Monday, October 28, 2013

How do developing countries catch up?

'Convergence' is a term that students of economics are familiar with. For several reasons, developing countries are poised to catch up with higher income countries over time, although this could be a long time. How to expedite this is an important policy issue. The conventional wisdom is that you allow markets to function freely and do the trick- produce high growth. Remove the dead hand of the state and- hey presto!- growth materialises. Most "reformers" would ascribe the high growth in India since the 1990s to precisely such a thing having happened.

Alas for them, the reality is rather different. Economist Deepak Nayyar has an article in the Hindu in which he points out that rapid growth flowed from meaningful state intervention rather than state retreat. (He has a book coming out on this theme):
Thus, industrialisation was not so much about getting-prices-right as it was about getting-state-intervention-right. Indeed, it is plausible to suggest that, for a time it might even have been about getting-prices-wrong. It may be argued that state intervention in the form of industrial policy should recognise and exploit potential comparative advantage, but it is just as plausible to argue that instead of climbing the ladder step by step it could be rewarding to jump some steps in defiance of what comparative advantage might be at the time. In either case, state intervention is critical.

Apart from an extensive role for governments, the use of borrowed technologies, an intense process of learning, the creation of managerial capabilities in individuals and technological capabilities in firms, and the nurturing of entrepreneurs and firms in different types of enterprises were important factors underlying the catch-up in industrialisation. The creation of initial conditions was followed by a period of learning to industrialise so that outcomes in industrialisation surfaced with a time lag. This accounts for the acceleration in growth of manufacturing output that became visible in the early 1970s.

Clearly, it was not the magic of markets that produced the sudden spurt in industrialisation. It came from the foundations that were laid in the preceding quarter century. In this context, it is important to note that much the same can be said about the now industrialised countries, where industrial protection and state intervention were just as important at earlier stages of their development when they were latecomers to industrialisation.

So, the acceleration since the 1990s didn't come out of thin air, it wasn't conjured up by markets or private sector firms. The foundations had been laid in terms of an industrial base, technological capability, investment in higher education, a growing middle class, etc. Liberalisation helped get the best out of this investment in capability that had been state-driven. It might have happened a little earlier; the License Raj excesses were clearly unwarranted. But this is different from saying that the private sector produced a magical transformation, starting in the 90s.

Economist on Sachin Tendulkar

The Banyan column in the Economist seeks to unravel the Sachin mystique. It's not just about Sachin being a great cricketer- the column suggests that Gavaskar was, perhaps, a better player and contributed more in a weaker Indian team.

It's about what Sachin represents, the transformation of India from a poor country into a relatively better off country. In the process, many have become richer, including Sachin himself. Now, a new set of players are knocking at the doors of good fortune in cricket. Unlike Sachin, however, they are brash and ostentatious. Sachin, with his low-key persona, good manners and devotion to family represents what India would like to see in the successful.

Well, nothing new here, I guess that's what Indians have always wanted to see in the successful. They would like politicians to sport khadi, they don't much like industrialists who own jets and yachts, and bureaucrats still go around in half-sleeved shirts and sandals. Even in Bollywood, the sober and soft-spoken Amitabh Bachchan is more revered than the flashier types. As the article points out, however, this applies to only to the older India (those above 35); with the younger crowd, ostentation may be going down well.

The column's point about Sachin overstaying in the team is a stronger one. All of us know how difficult it was for the board and the selection committee to ask him to leave. Sachin, the column points out, illustrated the bane of Indian society: the "impunity enjoyed by all India's rich and powerful". In not wanting to leave, again, Sachin, alas, represented something that is all too common in Indian politics, the corporate world, the bureaucracy and the cinema.

Perhaps, it is for politicians to give the lead: I read somewhere that Jairam Ramesh has suggested a retirement age for politicians. There should also be a generally accepted upper limit for people who assume high office, say, the prime ministership. It happens in the UK and the US. It should happen here as well. Once it happens in politics, hopefully the message will go out to other sections of society: for god's sake and ours, quit and find something else to do in life.

Friday, October 25, 2013

My latest book is out

My latest book, Before and After the Global Crisis, is out.  It's a collection of my writings in recent years, broken down into five themes: Indian Economy, Indian Banking, World Economy, Management and Governance, Indian Polity. I reproduce the blurb:

The Indian economy has been through something of a roller-coaster ride since 2004. There was a period of boom in 2004. Then came the global crisis, a sharp deceleration in India’s growth rate and a waning of confidence about India’s economic prospects both at home and abroad. 
This collection of articles, written for The Economic Times and the Economic and Political Weekly, provides an intelligent – and often off-beat- analysis of events in the Indian economy as well as the world economy over the period 2004-2012.     
As the financial sector has been at the heart of the crisis, the Indian banking sector as well as international banking come in for close scrutiny.  The book also takes in its stride developments in the Indian polity, and a range of issues relating to management and governance.  
Written in the readable and hard-hitting style for which the author is well-known, the book is at once a chronicle and a critique of a turbulent period for the Indian economy as well as the global economy.
As I thumbed the pages after receiving my copy, I asked myself whether the writings would stand the test of time. That's obviously for the reader to judge. But I have no difficulty in confessing that I seem to have been somewhat over-optimistic about India's growth prospects. I did not foresee the sort of sharp deceleration in growth we have had in the past three years. Some of it is, of course, the result of non-economic factors that could not have been foreseen: the Supreme Court ban on mining, the delays in environmental and other clearances that have held up projects, including the expansion of coal supply, and, not least, the CAG reports and the anti-corruption crusade which have paralysed both parliament and the bureaucracy.

A deceleration from 9% during the boom years to 6.5-7% would have been understandable. But not the drop to 5%. Still less could one have thought that the drop in the growth rate would have stretch out for so long. It doesn't seem likely that growth will move up to 7% before 2015-16, and, that too, is contingent on global factors. Before we get there, we will need to weather the storm that will be unleashed by the tapering of QE in the US. Looking back on the growth optimism, which I shared, one is reminded that economists need more than a touch of humility in pronouncing on the future.

Thursday, October 17, 2013

US education model should be a warning, not an example

Oxford's vice-chancellor complains that the ceiling of £ 9000 on fee charged by universities it not fair; it makes no allowance for differences in quality. After all, in the US quality universities can charge what they like. An article in FT warns that the US model may not be the right one for other economies.

To me, the interesting point the article makes is that, in exchange for the enormous fees they charge, universities have become generous with grades- or what is called "grade inflation:

Students are getting increasingly lavish accolades for their money. In the early 1980s, fewer than 30 per cent of all grades were As; now the figure is more than 40 per cent. By other measures things have worsened. In one survey, only a quarter of college graduates were deemed able to understand written material to achieve everyday goals.
Few who have taught in America outside the Ivy league will be surprised. Students receive highish marks for semi-literate work, displaying a glimmer of rhetorical power only when they plead for still greater leniency.

At the Ivy League and other reputed universities, education may be of high quality. But, precisely because it is so, universities have come to charge exorbitant fees- tuition costs five times on the average more than what it did 30 years ago. In general, costs bear no link with either cost or the value of education. The impact on students who cannot afford costly loans can well be imagined.

The US model should be a warning to others who wish to develop human capital. It's reassuring that, in India, institutions such as the IITs have desisted from raising fees, even when experts sitting on  committees have wanted them to. Privatisation of education is bad enough because it means the state has forsaken its role in providing education; leaving fees totally unregulated will sound the death knell for access to education for people at large.

Nobel for Economics

FT has two interesting articles on this year's Nobel for Economics, one by John  Kay and the other by Tim Harford (of Undercover Economist fame). They make a point that many others have made, that two of Nobel Laureates, Eugene Fama and Robert Shiller, got the award for holding rather contradictory views. Fama propounded the theory that markets are efficient, that is, securities prices reflect all available information. Shiller contended that markets are prone to bubbles and that volatility in stock prices exceeds what can be ascribed to new information.

Who is right? Well, in a way, I suppose both are. Markets tend towards efficiency; the fact that they deviate from efficiency often or even for long periods does not refute Fama's basic postulate. As Harford points out, one big outcome has to been to discredit stock analysts and stock pickers in general. It's far better in terms of returns and far more cost effective simply to invest in a basket that mimics the market.

The popular view is that the sub-prime crisis arose from the belief in market efficiency and that this belief underlies the crisis. Harford makes an interesting point: true believers in market efficiency would have wondered how safe (AAA securities) could yield such high returns and would have stayed away from these.

I guess the point about the crisis is that the banks ventured into activities that are more the preserve the capital markets; poor regulation allowed them to do so. Capital markets may not be efficient at all times but that does not diminish their role. Banks too have their traditional role but they must be careful not to stray away from it and involve themselves heavily in capital markets.

Saturday, October 12, 2013

The Nobel:how the news is given out and what makes it great

Nobel Laureate Peter Higgs chose to disappear on a holiday without his mobile to evade the media frenzy that follows the announcement. He must have been pretty sure he would win- and, of course, he was heavily tipped to.

How the news is given and how it is received is a story in itself- and it's well told here. Often, people are disbelieving: how could they be sure it's not a hoax? Sometimes, there is a stunned silence. At other times, people just want to be by themselves to digest the enormity of it all. Those tipped to win will be more than a little tense on the given day - if it's a Tuesday, it's Chemistry, Wednesdays are for the Physics prize-and Economics the following Monday. These prizes are announced by the permanent secretary to the Royal Academy of Sciences of Sweden. Peace, medicine, literature- these are left to others.

FT has a good article on why the Nobel remains the most sought after and respected, despite attempts by other endowments to outdo the Nobel in terms of money.

Friday, October 04, 2013

America Inc rules again

American firms have muscled their way back into nine of the top ten slots amongst global firms in terms of market cap. In 2009, only the US had only three firms in the list. Post-crisis, it seemed the US was headed for a decline. For the nth time, the US is to prove the naysayers wrong. The US economy is recovering better than Europe and it's emerging markets that are slipping up of late.

The Economist gives the reasons why America's renewed ascendance in the business world:
A perky stockmarket is partly responsible. The euro crisis has killed off any hope that more firms from the euro zone might scale the rankings: the currency block has just four firms in the top 50 (see article).
Two deeper factors are also at play, though. First, America’s mix of resilience and renewal. Three of its nine biggest firms have their roots in a 16-year period in the late 19th century—Exxon, General Electric and Johnson & Johnson. Their durability reflects their powerful corporate cultures. But the country still does creative destruction, too. IBM and Intel have slid down the rankings to be replaced by Apple and Google. Chevron, an energy firm, has gone from a laggard to a world-beater. Success has been anything but parochial. Six of the nine biggest firms sell more abroad than at home.

Second, the old rule that buying shares in state firms is investment suicide has reasserted itself. The world’s ten biggest state firms in 2009 have lost $2.2 trillion of value, or 60%, from their peaks. Lower commodity prices are only partly to blame. Investors now award most state firms stingier valuations than their private peers. Gazprom is worth three times its profits, versus Exxon’s multiple of 11. And although emerging economies have slowed, nimble private firms are doing fine. In 2007 investors gorged on shares in PetroChina when it listed in Shanghai, briefly making it the only firm ever to be worth over $1 trillion. Now China’s hottest corporate property is Alibaba, a private internet firm plotting a huge flotation.

The Economist may be exulting too soon over the falling fortunes of state firms. Nobody gave these firms the ghost of a chance of being highly valued, say, 10 years ago. But they did become a force to reckon with. With improvements in governance, restructuring and better market orientation, they could well reinvent themselves. The Economist had its ideological basis but it's too early to write off state-owned firms everywhere. 

Why McKinsey will stay at the top

Economist columnist Schumpeter takes a look at McKinsey's future while reviewing two books, one on the firm and another on consulting in general.

The big challenge to the to consulting firms comes from lower-priced competitors, some of whom use consultants who once worked for the big three. I doubt that lower prices will take away the bulk of the top three consultants' business- the companies who hire them are hardly the price-sensitive variety.

As Schumpeter correctly points out, McKinsey's strengths are talent, investment in knowledge creation and a network of alumni who are happy to use its services. In most companies, the people running them are so busy with operational matters that they just don't have the time or the mental space to strategise or even analyse information systematically. The bright minds at consulting firms do just that. Whether this adds value or not is not clear. But it serves a purpose akin that of the psychiatrist counselling patients:

Though lesser firms may be facing disruption, McKinsey dispenses a special sort of consultorial fairy-dust that is hard to replicate, and as much in demand as ever. The global ruling class is seized with a toxic combination of status-obsession and status-insecurity. Decision-makers also fear being swept away by one of Mr Christensen’s disruptive forces. They seek constant reassurance and reaffirmation from prestigious institutions. McKinsey knows better than almost anyone how to exploit this peculiar mindset. That will guarantee the Firm a solid future, even if no one can prove that its advice actually does any good.