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Why India will displace China as global growth engine A GAry ShillinG
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ost of us still look at China, the world’s secondlargest economy, as the undisputed leader among major developing countries. In the long run, however, I’m betting on India to emerge as the more significant global economy. those who are dazzled by China often forget that much of the rapid growth before 2008 was caused by the shift of global manufacturing from Europe and the U.s., not by domestic-oriented activity. China’s economy remains export-driven, with consumers accounting for only 38 percent of gross domestic product, far below the levels of many developing and developed countries. Chinese leaders are working to shift toward a more domestically directed economy. they want households to spend more and save much less than the current rate of almost 30 percent. one of the reasons that savings play such a big role is the high value Confucian society puts on providing for one’s family. the Chinese also save to pay for education for their children and to cover health care and retirement costs because there is no equivalent of Medicare and social security. In 2010, the Chinese government promised basic health care for all by 2020. that’s eight years from now, and basic care remains pretty basic. In some rural hospitals, a practical nurse is the most highly trained medical practitioner. HigHer Wages China has also increased minimum wages 20 percent to 30 percent in the last year to enhance consumer incomes and purchasing power. Yet higher pay, notably for factory workers producing goods for foreign companies, is driving low-skilled manufacturing jobs to cheaper venues such as Vietnam, Bangladesh and Pakistan. Furthermore, Western companies are increasingly resisting the requirement that they transfer technical expertise to Chinese partners as the price of setting up produc-
tion facilities in China. there is a widespread belief that much of the success of Chinese manufacturers is due to such voluntary technology transfers or outright theft of intellectual property. China recently reduced its target for real GDP annual growth to 7.5 percent from 8 percent. that target is probably too high as China’s one-child policy leads to a population decline, especially among new labor-force entrants. the number of 15- to 24-year-olds is already dropping and this group is projected to account for 150 million people in 2030, compared with 250 million in 1990. As a result, China’s labor force between the ages of 15 and 65 is expected to peak in 2014. China’s ample labor has increased GDP growth by an estimated 1.8 percentage points annually since the 1970s, but the contraction will cut into growth by 0.7 percentage point by 2030. At the same time, better conditions in rural areas have reduced the availability of cheap labor in coastal cities. By contrast, India has had no effective constraints on population growth. China still has the advantage — with 1.34 billion people last year, compared with India’s 1.24 billion — though not for too much longer. Furthermore, the age distribution of India’s population is better because of China’s one-child policy, which is now being reconsidered in view of its negative consequences for the country’s long-term labor force and economic growth. this means that the dependency ratio, the proportion of children and senior citizens to working-age people, is expected to continue falling in India in coming decades and to increase in China.
Younger PoPulation Younger people, of course, tend to be more geographically mobile, flexible in terms of occupation and creative. But these advantages only translate into greater productivity and economic growth if these workers have the right education and training as well as job opportunities. several centuries of British colo-
nial rule left India with a vigorous democracy and a parliamentary form of government. As in the U.s., these kinds of institutions are very well adapted to running a large, religiously diverse country where the central government is constrained by increasingly powerful states and weak coalition governments. China,
however, remains centrally controlled, with the Communist Mao Dynasty, as I’ve dubbed it, simply replacing the dynasties of old. the British also left India with a railway system that enabled the relatively easy movement of people and goods in that vast country. By contrast, China doesn’t grant resident status to farmers who move to urban areas in search of work. And, of course, the British gave India the English language — very useful in today’s world and a unifying force in a country with hundreds of languages and dialects. India also inherited a legal system that is very different from the Communist Party-dominated courts in China, which feature show trials and foregone convictions, as demonstrated by the recent trial and conviction of Gu Kailai, the wife of the disgraced party leader Bo Xilai. India is also home to a number of large, sophisticated companies, such as tata Group, that can compete globally. China, meanwhile, is burdened with government-controlled banks and other hugely inefficient stateowned enterprises that still produce a significant share of GDP and employ a quarter of the workforce. Indians have a natural bent toward technology, as was pointed out to me by the U.s. ambassador to India when I visited him in his New Delhi office in 1986. the ability of India’s many engineers and scientists to communicate in English is also a big help. Furthermore, the booming information-technology sector relies more on new technologies such as satellite transmission than it does on India’s utilities and inadequate basic infrastructure. englisH sPeakers Us and European companies outsource
many back-office and even legal and medical services to India. outsourcing now yields about $69 billion in annual revenue, accounting for a quarter of Indian exports. the lower wages in India and English-language skills of call-center employees offer big advantages to this industry. Another asset for India, as well as China, is a rapidly growing middle class. PricewaterhouseCoopers LLP estimates that 470 million Indians, or 38 percent of the population, had annual incomes of between $1,000 and $4,000 in 2010, enough to permit some discretionary spending. the number of consumers with such ready cash is expected to jump to 570 million in a decade, with about $1 trillion in income. the household-savings rate is high, almost 30 percent. Even so, 82 percent of Indian households had phones, usually mobile, last year. of the 247 million Indian households, 77 percent owned televisions, and 42 percent had bicycles, motor scooters or motorcycles, though only 10 percent possessed a motor vehicle, according to the 2011 census of India. Furthermore, much of Indian household saving is invested in gold and the dowries of yet-to-be married daughters. Another strong point is that the Reserve Bank of India is relatively independent of government influence, while the People’s Bank of China is completely controlled by the state. During the recent regime change in China, the PBoC governor, Zhou Xiaochuan, was dropped from the list of 205 members of the Communist Party’s Central Committee and is apparently being forced into retirement. Politicians, not central bankers, call the monetary shots in China. India has a vigorous and opinionated free press, compared with China’s statecontrolled propaganda machine. Internet use in India is expanding, although it is still tiny compared with the U.s. and even its BRIC cohorts: Brazil, Russia and China. A Gary shilling is president of A. Gary shilling & Co. and author of “the Age of Deleveraging: Investment strategies for a Decade of slow Growth and Deflation.” the opinions expressed are his own. this is the first in a five-part series. Courtesy BloomBerg
Financial reform’s breakthrough year SiMOn JOhnSOn Here’s an odd prediction for the coming year: 2013 will be a watershed for financial reform. true, while the global financial crisis erupted more than four years ago, and the Dodd-Frank financial reforms were adopted in the United states back in 2010, not much has changed about how Wall street operates – except that the large firms have become bigger and more powerful. Yet there are reasons to expect real progress in the new year. the Us Federal Reserve is finally shifting its thinking. In a series of major speeches this fall, Governor Dan tarullo made the case that the problem of “too big to fail” financial institutions remains with us. We need to take additional measures to reduce the level of systemic risk – including limiting the size of our largest banks. News reports indicate that the Fed has already started saying no to some bank mergers. At the same time, the Us Federal Deposit Insurance Corporation has become a bastion of sensible thinking on financialsector issues. In part, this is because the FDIC is responsible for cleaning up the mess when financial-sector firms fail, so its senior officials have a strong incentive to protect its insurance fund by preventing risks from getting out of control. the FDIC is showing intellectual leadership as well as organizational capabilities – Vice Chairman tom Hoenig’s speeches are a must-read. Wall street is pushing back, of course. But the rolling series of scandals surrounding global megabanks makes it difficult for anyone to keep a straight face when executives insist that our largest banks must maintain their current scale and scope. Do
we need HsBC to facilitate global money laundering? Do we need Barclays and UBs to manipulate Libor (a key benchmark for interest rates around the world)? Do we need still more losses at poorly run trading operations for JP Morgan Chase? the pro-bank lobby groups are positioning themselves to argue that the new resolution powers under Dodd-Frank have ended the too-big-to-fail problem, and we can expect a public-relations drive in this direction early in the new year. But the consensus view at the most recent meeting of the FDIC’s systemic Resolution Advisory Committee (of which I am a member) was that this claim should not be taken seriously. Under Dodd-Frank, it is arguably easier for the FDIC to handle the failure of a single large financial institution than it was in pre-Dodd-Frank days. But what if two or three or seven firms are all in trouble at the same time? the answer, as former Fed Chairman Paul Volcker implied at the meeting, is that we would be right back where we started – in the panic and frozen credit markets that followed the collapse of Lehman Brothers in september 2008. Indeed, the idea that substantial shocks could soon hit the Us financial system is not far-fetched. the European debt crisis, for example, remains far from being resolved. A significant sovereign-debt restructuring there would bring down European banks and potentially damage Us banks – as well as financial institutions around the world. Meanwhile, the continuing problems at European banks are a stark reminder that operating highly leveraged, thinly capitalized firms is incredibly risky. And the regulatory failures in Europe – consider the
German Landesbanks, for example – will become only more obvious in the coming months. Creating a common supervisory authority will mean nothing unless it can clean up the mess created by the existing supervisors. And that cleanup will expose more of the rot in banks’ current operations. the need for banks to finance themselves with more equity and relatively less debt will be the focus of one of the main publishing events in economics in 2013. Anat Admati and Martin Hellwig’s the Bankers’ New Clothes: What’s Wrong with Banking and What to Do About it? will appear officially in March, but advance copies are already being closely read in leading central banks. Bankers everywhere will rush to read it before their regulators do. the road to the ongoing financial and
economic crisis was built on a foundation of intellectual capture: not only regulators, but academics, too, became captivated by modern finance and its methods. Admati and Hellwig are at the vanguard of the counterrevolution, challenging the great myths of banking head-on. Do we need financial institutions to be so highly leveraged (that is, carrying so much debt relative to equity)? No, they argue. If banks of all kinds were financed with more equity, they would have stronger buffers to absorb losses. Both the equity and the debt issued by well-capitalized banks would be safer – and therefore cheaper. Bankers want to be so highly leveraged for a simple reason: implicit government guarantees mean that they get the upside when things go well, while the downside is
someone else’s problem. Contrary to bankers’ claims, this is not a good arrangement for society. Admati and Hellwig are confronting the bankers and their allies in no uncertain terms, grounding their argument in deep financial thinking, yet writing for a broad audience. Whatever else happens in 2013, we can be sure that they will not win the Goldman sachs Business Book of the Year award. simon Johnson, a former chief economist of the IMF, is a professor at MIt sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, the Baseline scenario. He is the co-author, with James Kwak, of White House Burning: the Founding Fathers, our National Debt, and Why It Matters to You. Courtesy ProjeCt syndiCate
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Class war in the new Gilded aGe rObert l bOrOSAGe 2012 was the first class-warfare election of our new Gilded Age. the first since the middle class has come to understand, in the words of new senator-elect Elizabeth Warren (D-Mass.), that the “rules are rigged against it.” Business-as-usual may no longer be acceptable. But Washington didn’t get the memo. Even as ballots were still being counted in Palm Beach, Florida, the two parties lurched into the fierce debate over the fiscal cliff, the noxious brew of automatic spending cuts and expiring tax cuts that would poison the recovery. the debate, a dismal sequel to the 2011 debt ceiling melodrama, focuses on deficits not jobs. once more, Republicans are threatening to blow up the recovery unless Democrats make otherwise unacceptable concessions. once more, President Barack obama looks for a “grand bargain,” seeking bipartisan support for terms divorced from opinion outside
the beltway. once more, what scott Galupo at the American Conservative called the “clown show” of the House Republican caucus blows itself up. Republicans are the most clueless about this new reality. the election’s one clear mandate, confirmed in polls ever since, was for obama’s oft-repeated pledge to let the Bush tax cuts expire on those earning more than $250,000. Yet, House Republicans stood staunch in defense of the very rich – refusing to pass their own speaker’s bill to extend the tax breaks on everyone except millionaires. this came after House speaker John Boehner (R-ohio) spent weeks insisting that Republicans would allow the Bush tax breaks to expire on the richest Americans only if the president agrees to cut Medicare, Medicaid and social security, the core pillars of family security. When the president came perilously close to giving him yes for an answer, Boehner broke off talks to get House Republicans to vote on his “Plan B” extension of all tax cuts for income under $1 million a year. But, with near Keystone Cop incompetence, House Republicans then blew up their own speaker’s plan. they recoiled at the horror of raising taxes on millionaires –
though they could also eliminate the automatic spending cuts for the Pentagon, while doubling them on education, food safety and other domestic programs. stunned, Boehner sent Congress home for Christmas, telling the media “God only knows” what will happen next. obama’s popularity has soared as Republicans have flailed about. Yet obama continues to seek a “grand bargain.” His last offer to Boehner would cut social security, veterans’ benefits and other government benefits over time with the lower inflation rate adjustment – the “chained CPI” – in exchange for ending tax breaks for those earning more than $400,000. House Minority leader Nancy Pelosi (D-Calif.) said she could deliver House Democrats to support that compromise. Nothing more clearly exposes the stark gulf between conventional wisdom inside the Beltway and the opinions of most Americans. Americans of all stripes are increasingly aware that they have been getting the shaft, while the big banks, corporations and money have been pocketing the gold. Large majorities believe their legislators are essentially corrupt – more responsive to their donors than their voters. that’s why poll after poll shows that broad majorities of Americans – including majorities of Republicans – support raising taxes on the wealthy. overwhelming majorities – including most Republicans – want Medicare, Medicaid and social security protected, not cut. In an election night poll sponsored by the Campaign for America’s Future, voters were asked what they would find acceptable in a deal to cut deficits. sixty-two percent said cutting social security over time was unacceptable. Even more, 72 percent, opposed cutting discretionary spending, like “education, child nutrition, worker training and disease control.” Almost fourfifths, 79 percent, opposed forcing seniors to pay more for Medicare. As for raising taxes on the top 2 percent, more than two-thirds, 70 percent – including a majority of Republicans – found it acceptable. Far more, 89 percent, supported saving Medicare costs by negotiating lower drug prices from drug companies. seventy-two percent supported reducing military spending by ending the war in Afghanistan. More than two-thirds supported a minimum tax on corporate profits reported overseas. Americans support compromise. Cour-
Kim Jong-un as cult icon? The joke’s on you, capitalist comrades! Laughing at North Korea’s absurdities is a decades-old pastime, but the west now has reason to be more nervous than amused g
Alex hObAn Kim Jong-un has the best job in the whole world, right? He’s bequeathed his people dolphinariums filled with backflipping sea-life and high-adrenaline roller-coasters that rival Alton towers. He’s spruced up his capital city with flashy times square-style billboards and built its burgeoning hipster contingent a massive skatepark. He smokes whilst casually launching big-boy rockets. He has a beautiful fashionista wife and a box-top haircut to rival the Fresh Prince of Bel Air. LoL. one helluva guy. that, at any rate, seems to be increasingly the image of North Korea’s supreme leader – a view that tends to overlook the fact that the nation he is supposed to look after suffers from severe malnutrition and chronic corruption. When spoof news website, the onion, ran an article claiming the young ‘un was the “sexiest Man Alive”, the affection for the socialist regime’s new dynastic ruler seemed sincere enough that Chinese state media mistakenly re-reported it as truth. this week time magazine decided to cast off 5.6m votes for the supreme Leader Kim as Person of the Year, which North Korean state Media nevertheless reported as an unbridled victory. Admittedly, the 5.6m votes did turn out to be erroneous troll-casts by the tiresome netizens of 4Chan, but still – what if they’re just saying what we wish we weren’t all thinking? What if our tongue-in-cheek adoration for Kim is an expression of our own frustrations with another year of directionless recession, austerity, uncertain leadership and a deep moral ambiguity in the ever-stuttering procession of western zombie capitalism? Meanwhile, behind the surreal cartoon version of North Korea, the west’s relationship is changing in a more fundamental way. When luxury German hoteliers Kempinsiki announced it would be opening North Korea’s much maligned “Hotel of Doom”, CEo Reto Wittwer tastefully predicted the deal would become a “money printing machine”. It came as part of a wave of luxury redevelopments in the capital city Pyongyang, including its new showpiece Mansudae area. Courtesy the guardian
tesy reuters
The euro zone’s delayed reckoning g
While financial strains have eased, economic conditions on the euro zone’s periphery remain shaky nOuriel rOubini
the risks facing the euro zone have been reduced since the summer, when a Greek exit looked imminent and borrowing costs for spain and Italy reached new and unsustainable heights. But, while financial strains have since eased, economic conditions on the euro zone’s periphery remain shaky. several factors account for the reduction in risks. For starters, the European Central Bank’s (ECB) “outright monetary transactions” programme has been incredibly effective: interest-rate spreads for spain and Italy have fallen by about 250 basis points, even before a single euro has been spent to purchase government bonds. the introduction of the European stability Mechanism (EsM), which provides another €500 billion to be used to backstop banks and sovereigns, has also helped, as has European leaders’ recognition that a monetary union alone is unstable and incomplete, requiring deeper banking, fiscal, economic, and political integration. But, perhaps most important, Germany’s attitude towards the euro zone in general, and Greece in particular, has changed. German officials now understand that, given extensive trade and financial links, a disorderly euro zone hurts not just the periphery, but also the core. they have stopped making public state-
ments about a possible Greek exit, and just supported a third bailout package for the country. As long as spain and Italy remain vulnerable, a Greek blowup could spark severe contagion before Germany’s election next year, jeopardizing chancellor Angela Merkel’s chances of winning another term. so Germany will continue to finance Greece for the time being. Nonetheless, the euro zone periphery shows little sign of recovery: the gross domestic product (GDP) continues to shrink, owing to ongoing fiscal austerity, the euro’s excessive strength, a severe credit crunch underpinned by banks’ shortage of capital, and depressed business and consumer confidence. Moreover, recession on the periphery is now spreading to the euro zone core, with French output contracting and even Germany stalling as growth in its two main export markets is either falling (the rest of the euro zone) or slowing (China and elsewhere in Asia). Moreover, balkanization of economic activity, banking systems, and publicdebt markets continues, as foreign investors flee the euro zone periphery and seek safety in the core. Private and public debt levels are high and possibly unsustainable. After all, the loss of competitiveness that led to large external deficits remains largely unaddressed, while adverse demographic trends, weak productivity gains, and slow implementation of
structural reforms depress potential growth. to be sure, there has been some progress in the euro zone periphery in the last few years: fiscal deficits have been reduced, and some countries are now running primary budget surpluses (the fiscal balance excluding interest payments). Likewise, competitiveness losses have been partly reversed as wages have lagged behind productivity growth, thus reducing unit labour costs, and some structural reforms are ongoing. But, in the short run, austerity, lower wages, and reforms are recessionary, while the adjustment process in the euro zone has been asymmetric and recessionary/deflationary. Meanwhile, the monetary union remains an unstable disequilibrium: either the euro zone moves towards fuller integration (capped by political union to provide democratic legitimacy to the loss of national sovereignty on banking, fiscal, and economic affairs), or it will undergo dis-integration, fragmentation, and eventual breakup. And, while European Union leaders have issued proposals for a banking and fiscal union, now Germany is pushing back. German leaders fear that the risk-sharing elements of deeper integration (EsM’s recapitalization of banks, a common resolution fund for insolvent banks, euro zone-wide deposit insurance, greater EU fiscal authority, and debt mutualization) imply a politically
unacceptable transfer union whereby Germany and the core unilaterally and permanently subsidize the periphery. Germany thus believes that the periphery’s problems are not the result of the absence of a banking or fiscal union; rather, on the German view, large fiscal deficits and debt reflect low potential growth and loss of competitiveness due to the lack of structural reforms. of course, Germany fails to recognize that successful monetary unions like the Us have a full banking
budget. the Us is also a large transfer union, in which richer states permanently subsidize the poorer ones. At the same time, while proposals for a banking, fiscal, and political union are being mooted, there is little discussion of how to restore growth in the short run. Europeans are willing to tighten their belts, but they need to see a light at the end of the tunnel in the form of income and job growth. Courtesy livemint
union w i t h significant risk-sharing elements, and a fiscal union whereby idiosyncratic shocks to specific states’ output are absorbed by the federal
Monday, 24 December, 2012