Wednesday, June 24, 2015

China's communist party is not so communist

I am not saying this, it's well known sociologist Daniel Bell who thinks so. I have to say that this is the impression I too have formed over the years.

The CCP no longer subscribes to full-blown communism- it is committed to the market economy to a degree. More importantly, it's not the monolithic entity that most people outside think it is, with people of a particular orientation only being included and those at the top dictating the line. It is highly pluralistic and there is plenty of room for people to express their views:
With 86m members, the CCP is a pluralistic organisation that co-opts leaders of different sectors of society, including keen capitalists, and it aims to represent the whole country..........The CCP does not need a unifying ideology, so long as people agree that the political system does a good job of selecting public officials with superior qualities. The pressing problem of corruption casts doubt on the question of virtue. So the anti-corruption campaign is essential to buttressing the legitimacy of the CCP, though we will not see results for a few years. 
In other words, the CCP is the political equivalent of the bureaucracy. People with a flair or passion for public life are selected and promoted on merit. It's not yet free from dynastic politics (many of today's leading lights are descendants of close associates of Mao or Deng) but there is the promise of getting there.  Moreover, as Bell points out, it's important for the party to gain legitimacy by rooting out extreme corruption.

The differences on most issues within the CCP, I would imagine, are as broad as those between the Congress and the BJP. Instead of having people in two parties sharing the spoils, the CCP does it within one roof. The key divide between the Congress and BJP is not political or economic but cultural. The BJP differentiates itself clearly with its Hindutva orientation. Who knows?- the Congress may go the same way. Rahul Gandhi's decision to head for Kedar soon after he came back from his retreat is an interesting straw in the wind.

Tuesday, June 23, 2015

Helsinki Diary-II

The presentation of papers kicks off on day 2 at the Grand Marina Congress Center right opposite my hotel. It's a two-storied building with several conference rooms, large and small. As in such conferences, there are parallel sessions on various topics: banking, education, stochastic frontiers, total factor productivity, etc. Delegates move from one room to another depending on their interest. Mine is banking. The participants are from all over the world but there are not many from North America. I am one of two Indians at the conference.

The sessions are well organised. About 20 minutes for the presenter with five minutes for questions. Not enough time to do justice to issues arising from a given paper but that is something that participants do "offline" during the coffee and lunch breaks. Food is laid out on two tables. Unlike in the typical Indian conference which swarms with attendants, there's nobody behind the counters- again, a reminder that manpower is costly. When the break is over, a couple of ladies, with aprons tied around their waists, materialise from nowhere and clear the tables without fuss. Within minutes, the lobby is spotless.


There's no point hanging around for lunch- not much to take care of a vegetarian. I head for my room and munch tepla along with chundha, which I had had the sense to pick up Indubhen's in Ahmedabad. (This is a place from which people buy snacks to courier to relatives and friends pining for Indian savouries and sweets elsewhere in the world).  I have picked up several varieties of yoghurt and protein bar from a nearby supermarket. My lunch is done in all of ten minutes.

I make my way to the Uspenski Orthodox Church located a few hundred metres away from the hotel. Built in 1868, it's the largest Orthodox Church in western Europe. It's built on a hill and appears to ascend into the skies. The Orthodox Church dominates in Finland, something the country has in common with Russia.  (Ditto  for Greece, a point PM Tsipras has made in talking ominously of his nation's long-standing ties with Russia). The architecture is strikingly reminiscent of that at IIMA, with the red brickwork clearly standing out in the distance. The golden cupolas are magnificent.

I ascend a steep stone staircase leading up to the Church, crossing tourists moving in the other direction. I'm told the tourists are mostly Chinese and Japanese. There are some very old people in the crowd- one elderly man can barely walk and is being helped by a girl. I wonder how he made it up the stairs in the first place. There's no admission charge and no security, perhaps, not such a great idea considering that an icon was stolen from the Church about a decade ago.The balcony one level below the Church entrance gives a great view of the city. I could have stood there for hours taking in the view and enjoying the weather.


There is a wide range of papers in banking. The impact of financial services on industrial structure and development (one important question that came up was whether small, local banks translate into more lending for small enterprises); Sources of productivity growth in Indonesian banking; Bank branch operational performance; Sources of return to scale of US banks; and so on.

My paper is on performance of public and new private sector banks in India in the post-reform period, using what is called a pooled sample. The conclusions are striking: between 1993 and 2011, there was a trend towards convergence in performance between the two categories of banks. Only in 2011-13 did performance diverge. And the divergence happened because public sector banks chose to be exposed to infrastructure in a way in which new private banks did not. The infrastructure sector itself was impacted by non-economic factors such as regulation, lack of clearances, etc. I conclude that performance in Indian banking has been ownership neutral. Policy prescriptions based on a snapshot of performance in recent years, such as the ones made in the P J Nayak committee report, are thus inappropriate.

My conclusion is not novel. There is a wide range of studies that have arrived at the same conclusion but these were done much earlier. What my study does is to validate the conclusion for a much longer period. Strangely, neither the media discourse nor government policy has been informed by the evidence thrown up by the academic literature on the subject. People keep parroting the same nonsense about the superior performance of private sector banks.


In the evening, I head for Esplanade Park, just past Market Square. The Square itself is filled with stalls selling cherry, plum, strawberry and banana, a wide range of fresh vegetable and lots of sea-food. I sit on a stool facing the sea, the wind blowing lightly, and savour a delicious cup of freshly squeezed orange juice.

Esplanade Park has come alive. There is a band playing on stage. The chairs are filled with mostly old people. (The adverse demographics of Europe is manifest on the streets). Then, a group of dancers dressed in traditional costumes hope on to the stage for a round of folk dance. The glass cafe, Kappeli, opposite the stage is more nearly 150 years old. It was a hangout for the likes of Jean Sibelius, the famous music composer of Finland. (Finlandia is one of the famous compositions of the country- you should listen to it on You Tube).

The music and the luxuriant vegetation on the park are wonderfully soothing. There must be several dozen such places in Helsinki where people can hang out and relax. In material terms, life is made for people in such places The income level is high, medical care of high quality is assured and so is social security. There are parks, swimming pools and saunas in abundance (an estimated two million saunas for a nation of five million!).

In much of the developing world, including India, life is harsh, unrelenting and the main cities virtually devoid of beautiful public places. When you step out, there is very little to lift the spirit. Paris is, perhaps, the finest example of a city built to enthuse and energise its denizens. China is a luminous exception in the developing world. There is, however, a downside to the comforts of the Nordic region. People have to deal with a truant sun- I'm told by a conference participant that depression is high in many of these places and so is suicide. Not all the cafes and parks and upmarket shops can make up for a plain sunny day.

There is a reception for the conference participants at City Hall, just off Market Square. This is the building that houses the Mayor of Helsinki and his administrative staff. There's a brief welcome speech by one of the assistants of the mayor. The City Hall, he says, is meant to receive important visitors "such as yourselves"- there are broad grins in the audience. Food and wine are served in a high-ceilinged room lit up with chandeliers.


It's time for a tour of the city. There are two basic options: a straight one and a half hour visit to the main sights and a hop-on-hop-off tour which enables you to get off and explore places and get back to a bus when you are done. I opt for the former. I have a flight to catch in the evening. Besides, it's impossible to do justice the museums, concert halls and other places in a hour or so.

You need to stay in a place for at least ten days if you want to do justice to it. You must use public transport, including trains, to get a feel for it. And, of course, a lifetime is not enough to explore New York or London (my two favourite cities, I spent five years as a student in the former.). That's why I've always felt that the seven-day tours of eight cities that tour operators offer are a dumb idea- there's nothing to these other than being able to tell yourself that you've been there.

I board a bus at Esplanade Park. The driver greets every single passenger warmly. There is a young girl to shepherd us around. A commentary is available on the audio system in 12 languages. It's raining hard so the windows have streaks of water on them. The snaps one takes end up with gashes.

Off we go. Over the next couple of hours, Helsinki is revealed in all its splendours. There's the Senate Square with a variety of important buildings. The government Palace which houses the PM and his cabinet, on the opposite side is the main building of Helsinki University and adjacent to these is the Helsinki Catherdral glistening in white. A university opposite the office of the PM? Given the security paranoia we have in India, this would be unthinkable. I can't seen any sort of security anywhere in the Square, much less gun-toting commandos. It's a different world.

Other sights fly past in succession. The upmarket residential area which houses the embassies and the Helsinki rich- it's set on a hill facing the sea, the houses surrounded by acres of greenery; the Museum of Contemporary Art; the National Museum; the central office district which includes the biggest supermarket in Europe; the Central Bank; the Finnish Parliament; the Olympic Stadium; and the Sibelius memorial. All along the route, elegant cafes and parks spring into view. Helsinki was able to host the Olympics in 1952; we dream of hosting one in the next decade. That one fact
epitomises  the gap in standard of living. I mustn't sound too harsh. There's a world of difference between creating prosperity for a land of five million and a land of 1.2 billion.

The bus drops us at Senate Square. It's raining hard but I think it would be a shame not to visit the Helsinki Cathedral. I climb the steps leading up to the white stone monument. As I enter the Church, a communion is on with a priestess presiding. I take a seat. The priestess says a few words, then the music starts playing. I am not a religious person but the ambience in the Church gives me a flavour of what the religious feeling is all about, a sense of beauty and a sense of the sacred.


I await the taxi that will take me to the airport. The receptionist at the hotel tells me it's safer to book one than to bank on getting a taxi at the stand right outside the hotel. She doesn't tell me that pre-booking costs an extra five euro- commercial instincts are the same everywhere in the world. I am charged ten euro per hour for the five hours I have spent past the check-in time. In India, if you have stayed in such a place for four days, they would cheerfully waive extra charges for late check-out. If they charged extra, people would start howling.

I keep looking around the lobby for signs of the driver. Finally, I see somebody at the door holding a placard below his waist. I missed him earlier because he happened to be wearing a suit. With his spectacles and gray hair nicely brushed, he could pass for a distinguished academic. He picks up my bag and takes it down the steps. The vehicle is a mini-van. I tell him I had asked for a cab. He smiles, "The fare is the same". He keeps up a steady chatter of comment on the places along the route. He will park his vehicle near the airport and cycle back home, he tells me. No wonder he looks so fit.

The check-in and immigration counters are done without fuss. I am soon at the check-in counter. I head for the loo. There's a heavy stench as I enter. I feel almost exultant- this happens in the developed world too! The crowd again is overwhelmingly Indian and middle-class.

A girl is going around offering her laptop to sundry passengers. I figure she's taking some sort of feedback about the airport. I see our aircraft parking outside the boarding gate just hour an half before the departure time. I know we are gong to be late. Sure enough, we depart late and arrive in Delhi half an hour past the scheduled time. At Delhi airport, I make a beeline for Vaango and gobble down idli-sambhar.

Helsinki, you won my heart.

Saturday, June 20, 2015

Two hundred years after Waterloo

Napoleon born apart. That terrific pun I heard from my school master about sums up the popular perception of one of the greatest conquerors and military leaders in history. On the bicentennial of the battle of Waterloo, which put an end to Napoleon's reign once and for all, there is a spate of books and assessments of this larger-than-life figure.

There are, as is to be expected, diametrically opposite views on Napoleon. The positive view is one that sees him as a creator of modern France. One article sums up his achievements very well (and is worth reading for its analysis of the epic battle of Waterloo alone):
Yet he said he would be remembered not for his military victories, but for his domestic reforms, especially the Code Napoleon, that brilliant distillation of 42 competing and often contradictory legal codes into a single, easily comprehensible body of French law. In fact, Napoleon’s years as first consul, from 1799 to 1804, were extraordinarily peaceful and productive. He also created the educational system based on lycées and grandes écoles and the Sorbonne, which put France at the forefront of European educational achievement. He consolidated the administrative system based on departments and prefects. He initiated the Council of State, which still vets the laws of France, and the Court of Audit, which oversees its public accounts. He organized the Banque de France and the Légion d’Honneur, which thrive today. He also built or renovated much of the Parisian architecture that we still enjoy, both the useful—the quays along the Seine and four bridges over it, the sewers and reservoirs—and the beautiful, such as the Arc de Triomphe, the Rue de Rivoli and the Vendôme column.
Napoleon's big mistake, as is well known, was the invasion of Russia. It turned out to be a disaster- he lost half a million soldiers. And it brought his enemies together in an assault on France. Napoleon abdicated and was exiled to Elba. The French monarchy, represented by the Bourbons, returned to power but were unequal to the task of reconciling the divisions in French society.
Napoleon escaped from Elba and made a spectacular return to power. The Allies did not like that one bit and made plain their intention to oust him. Napoleon had disavowed plans of conquest but the Allies were unwilling to forget or forgive. More importantly, as the article I have cited argues, the aristocracy of Europe was determined to thwart the liberal ideas that Napoleon had once stood for. The Battle of Waterloo was inevitable. 
Now, for the opposite view. There's no getting away from the fact that Napoleon departed from the revolutionary ideals of Voltaire and Rousseau once he came to power. His crowning blunder, to speak, was his decision to call himself Emperor. An article in FT dissects the negatives of Napoleon's reign mercilessly:
That Napoleon, the supposed deliverer of liberty and equality, all wrapped up in the tricolour, was the mortal enemy of freedom there can be no argument. When in 1799, the 30-year-old general came to power through the coup of 18th Brumaire, there were 70 newspapers in Paris. Bonaparte said there was need for but one — the Moniteur, the official tool of his propaganda — and closed down all but a handful of lickspittle flatterers.

His police and spies were everywhere, deadening cultural life in Paris. Theatres were shut the minute they dared to perform anything that could be construed as critical of the regime. Napoleonic Paris was a showplace for grandiose architecture but the cemetery of independently conceived art and ideas. 

Ah, sigh the Napoleonomanes wringing their hands and dabbing their eyes, liberty had to die so that equality might live. Unless, that is you were black or a woman. In 1802 Napoleon reinstated slavery; two years later he liquidated one of the Revolution’s most precious achievements: divorce by mutual consent. The Civil Code made wives more the prisoners of their husbands than in the old regime. They no longer had any right to their property in marriage and had to ask their husbands’ permission to take the stand in legal proceedings.  

The writer also makes the point that, in seeking to unite Europe, Napoleon lost sight of the need for disparate nations to express their identity, one reason why modern Britain is steadfastly opposed to the EU. Perhaps, the Europeans might borrow from the Indian Constitution and give themselves a Finance Commission (although one should not be blind to the problems within the Indian federation, notably the problems in the North-East).

In the ultimately analysis, Napoleon, for all his administrative abilities, failed to recognise the need for individual freedom and cultural identity. Modern rulers must take note. And the present-day leaders of Europe need to be mindful of the seminal lesson from the titanic reverses of Napoleon and Hitler: don't mess with the Russian bear. 

Helsinki Diary- I

As I await the Air Finland flight to Helsinki at the boarding gate in Delhi, I am in for a big surprise. The flight is full - and most of the passengers are Indian, mostly middle-class people on a group tour. 

The flight departs half an hour late (and lands half an hour late), so India's airlines take heart. The economy section is cramped and uncomfortable and it's warm inside as the plane readies to depart. The airline doesn't provide a bottle of mineral water. You are supposed to trudge up to the flight crew's section and help yourself to a cup of water. Since this means having to disturb the person next to you, it's not pleasant at all. Lunch is frugal and nothing to write home about. There are announcements in Hindi and English, the airline mindful of the large complement of Indians on the flight.

Helsinki airport is quite small and the immigration counter courteous and quick to clear. I am out in about half an hour or so. It's cold and drizzling outside,14 degrees- and this is supposed to be summer in the Arctic region. I'm glad I have my jacket on and have brought along a sweater. I get into a large-sized cab. It turns out to be a BMW (and yet the fare is no different from that for other cabs). The driver is from Somalia. He landed decades ago and hasn't thought it necessary to ever go back. "It's rather tough out there", he says. It's hard to disagree.

The sights alone the drive from the airport to downtown Helsinki, where my hotel is located, remind me of London, with lots of brickwork-like buildings along the route and plenty of greenery. It's a Sunday, so traffic is scanty. We do the 20 km distance in about 20 minutes. The cab fare is around 50 Euro. As I arrive at the hotel, a seafront and several large liners loom into view. Helsinki has five ports and this one comes right into the city. There are plenty of cruises from here to Stockholm, St Petersburg and elsewhere.

Scandic Grand Marina is a four-star hotel. It wouldn't compare with Taj Vivanta although the tariff is comparable to that at Taj Colaba. There is a flight of steps to climb from the road into the hotel. No attendant comes rushing nor is there a doorman. I have to lug my bag up the stairs up myself. There is a smallish lobby leading to the only restaurant. Just two people at the counter to do the check-in and check-out. You understand what it is to be in a high-wage country (Finland has a per capita income of around $30,000).

I had asked for a sea-facing room. What I get is a room facing the conference centre. Standing at the window and viewing the outside from a sharp angle, I get a glimpse of the sea. The room itself is quite utilitarian. Surprisingly, there's no indoor heating. I'm told a room heater can be available on request. I had seen the menu card put up at reception and my heart sank. There is a very limited number of items on offer (quite unlike the multi-page menu you get at an upmarket hotel in India) and, except for one item of salad, no vegetarian food.


The next morning, I head for Aalto business school where the conference is to kick off. I'm there for the European Workshop on Efficiency and Productivity Analysis. Helsinki has free wi-fi in most places in the city. I look up Google Maps and know which tram to take and where.

I step out of the hotel and make way to the tram stop. The narrow road from the hotel gives way to a broader one about 100 metres away. I walk pass Market Square where fresh vegetable, fruit and other foods are on offer. This is a typical downtown location of an European city. Broad avenues with parks and other greenery at regular intervals at the centre. Cafes and other restaurants on either side, along with upmarket shops selling clothes, jewellery, hand bags and what have you.

I have to stop and ask for directions every now and then. I am to find over the next few days that people are uniformly courteous helpful. This is probably the friendliest country I've ever been to.
Finland has a population of just five million. It was ruled for nearly 150 years by Sweden and then by Russia, becoming free, I am told, in 1917. It is part of the Nordic states and its economy conforms to the Nordic model- high taxes (43% at its highest in Finland) and free provision of education at all levels and high-quality medical care. It also has an excellent public transport system, comprising buses, trams and a metro, and cycling paths all over the city.

I board the tram. Most drivers, I notice over the stay, are female. There's no conductor, you pay the driver as you enter. (Doubt that this would work in India). I know from Google Maps that the ride is about 20 minutes long. I keep glancing at my watch. It turns out that there is a lady next to me who is also headed for the conference. Twenty minutes later, we ask somebody if we are close to Aalto. We learn we are and hop off. It's a good ten minutes from the tram stop to the business school.

There's not much of a formal inauguration. The first day is spent on workshops for students. I head for the finance department. Some of the offices are open. I knock on a door titled, 'Director of finance'- I guess it must be the head of the department. A professor with his back turned to me and bent over a PC wheels around on his chair and looks up. I ask,"Do you have few minutes"? He breaks into a grin. "Of course".

I walk in and take a chair. I introduce myself. I tell him I want to know something about the school. He chats with me for a while and then puts me on to a colleague. Aalto is Finland's leading business school. Both students and faculty are overwhelmingly from Finland but that's changing of late.There is a huge effort to recruit faculty from outside by offering competitive pay. A business school degree is not part of the mainstream university courses, so Aalto charges a fee for its undergrad and MBA programmes. I am surprised to learn that placement- which is really the whole point about a business school- is not very active at Aalto. Not many companies come to the campus  to recruit. Students have to apply on their own. If this happened in India, b-schools would lose their clientele.

I ask about Finland's high school education model of which I have heard so much. Kids go to school only when they are seven.There are no exams until the final stage. The teacher to student ratio is amongst the best. School teachers are well paid, well-educated and highly respected in society. The prof remarks, "This system is good for bringing everybody up to a certain level but it's not good enough to achieve excellence". I guess that could pass for a comment on socialism in general. What he omits to mention is that it may be difficult to achieve excellence until society as a whole first reaches a certain level. Ask the Russians and the Chinese.

Aalto b-school is part of Aalto university. The university itself is split across three campuses, one of which is close to my hotel. The b-school has another building, called the main building, which houses mostly the administrative staff. I am put in touch with the international exchange coordinator. I'm pleasantly surprised to learn that IIMA has an exchange arrangement with the b-school and a couple of students on either side have been going over for the past several years.

Not far from the B-school is one of the best-known sights of Helsinki, the Rock Church, a whole church burrowed into a natural rock formation. I enter the cavernous structure and am amazed to see a beautifully lit church inside swarming with tourists. There's a lady playing the piano. I sit on the one of the benches and take in the mellifluous notes.

Friday, June 12, 2015

The Great Reversal: developing countries no longer the growth engine

After the financial crisis, there was much talk of "decoupling". This meant that growth in the developing world would  be de-linked from that in the developed world which was weighed down by the financial sector. The developed world might suffer slow growth but, for a variety of reasons, the developing world would grow rapidly so that "convergence" - the catching up of the developing with the developed world- would happen sooner than thought. So it was for about three or four years after the crisis.

Alas, like most economic forecasts, this one has met a sorry fate. The World Bank now says that it is the developed world that will be the growth engine of the world. Developing countries will see growth slowing down- with India and China being notable exceptions. What explains the slowdown in the developing world? One can point to a range of factors, some of which are specific to a few economies:
  • China's economy is slowing down, in part inevitable following the high growth rates of several years
  • A slump in commodity prices (to which China's slowdown has contributed) is affecting several leading developing economies, notably Brazil and Rusia
  • Much of the boom in production and trade in the Asian countries was China-centred and these economies are feeling the effects of the Chinese slowdown
  • The impending reversal of interest rates in the US is a big factor. Already, emerging markets have seen huge outflows and this is likely to intensify once the Fed decides to hike interest rates. 
In short, the two great themes of the past decade- China's rapid growth and cheap credit- are now diminishing in importance.

India looks good in relation to a range of developing countries- a growth rate of around 7.5%  and a current account deficit of around 1-1.5% this year makes it a bright spot. But the global slowdown is bound to have its effect- export growth will be muted. A return to 9% growth looks very unlikely in the medium-term- we will be lucky to touch 8%.

India's big problem is that low employment elasticity of income in recent years means that 8% growth just cannot generate the jobs it needs. The signs in recent weeks of Modi emphasising equity rather than pushing for growth suggest that the PM has seen the straws in the wind.

Sunday, June 07, 2015

Who needs labour reforms?

There is a continuous clamour in India for labour "reforms" which, shorn of euphemism, is really about the employer's right to hire and fire workers. Without this, proponents of such "reforms" say, you can't expect manufacturing to take off in India. How valid is this contention? A paper in EPW explores this question and comes up with answers that will confound advocates of labour "reforms":
  • When we argue against onerous regulations that govern labour markets, the first question to ask is whether the labour market needs regulation at all- why not leave it to market forces? Well, the question is answered even in the developed markets where there are regulations governing the minimum and even the maximum number of working hours per week (as in parts of Europe). Nobody seriously believes that the labour market should be a "free" market. - just as nobody believes that credit should be left to the "free" market.
  • How stringent are dismissal laws in India?  The authors show, using an index, that France's laws are more stringent- and that hasn't stopped the French from prospering over the past century. More significantly, China  made its labour laws more stringent in 2007- and are comparable now to those in India (although there might be special zones that are exempt from the operation of these laws).  
  • The authors also note that the literature on employment protection laws shows that such laws are seen to be correlated with increases in productivity. Why would this happen? Because giving workers a measure of protection encourages them to invest in firm-specific skills. 
  •  Dismissal laws, along with a greater voice for workers at work and collective bargaining for wages, are seen to lead to more egalitarian outcomes. I would add: it's important that workers perceive the system as fair if we are to have a measure of industrial harmony. You can't have hire-and-fire for workers when promoter-management faces no consequences for bad decisions by being ousted from management. It cannot be that losses lead to workers being sacked while management stays put.
  •  It's true that Gujarat has experimented with a measure of deregulation in labour laws. However, it would be incorrect to say that it is this factor that is responsible for Gujarat's success in industry. Gujarat has a number of other favourable factors- a tradition of entrepreneurship and ports, to name only two. Moreover, Maharashtra has matched Gujarat's industrial record without labour law deregulation.