Friday, October 24, 2014

Is China's political system an obstacle to its rise?

There is one refrain that is comment to forecasts on China: the Chinese political system is incompatible with growing standards of living. There is a corollary to this: as soon as China's growth rate slows perceptibly, the strains on the political system will begin to show. Turbulence will set in. Some even forecast that the Chinese system will implode.

One thing that strikes me is that this hasn't happened in the last two decades of China's rise. Okay, you could say, that's because the Chinese people were bought off with goodies. However, that's only part of the story. What's missed, as an article in FT points out, is that the Chinese state has shown itself highly competent, able to adapt and responsive to popular aspirations. In short, it does everything that a democratic government is expected to do- except that many democracies, including the US, are showing themselves to be increasingly dysfunctional.The author writes:
There is a tendency to see Chinese government as unchanging. This is because in the west the only reforms that we really count are those that appear to move the country towards the western model. In fact, government has been through huge and constant reform since 1978, far greater than anything that has taken place in the US or the UK. It is inconceivable that the Chinese state could have masterminded such a huge economic transformation if it too had not been the subject of profound reform. This process will continue, probably even more dramatically.
The Chinese communist party is seen as monolithic and intolerant. In fact, it contains within itself diversity of views and there is no reason to suppose that tolerance of dissent is a great deal less than in western democracies (where views outside a certain mainstream can be filtered out quickly or even actively suppressed). Voters in the US may have a theoretical choice between two parties but, on a wide range of issues, you have to think very hard to tell the difference between George Bush and Barrack Obama. This applies to the UK and many other democracies as well. The choices open to voters are within a rather narrow bandwidth.

The odds are that, instead of China going into decline because of its one-party system, it is the west that may suffer decline the years to come:
The west is in decline, Europe rampantly so. Some estimates suggest that by 2030 China could account for a third of global output and be twice the size of the US economy. American power would then be a pale shadow of what it is today. This is bound to affect how the American people regard their political elite and political system. Furthermore, with strong evidence that living standards have been static for many people in the US and western Europe, the outlook is uncertain.
Gloomy views of China go hand in hand with western attempts to undermine the Chinese system in many ways, as an article in Atimes points out. These attempts take various forms: support for separatist groups, talk of the high level of corruption in China, criticism of crackdown on dissidents and a constant glorification of western cultural and political values:
The hierarchy of China experts is this: At the top we find the philosophers and statesmen who set the stage and agenda for the universal ideology - exclusively serving Western interests. They always reside in the West, know little or nothing about China, and discuss China solely on Western terms......Next we have the journalists and editors, most of them white or accessory white, in key positions at the New York Times, Wall Street Journal, Economist, and so on. Thanks to the Western planetary media monopoly, they have become the new global fascist elite.....They also prominently decide who - Chinese or foreigner- gets praised and who gets defamed, and - most importantly- what gets omitted in their China reports. Their own corrupt ways get omitted. Ask yourself, when was the last time you read a piece by a prominent Chinese (other than a dissident) in your nation's newspaper? You haven't. It is a tight Orwellian grip. 
It's not just China that is at the receiving end of western propaganda. Today, even greater venom is directed at Russia. 
 


Friday, October 17, 2014

RBI autonomy

What exactly is RBI autonomy in monetary policy? Does it set the policy objective (say, primary focus on inflation), the inflation target as well as the means to achieve the target? Are all these the province of the RBI? Or does the government have a say in these matters?

I would think that the government has the right to decide the primary objective and also the inflation target. When it comes to the means of achieving the objective, the decision is primarily that of the RBI but the government should be involved in decision-making.

That is how RBI governors have viewed matters all these years. They have ensured that the government is duly consulted on monetary policy matters and then taken the final call on interest rates. Over the past year, however, the RBI has sought to change the situation somewhat. The Urjit Patel committee recommended that inflation targeting would be the primary objective and it also set the inflation targets to be met. The interest rate policy to meet the targets has also been decided by the RBI. It does seem that there is over-reach on the part of RBI.

Now, moves are afoot in  government to get the balance right between itself and the RBI. The government wants to set the inflation target. Monetary policy will be decided by a committee dominated by outsiders. This amounts to a dilution of the RBI's autonomy as it takes away the RBI governor's right to be the final authority on interest rates. I guess the government's moves were inevitable given the attempt on the part of the RBI to be the sole decision-maker in monetary policy matters.

More in my article in the Hindu, The limits to autonomy.

Thursday, October 16, 2014

Travails of entrepreneurship

The business media tends to romanticise entrepreneurship by focusing on the success stories, says Schumpeter in the Economist. I would add that it also tends to portray entrepreneurs as people who know how to balance work, leisure and family, have great EQ and, of course, they glorify the millions that entrepreneurs make.

The reality is that entrepreneurship is enormously challenging mentally and physically. Schumpeter writes:

Business professors celebrate the geniuses who break the rules and change the world. Politicians praise them as wealth creators. Glossy magazines drool over Richard Branson’s villa on Lake Como. But the reality can be as romantic as chewing glass: first-time founders have the job security of zero-hour contract workers, the money worries of chronic gamblers and the social life of hermits.

Failure rates are frighteningly high:
Over half of American startups are gone within five years. Most of the survivors barely stumble along. Shikhar Ghosh of Harvard Business School (HBS) found that three-quarters of startups backed by venture capital—the crème de la crème—failed to return the capital invested in them, let alone generate a positive return. In 2000 Barton Hamilton of Washington University in St Louis compared the income distributions of American employees and entrepreneurs, and concluded that the latter earned 35% less over a ten-year period than those in paid jobs.
As for their being balanced personalities, forget it:
John Gartner, who teaches psychiatry at Johns Hopkins University medical school, suggests that a disproportionate number of entrepreneurs may suffer from hypomania, a psychological state characterised by energy and self-confidence but also restlessness and risk-taking. Numerous studies confirm, at the least, that they are prone to over-optimism.
Schumpeter quotes one ex-entrepreneur as urging would be entrepreneurs to have more healthy lifestyles. Somebody else urges them to get support networks and mentors.

I doubt that these can help. Entrepreneurship is a passion. Like great works or art, music or even writing, they are born of enormous sacrifice. Sometimes there are rewards at the end of the tunnel, very often there are none. Entrepreneurship is a form of madness. Entrepreneurs will pursue their dreams regardless. To ask them to do so in a balanced way or with help or guidance is rob them of the special quality that makes for success in some cases.

You cannot ask an entrepreneur to be balanced any more than you can ask a genius or a prodigy to be normal.





Wednesday, October 08, 2014

Is optimism about India's growth prospects justified?

Analysts see an acceleration in growth to 5.5%. 6.5% and 7% starting this year and then in the next two years. Is this feasible? I think yes. But the RBI needs to help out by cutting the interest rate.

My analysis appears in today's Asian Age, Growing Pains.

Tuesday, October 07, 2014

When management gurus dissect politics....

How can we tell whether a political leader such as Narendra Modi will succeed? Three management experts, including Ram Charan, attempt an answer in a business journal. I can't say I was bowled over by their analysis.

The authors say we should look for five signals, on all of which Modi scores. Let me take up two in detail

i. How deep is the politician's insight into public interest? Modi's interest is very deep, the authors say, because of his own background of poverty. Well, Manmohan Singh too came from a poor family in a very backward village. He could, perhaps, claim that he understood the poor as well as the elite and was thus well placed to negotiate his way through the elite on behalf of the poor.In India (unlike in the US), we have hordes of politicians who have come up from the grassroots. Lalu Yadav and Mayawati, for instance. But they have not proved to be transformative leaders in the sense of bringing about an improvement in the lives of the class of people they once belonged to.

ii. Can the leader get things done? Modi has a record as a doer in Gujarat, the authors point out. But Gujarat was one of the best performing states even before Modi became Chief Minister (although, to his credit, Modi was able to maintain that record). India's growth rate has improved since the nineties and through the noughties under a succession of governments and leaders. Not all were headed by doers. However, starting with Narasimha Rao, we managed to put in place policies that paid off. So, yes, it helps to be good at execution but the role of policy must not be understated.

The authors mention other factors that favour Modi: his business mind-set, his ability to engage senior government officials, the broad support he enjoys. It's hard to disagree on these. But none of these by themselves or even put together ensure results.  Both Indira Gandhi and Rajiv Gandhi had broad support but both saw how quickly this could dissipate. A "businesss mind-set" can be a negative if it means being pro-business at the expense of welfarist considerations.

Modi's strengths are his ability to connect with the masses, formidable administrative experience, a a capacity to think out of the box. deep study and reflection, boundless energy and a genuine passion to make a difference at the national level. This combination bodes well for any leader. We don't need management experts to tell us that.



Indian inflation: don't blame it on support prices for foodgrains

Minimum support prices (MSP) for foodgrains have been rising over the years (although the new government has kept increases under control). This is said to be a driver of inflation in recent years.

Amartya Lahiri, writing in IE, thinks the explanation facile. Why? Because MSP increases themselves result from a rise in past inflation! 
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation.
Using the CPI (industrial workers) and a weighted MSP index for the period of 1976-2014, I did precisely that exercise. The bottom-line of the results is that, using the part of the MSP due to past inflation to predict inflation does almost as good a job
as using the overall MSP. Moreover, when both components of MSP changes are used to predict inflation, the effect of inflation-induced MSP is three times as high as that of non-inflation MSP. The main implication of this is that the biggest predictor of inflation is past inflation. It is clear that past MSP changes due to inflation account for a much larger part of overall CPI inflation than does non-inflation MSP.
- See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf

Using the CPI (industrial workers) and a weighted MSP index for the period of 1976-2014, I did precisely that exercise. The bottom-line of the results is that, using the part of the MSP due to past inflation to predict inflation does almost as good a job as using the overall MSP. Moreover, when both components of MSP changes are used to predict inflation, the effect of inflation-induced MSP is three times as high as that of non-inflation MSP. The main implication of this is that the biggest predictor of inflation is past inflation. It is clear that past MSP changes due to inflation account for a much larger part of overall CPI inflation than does non-inflation MSP.

In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf

Wednesday, September 24, 2014

The brains in a company are at the bottom of the pyramid

The higher you go up the corporate ladder, the duller you become. And yet decision-making is concentrated at the top. FT columnist Lucy Kellaway quotes a graduate trainee on the subject:
The main thing that had struck him so far was that people seemed to get dimmer the higher they went in the organisation. His fellow trainees were almost all brilliant, he said, and people at the next level up were also pretty smart. But those 10 years older were pedestrian by comparison, while some of the partners seemed borderline moronic.

I asked if he had any explanation for this. He looked at me as if I were a moron too and said the reason was self-selection. Really smart people don’t stay at the institutions they have fought so hard to get into. The best leave within two or three years; the slightly less good stay a bit longer, and only the also-rans and the terminally unimaginative are in for the long haul. 
Kellaway rightly points out that success in a company has little to do with brilliance. A company values other things in people:
Rather than reward brilliance it prefers skills that graduates can’t see: good judgment, a nice way with clients, and an instinct for when to bite your lip. Even if today’s partners weren’t boring to start off with, they quickly learn to seem that way. 
So, there are strengths that people at the top bring to the table. The challenge is how to marry the analytical brilliance at the bottom with the sound judgement and rounded view that obtains at the top of a company. One thing that Kellaway highlights is that the two levels need to talk to each - and understand what the other is saying. The other thing, which I believe is important, is that decision-making must be truly participative. Don't leave decision making only to sound judgement; bring in the creative, disruptive types at the bottom as well. 

US takes aim at ISIS- or is the target Assad?

The US, supported by Australia and soon to be joined by the UK, has put together a coalition of an estimate 40 nations to take on ISIS. Initially, the US will launch air strikes and provide advisors on the ground. However, it could only be a matter of time before the US puts boots on the ground.

The coalition is truly bizarre. It includes nations such as Turkey, Saudi Arabia and the GCC who, amongst others, are the very nations that created and propped up ISIS in many ways. The Saudis and GCC provided financial support, if not directly then through private donors. Turkey has kept its borders open for jihadists to go through and for ISIS to sell oil. And yet they have now made a U-turn exactly as Pakistan did with respect to the Taliban post- 9/11.Equally bizarre is the exclusion of the two nations that have steadfastly opposed ISIS, Iran and Syria (although John Kerry, the US secretary of state, has said that Iran may be free to join).

To aid the US involvement in Iraq and Syria, we have seen the figures of ISIS fighters swelling by the week. The earlier 15,000 fighters now number over 30,000. US officials gravely inform the world that the IS is beyond anything they have seen before. What's going on?

The ISIS, intelligence sources have indicated, poses no immediate threat to the west. America's return to the Iraq theatre and, by extension, to the Syria theatre appears to be aimed at Syria's Assad rather than ISIS. In taking care of the ISIS threat, the US hopes to give a decisive push to the efforts to topple Assad and undermine Iran's position in the region, given that Iran has been a supporter of Syria. This despite several foreign policy veterans, including former UK former secretary and currently MP Malcolm Rifikind, saying that an alliance with Assad is vital to the defeat of ISIS.

Listen to Atimes columnist Pepe Escobar:
There is no "Free Syrian Army" - that Qatari myth - anymore. There are no "moderate" jihadis left in Syria. They are all fighting for The Caliph or for al-Zawahiri. And still the Obama administration extracted a Congressional OK to train and weaponize "moderate rebels".

US ambassador to the UN
Samantha Power - Undisputed Queen of Batshit Craziness - at least got one thing right. Their "training" will "service these troops in the same struggle that they've been in since the beginning of this conflict against the Assad regime." So yes - this "sustained campaign" is the back door to "Assad must go" remixed.

People who are really capable of defeating The Caliph's goons don't tomahawk. They are the Syrian Arab Army (roughly 35,000 dead so far killed in action against ISIS/ISIL/IS and/or al-Qaeda); Hezbollah; Iranian Revolutionary Guards advisers/operatives; and Kurdish militias. It won't happen. This season's blockbuster is the Empire of Chaos bombing The Caliph and the ghost in the GWOT (Global War on Terror) machine. 




Monday, September 22, 2014

Will McKinsey be around 50 years from now?

Lucy Kellaway, FT's management writer, suggests somewhat cheekly that the big daddy of strategic consulting may not be around 50 years from now. She comes to this conclusion after looking at a special issue of the McKinsey Quarterly meant to commemorate the journal's golden jubilee. The issue carries a piece of research that purports to look at broad trends that will shape the future:
The first is technology. Its growth will be exponential and there will be “turbocharging advances in connectivity”. Second, growth in emerging markets will continue and a lot more big cities will spring up in places we’ve hardly heard of. Finally, all over the world everyone is going to go on getting older.
If this is all that McKinsey can come up with, based on its research, Kellaway fears for its future:
Fifty years hence, McKinsey won’t exist. This is based on three trends similar to those the firm spotted. If economic activity moves to new cities in far-flung places, these are the very parts of the world where western strategy consultants tend not to flourish. The next trend is that as executives get smarter in dealing with this complex world, they will be more able to solve their own problems......

....Most important is the effect of technology. All the grunt stuff consultants do analysing markets can be done by anyone with an internet connection. The two things that people will always be better at than machines are motivating others and coming up with original ideas. Yet on neither score does the consultant look good. Strategy firms don’t do much in the way of motivation. And as for originality, if the best McKinsey can do after years of study is say that technology, globalisation and ageing will feature in the next 50 years – a robot could have come up with that in a jiffy.