employees Provident Fund(EPF). One basis point is one hundredth of a percentage.

The airline business is a very tough and competitive business to be in. Any airline hoping to make a profit needs to be run by a professional who has some experience in the airline business. Air India has never had that luck for a sustained period of time. No such moves have been made by the current government either. This belief that bureaucrats and not specialists, can do everything, has been one of the primary reasons behind the degradation of India.

In fact, Air India has now reached a stage where even if the government were to try selling it, there would be no buyers. As civil aviation minister Ashok Gajapati Raju said sometime back: “Its (Air India) books are so bad. I don’t think that even if it is offered, anybody would come for it.”

The more things change the more they remain the same. The taxpayer will continue paying for this national loot.

The column originally appeared in Vivek Kaul’s Diary on June 29, 2016

India and the Fallacy of the Demographic Dividend

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At times it is very difficult to make sense of a country as complicated as India is. What complicates the situation further is the fact that we have very little data going around in many cases. But then there are broader trends, which one can comment on.

One such thing is the demographic dividend or to put it more precisely India’s demographic dividend. Nearly eleven years back, when I didn’t understand much economics or finance, this was one of the terms I heard people connected with the investment industry, continuously talk about.

India will do well in this decades to come because of its demographic dividend, they said. In fact, some of them are still talking about it.

So what is the demographic dividend? As country progresses it moves from being a largely rural agrarian society to a predominantly urban society. Along the way it changes from being a society with high fertility and mortality rates to a society which has low fertility and mortality rates.

As Ronald Lee and Andrew Mason write in an article titled What is the demographic dividend in the Finance and Development magazine of the International Monetary Fund: “At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labour force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly too.”

The infant mortality rate in India was 75 in 1996. It has come down to 38 in 2015, data from World Bank shows. The infant mortality rate is essentially defined as the number of infants who die before reaching one year of age, for every 1000 live births during the course of a given year.

Along with the infant mortality rate declining, the general technological advances as well as access to medical facilities have improved. This essentially means that in the coming years there will be a huge bulge in the number of young people in the country. In this stage, the workforce of the country will increase dramatically.

There are multiple estimates of what India’s workforce will look like in the years to come. Most of these estimates essentially suggest that India’s workforce is increasing at the rate of one million workers per month and will continue increasing at this rate in the years to come.

The Planning Commission, before it was disbanded by the Narendra Modi government, had made an estimate on India’s workforce in the years to come.

As the 12th Five Year Plan (2012-2017) document pointed out: “One hundred and eighty-three million additional income seekers are expected to join the workforce over the next 15 years.” This essentially means that a little over 12 million individuals will keep joining the workforce every year, in the years to come. This works out to around one million a month. And at this rate, the Indian workforce is expected to be larger than that of China by 2030.

And this is India’s demographic dividend. As these individuals enter the workforce, find work, earn money and spend it, the Indian economy is expected to do well. When economists and politicians talk about an economic growth of close to 10 per cent per year, they are essentially hoping that India’s demographic dividend will play out as it is expected.

But the question is how likely is this? How have things with other countries been in the past? Have countries which were expected to benefit from the demographic dividend benefitted from it?

As Ruchir Sharma writes in his new book The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The trick is to avoid falling for the fallacy of the “demographic dividend,” the idea that population growth pays off automatically in rapid economic growth. It pays off only if political leaders create the economic conditions necessary to attract investment and generate jobs. In the 1960s and ‘70s, rapid population growth in Africa, China, and India led to famines, high unemployment and civil strife. Rapid population growth is often a precondition for fast economic growth, but it never guarantees fast growth.”

Sharma then talks about the Arab world which despite being poised to, did not benefit from a demographic dividend. As Sharma writes: “The Arab world provides a cautionary tale. There between 1985 and 2005 the working age population grew by an average annual rate of more than 3 percent, or nearly twice as face as the rest of the world. But no economic dividend resulted. In the early 2010s many Arab countries suffered from cripplingly high youth unemployment rates; more than 40 percent in Iraq and more than 30 percent in Saudi Arabia, Egypt, and Tunisia, where the violence and chaos of the Arab Spring began.”

This is something that India and Indians need to be aware of. The demographic dividend benefits a country if the government of the day is able to create the right environment in which jobs are created. As Sharma writes: “In India, where hopes for the demographic dividend have also been sky high, ten million young people will enter the workforce each year over the next decade, but the lately the economy has been creating less than five million jobs annually.”

If this were to continue, there will be no demographic dividend for India.

The column originally appeared in the Vivek Kaul Diary on June 17, 2016

The Middle Class Indian Man and His Search for a Benevolent Dictator

 

 

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India needs a benevolent dictator.”

I have heard this being said over and over again, over the years.

Usually, the person saying it is a man.

Usually, he is a successful corporate type who is in the habit of driving his team to meet unreasonable goals set by the organisation.

Usually, he doesn’t like to take no for an answer.

Usually, he is looking to encash his ESOPs at the end of the year.

Usually, you will hear him say things like, this year we did Turkey, next year we plan to do New Zealand.

Usually his heart is in the right place. It beats for his country. It wants the country to do well. And in the process, he ends up saying the nonsense that he does.

In some cases, he is a Non-Resident Indian, living in the United States, the oldest and one of the most successful democracies in the world. In some cases, he is someone who has lived through Indira Gandhi’s emergency between 1975 and 1977 and is nostalgic about it.

“You know, trains ran on time,” he says. I don’t know if they did, but at least that is the argument that is offered.

And in some other cases, he opens the argument with the line: “Look at Singapore”.

So what is this Look at Singapore argument? Allow me to explain. As Arvind Pangariya writes in India—The Emerging Giant: “Countries, such as the Republic of Korea, Taiwan, Singapore Hong Kong, and the People’s Republic of China…have attained high rates of growth under authoritarian regimes.

India on the other hand almost always been a democracy since its independence in 1947. And on top, it has been one of the few countries which has managed to be a democracy almost all along. As Panagariya writes: “Along with Costa Rica, Jamaica, and Sri Lanka, India is only one of the four developing countries to have had democratically elected governments throughout the second half of the twentieth century and beyond…The remaining three countries…are all relatively tiny. The brief period of emergency rule—from June 26, 1975, to March 21,1977—in India may be viewed as representing a break in its democratic tradition.”

The people who argue in favour of benevolent dictators have basically this to say—countries in Asia that have done well, are those which have had autocratic regimes. India lost out because it was a democracy.

As Ruchir Sharma writes in Breakout Nations: “Of the eight countries that quadrupled their incomes between 1950 and 1990, two (Taiwan and Singapore) were ruled by dictators during the entire period, one (South Korea) was ruled by a dictator during most of it, two (Japan and Malta) were democracies throughout the period and three (Thailand, Portugal and Greece) waffled between autocracy and democracy.” China has also had an autocratic regime through its period of economic development through the late 1970s.

This is offered as evidence as to why India would have done much better if it had been run by a benevolent dictator and an autocratic regime. The trouble with this argument is that it looks at just one side of the equation—the countries which have had benevolent dictators and have done well. It doesn’t look at countries, which have had dictators and gone absolutely to the dogs.

The African continent is littered with examples of such countries. Closer to home, there is Pakistan. Look at the mess the country currently is in. Or look at what has happened in a country like Myanmar.

Economist William Easterly has done some interesting research in this area, which he summarises in a research paper titled Benevolent Autocrats. As he writes: “The probability that you are an autocrat IF you are a growth success is 90 percent. This probability seems to influence the discussion in favour of autocrats.”

But that is the wrong question to ask. The question that needs to be asked should be exactly the opposite—if a country is governed by an autocrat what are the chances that it will be a growth success? “The relevant probability is whether you are a growth success IF you are an autocrat, which is only 10 percent,” writes Easterly.

To put it simply—most fast growing nations are ruled by autocrats. Nevertheless, most autocracies do not grow fast. The point being, if the government in a country is being ruled by a dictator, there is no way to figure out in advance, whether he will turn out to be a disaster or be benevolent.

The question is why do so many educated middle class Indian men believe in the idea of a benevolent dictator then? (I know I am stereotyping here, but I have experienced this many times over the years).

I guess what behavioural economists call availability bias is at play here. As Leonard Mlodinow writes in The Drunkard’s Walk—How Randomness Rules Our Lives: “In reconstructing the past, we give unwarranted importance to memories that are most vivid and hence most available for retrieval. The nasty thing about the availability bias is that it insidiously distorts our views of the word by distorting our perception of past events and our environment.”

Air-crashes are an excellent example of this. As Jason Zweig writes in The Devil’s Financial Dictionary: “Flying is among the safest ways to travel, but on the rare occasions when an airplane does crash, the fireball on the runway is broadcast worldwide and burned into the brain of everyone who sees it.”

This leads people to believe that airplane travel is unsafe. But what they don’t realise is that the media does not report about the thousands of planes that land safely every day all over the world. It also does not report the many car crashes that happen all over the world every day, unless a celebrity is involved.

Availability bias comes into the picture with an event being over-reported. As Easterly writes: “One way this can happen are with an event that is over-reported relative to its actual frequency. A common example is that probability of death from murder is overestimated because of intensive coverage of murders by the media relative to other causes of death that are not as newsworthy (e.g. heart disease).”

When it comes to the idea of a benevolent dictator, this phenomenon is at play. Indians who go to countries like Singapore and China, see how much progress the country has made, and come to the conclusion that autocracy leads to economic growth. But these individuals never go to Pakistan, so that they can see that the opposite is also true. Or Myanmar for that matter.

The media with its stories of China’s progress also has a role to play. But then the stories of how much mess dictators have made in Africa, over the decades, never really make it to the Indian press.

The column was originally published in the Vivek Kaul Diary on June 6, 2016

If we go by what Keynes said, the world is currently going through a depression

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In a few weeks, it will be the seventh anniversary of the start of the current financial crisis. The fourth largest investment bank on Wall Street, Lehman Brothers, filed for bankruptcy on September 15, 2008. A day later, AIG, the largest insurance company in the world, was nationalized by the United States government.

A week earlier two governments sponsored enterprises Fannie Mae and Freddie Mac had also been nationalized by the United States government. In the months to come many financial institutions across the United States and Europe were saved and resurrected by governments all across the developed world. Some of them were nationalized as well.

Economic growth crashed in the aftermath of the financial crisis. Central banks and governments reacted to this by unleashing a huge easy money programme, where a humongous amount of money was printed(or rather created digitally) in order to drive down interest rates, in the hope that people would borrow and spend, companies would borrow and spend, and economic growth would return again.

And how are we placed seven years later? It would be safe to say that despite all that governments and central banks have done in the last seven years, the world hasn’t returned to its pre-crisis level of economic growth.

In fact, if we go by what the greatest economist of the twentieth century, John Maynard Keynes, wrote in his tour de force, The General Theory of Employment, Interest and Money, a large part of the developed world is currently going through a “depression”.

Keynes, defined a depression as “a chronic condition of sub-normal activity for a considerable period without any marked tendency towards recovery or towards complete collapse.”

This is something that the economists tend to ignore. As James Rickards writes in The Big Drop—How to Grow Your Wealth During the Coming Collapse: “Mainstream economists and TV talking heads never refer to a depression. Economists don’t like the word depression because it does not have an exact mathematical definition. For economists, anything that cannot be quantified does not exist.”

Hence, if we go as per what Keynes said, depression is a scenario where economic growth is below the long-term trend growth. And that is precisely how large parts of the global world have evolved in the aftermath of the financial crisis. As Rickards writes: “The long-term growth trend for U.S. GDP is about 3%.

Higher growth is possible for short periods of time. It could be caused by new technology that improves worker productivity. Or, it could be due to new entrants into the workforce…Growth in the United States from 2007 through 2013 averaged 1% per year. Growth in the first half of 2014 was worse, averaging just 0.95%.”

The current year hasn’t been any better either. The economic growth between January and March 2015 stood at 0.6%. Between April and June 2015, it was a little better at 2.3%.  As Rickards puts it: “That is the meaning of depression. It is not negative growth, but it is below-trend growth. The past seven-years of 1% growth when the historical growth is 3% is a depression as Keynes defined it.”

The United States economy accounts for nearly one-fourth of the global economy and if it grows slowly that has an impact on many other economies as well.
China, another big economy, has also been growing below its long term growth rate. Between 2003 and 2007, the Chinese economy grew by greater than 10% in each of the years. It slowed down in 2008 and 2009 as the financial crisis hit, and grew by only 9.6% and 9.2% respectively. In 2010, the economic growth crossed 10% again with the economy growing by 10.6%. This was after the Chinese government forced the banks to unleash a huge lending programme.

Nevertheless, growth fell below 10% again and since then the Chinese economy has been growing at below 10%. In fact, in the recent past, the economy has grown at only 7%, which is very low compared to its rapid rate of growths in the past.

Interestingly, people who observe China closely, are sceptical of even this 7% rate of economic growth. As Ruchir Sharma, Head of Global Macro and Emerging Markets at Morgan Stanley wrote in a recent column for the Wall Street Journal: “Chinese policy makers seem unwilling to accept that downturns are perfectly normal even for economic superpowers…But Beijing has little tolerance for business cycles and is now reviving efforts to stimulate sectors that it had otherwise wanted to see fade in importance, from property to infrastructure to exports….While China reported that its GDP grew exactly in line with its growth target of 7% in the first and second quarters this year, all other independent data, from electricity production to car sales, indicate the economy is growing closer to 5%.”

The moral of the story being that China is growing much slower than it was in the past. What this means is that countries like Brazil and Australia, which are close trading partners of China, will also feel the heat. Over and above this, much of Europe continues to remain in a mess. As Rickards puts it: “Keynes did not refer to declining GDP; he talked about “sub-normal” activity. In other words, it is entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of national debt.”

In fact, much of the economic growth that has been achieved through large parts of the developed world has been on the basis of more lending carried out at very low interest rates. Data from the latest annual report of the Bank of International Settlements based out of Basel in Switzerland, suggests, that the total global debt has touched around 260% of the global gross domestic product (GDP). In 2008, it was around 230% of the global GDP.

As the BIS annual report for the financial year ending March 31, 2015 points out: “very low interest rates that have prevailed for so long may not be “equilibrium” ones, which would be conducive to sustainable and balanced global expansion. Rather than just reflecting the current weakness, low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates.”

The tragedy is that there seems to have been no change in the thought process of those who are in decision making positions.

The column originally appeared on Firstpost on Aug 20, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Chinese politicians will do whatever it takes to keep economic growth going

chinaThe one thing I know for sure about China is, I will never know China. It’s too big, too old, too diverse, too deep. There’s simply not enough time.”
Anthony Bourdain, Parts Unknown

Ideally, I should have written this column last week, but this trend isn’t going anywhere anytime soon.  On August 11, 2015, the People’s Bank of China, the Chinese central bank, engineered a 1.9% cut in the value of the Chinese yuan against the US dollar. This was the largest single day cut in the value of the yuan against the dollar in two decades. The Chinese yuan doesn’t move freely against the dollar. The People’s Bank of China controls its value. Before last week’s cut, 6.2 yuan equalled a dollar.

As I write this on August 17, 2015, around a week later, 6.4 yuan are worth a single dollar. The value of a currency is a big variable for exporters. But by ensuring the yuan had a fixed value against the dollar, the Chinese central bank took this variable out of the Chinese exporters’ equation totally. This helped Chinese exports and exporters flourish and has been a very important part of the Chinese economic miracle.

Nevertheless, Chinese exports have been falling lately. In July 2015, Chinese exports fell by 8.3% compared to a year earlier. Even in June 2015, the exports had gone up by only 2.8%. A major reason for this is that the Bank of Japan, the Japanese central bank, has rapidly driven down the value of the Japanese yen against the dollar. In October 2012, 80 yen made up a dollar. As I write this, around 124.5 yen make up for a dollar. This has made many Japanese exports more competitive than China’s. Further, it has made imports into Japan more expensive. This caused Chinese exports to Japan between January and July 2015 to fall by 10.5%.

So it’s not surprising that the Chinese authorities pushed down the value of the yuan against the dollar. Their goal is to boost Chinese exports while making imports into China more expensive, thereby pushing the sales of local Chinese made goods and boosting economic growth in the process.

The People’s Bank of China decreased its foreign exchange reserves by $300 billion over the last four quarters. In other words, in a bid to keep the yuan at 6.2 for every dollar, the Bank has been selling dollars from its kitty and buying up yuan, which is essentially money being taken out of the country.

The People’s Bank doesn’t have an unlimited supply of dollars. At some point, it had to let the value of the yuan fall against the dollar, which is precisely what it did last week. For years on end, China has grown at double-digit rates. But recently, as global demand has fallen in the aftermath of the financial crisis which started in 2008, economic growth has slowed to 7% per year. In fact, many China followers believe the official 7% figure is an overstatement.

For example, Ruchir Sharma, Head of Emerging Markets and Global Macro at Morgan Stanley, wrote in a recent column in The Wall Street Journal that: “While China reported that its GDP grew exactly in line with its growth target of 7% in the first and second quarters this year, all other independent data, from electricity production to car sales, indicate the economy is growing closer to 5%.”

Most China experts and analysts fail to mention this, but it is important to understand that economic growth gives legitimacy to the unelected communist government that runs China.

As John Plender writes in Capitalism: Money, Morals and Markets:  “Unelected Chinese politicians may put the interests of the Communist Party elite before those of the nations. Their legitimacy, after all, rests chiefly on the continuation of high rates of economic growth. If they fail to deliver, their survival in an economic crisis may depend on whipping up nationalist popular feeling against Japan, Taiwan or other Asian neighbours, intensive trade relations notwithstanding.”

This phenomenon was at play in the recent past, when the Chinese government tried to do everything to stop the stock market from falling. It banned investors with more than a 5% holding in a company from selling shares and it directed big financial institutions to invest in the stock market. These moves were to prop up stocks, but mostly to maintain political legitimacy.

Since the financial crisis, the Chinese politicians have been able to maintain credibility by ensuring that the economic growth has not collapsed, as it has in much of the Western Word. This has been done by lending cheap money across various sectors. As Sharma of Morgan Stanley writes: “The problem is that China’s economic rise of late has been facilitated by a massive and unsustainable stimulus campaign. No emerging nation in recorded history has ever tacked on debt at such a furious pace as China has since 2008, and a rapid increase in debt is the single most reliable predictor of economic slowdowns and financial crisis. China’s debt as a share of its economy increased by 80 percentage points between 2008 and 2013 and currently stands at around 300%, with no sign of abating.”

This easy money first led to a property bubble, which was followed by an infrastructure bubble and a stock market bubble.
The point is that the Chinese politicians will do whatever it takes to keep the economic growth going. So expect the devaluation of the Chinese yuan against the dollar to continue, as China tries to push up its exports again.

As Albert Edwards of Societe Generale writes in a recent research note: “For although the PBoC [People’s Bank of China, the Chinese central bank] said the move was a one-time adjustment [the drop in the value of the yuan against the dollar] to reflect changes in the way it calculates the daily fix, it also said that the price would be set “in conjunction with demand and supply conditions in the foreign exchange market and exchange rate movements of the major currencies.”

What does this mean? Well, the race to the bottom isn’t exactly rocket science. With the yuan’s value now down against the dollar, chances are that the Bank of Japan will respond by printing even more yen, in a bid to further drive down the value of the yen against the dollar. The South Korean central bank may also do something along similar lines in order to drive down the value of the won [the South Korean currency] against the dollar to protect its exports. This in turn will lead to the People’s Bank of China to push the yuan down even further against the dollar. Rest assured, the currency wars in Asia will continue.

The column originally appeared in The Daily Reckoning on Aug 18, 2015