governance, political economy, institutional development and economic regulation

Posts tagged ‘China’

G 20 summit: Not India’s turn to eat

ivanka G20

President Trump’s implicit assessment of the value of the G20 Hamburg summit was best illustrated by letting his daughter replace him, whilst he was away from his seat at the summit and to spend double the budgeted time, holding President Putin’s hand. We should take note.

Did Trump try and devalue the G20, President Xi or both by letting Ivanka replace him?

Despite his oddities and his rhetoric, President Trump is a businessman. He cannot but recognize that his real fight is with China. So occasional side swipes to emphasize US dominance over China are par for the course. But the US is too fat to keep pace with China. Its entrepreneurial juices have dried up, bled by the strain of keeping the American Dream alive – an endlessly aspirational, middle class and a voraciously, acquisitive elite, albeit both sets being more meritocratic than elsewhere. But the strain shows. If there is no public money for infrastructure and Facebook needs to build a village to increase the supply of affordable housing in Silicon Valley, there is something very wrong with institutional incentives in the US.

The football “huddle” to plot strategy

Trump

President Trump’s instincts to deal with a problem is to “huddle” in a group of “familiar” friends. Co-opting Russia into a loose friendly alliance of northern hemisphere countries could be an outcome of such “huddling”. After all, there are the cultural bonds. The UK will be supportive. It was Tony Blair, who persuaded Russia to join the rich country club of G7, which thereafter became the G8. Russia was expelled, in 2014 over its muscular action in Crimea. But the G7 was already in decline, post 2009, whilst the G20 gained leverage, as a more inclusive forum with economic heft.

Russia better as a friend than an enemy

Putin2

Bringing Russia in from the cold, makes sense. It is no longer an ideological threat to the West – just a shade smarmier in its management style. But no more so than other upper middle-income countries. Its GDP, in constant terms, has barely moved from US$ 1.5 trillion in 1989 to 1.6 trillion in 2016 – though it has doubled since 1998, when it reached its nadir at US$ 0.8 billion. Russian expatriates live happily in the US and in Europe.

Hypertension, made in China

china air craft carr

Expansionist Germany was the muscular outlier in the early part of the last century. In the early part of the current century, it is China. Scale matters. Consider that the world’s largest mall, 19 million square feet of space, has come up in Chengdu, western China.

The Chinese manufacturing engine has surplus capacity to feed the world over the next decade with goods, targeted at the price points and quality requirements of local markets, across the globe.

China applies the late CK Prahalad’s principle of, “finding the fortune hidden at the bottom of the pyramid” by supplying consumables and consumer durables to 3 billion humans at the bottom of the economic food chain. And they do it better than local manufacturers, located in countries where the poor exist, including India.

India’s dharma

So where does this leave India? It is not in India’s DNA to kowtow. So, we are a poor fit with China. It is in India’s political DNA to be ideological. Remember Non-Alignment? Ideologically committed bureaucracies are a menace. They must be tamed. To come out tops, from the ongoing international churn towards a transactional future, we need to reign-in our tendency to grandstand. There is virtue in being supremely transactional. But transactions must be anchored in public interest. We have not been very good at that.

Had we been better, we would have got rid of poverty faster than we have. We would have cared more about creating physical and social (education and health) infrastructure and jobs. And we would have exploited every growth opportunity, which came our way, rather than choose to sit out the 1970s and the 1980s on our elitist, immaculately manicured hands.

We do not have the luxury, unlike Latin America and large parts of Africa, of being natural invitees to the western, Christian table of nations. Nor do we fit the dismal, backward looking club of Islamic nations. And we are too large to be helped economically. So, like China, we have no option, except to fend for ourselves.
International trade is our entry point to becoming more competitive.

We need cheap Chinese goods more than China needs our market. We import just 3 percent of China’s exports. We should be trying harder to become part of global supply chains to pull-in foreign investment, technology, jobs and increase net exports. Our traditional links with Russia are valuable but need to be lubricated.

With the US and its West European allies, we share a tradition of democracy – a generic, clunky, artifact to safeguard citizen rights versus the State via an elaborate architecture of self-balancing, institutional power centers. These links can be deepened.
Going under the radar and setting-off no red alerts till we have accumulated critical economic heft is sensible.

Playing second, or even seventh fiddle, to achieve targeted outcomes is better than to compromise outcomes by being top-dog in process matters. But low profile economic diplomacy does not come easy to our colonial style Foreign Policy establishment. Best to remember that we rank seventh in nominal GDP and are a lower middle-income country. We should punch our weight. Doing more is unsustainable.

Adapted from the author’s article in TOI July 9, 2017Blogs http://blogs.timesofindia.indiatimes.com/opinion-india/g20-trumped/

 

 

 

 

New social compact : wooing the underdogs

voting

Do Indian voters remain deeply aligned with caste, clan and community (read religious) interests, as reported in the ongoing state elections? Possibly, yes, they do. Continued allegiance to traditional identities makes sense, if new ones never had the chance to take root.

Industrial work was one such silo-buster, as is urbanisation. Both, have had a limited impact on India’s social profile. Large, organised industry employs barely 10 million people, or just two per cent of the workforce. The impact of urbanisation is still far too recent to induce a change in social behaviour. Migration by men, for work in the urban, informal sector, has done a lot to contribute to the urban sprawl. But it doesn’t let new urban identities take root, as families remain village bound.

Modi – disrupting the status quo

No surprise then, if the 657 political parties (many are moribund) that are registered with the Election Commission vie for existing group interests as vote banks. There are only two examples in the past three decades which go against this grain of vote bank politics. The BJP came to power at the national level in 2014 by disrupting traditional identity-based vote banks. In a powerful outreach to young, aspirational India, Prime Minister Narendra Modi provided the instant hope of jobs through a government which worked for them, not against them. This enlarged support beyond the BJP’s traditional vote banks — upper caste and bania groups.

tea-3

Modi exults in the hard work and determination that enabled him to overcome his humble origins  – chaiwala (tea server) – in status quoist India. Mayawati – BSP and Mamata Banerjee – Trinamool Congress are female avatars of Modi.

It helped that Narendra Modi is himself from a backward caste. His is a rags-to-riches story. More important, he flaunts his humble origins and makes a virtue of his struggle to make good. More conventionally, he publicly dons the mantle of the selfless “sevak”. Anybody in the audience could be him, if they only had the gumption to succeed.

AAP – the new “Left”  

aap-uk

The Aam Aadmi Party had similarly disrupted traditional identity politics in December 2014. It fashioned a winning alliance of the urban poor and neo-middle class against the corruption of elites in the Delhi state election. This anti-establishment, anti-corruption model is now facing a test, for its resilience and appeal, in the rural settings of Punjab and the BJP stronghold of Goa — both of which are “rich” states.

Its a tough world out these

wire

Like the Congress during the post-Independence period, Mr Modi’s BJP is shaping a new India. It is an India that recognises today’s harsh international realities. First, unlike the rosy expectations of the 1950s, foreign aid, as an instrument of change, is dead. Economies need to fund their own development, by borrowing from the market or collaborating with foreign investors. This requires governments to bend before those who have the surplus capital; ship up to strengthen their own economies or continue to lag. Second, the consensus of the 1980s, that markets could substitute for the State’s inefficiency, is less credible, particularly after 2008. Strong states seem inevitable, albeit exercising judicious restraint while regulating markets.

A Nobel for the Communist Party of China?

china-politburo

For lifting more people out of multi-dimensional poverty that ever before; for adapting ideology to market realities and for standing true to their national objectives, the Nobel goes to ……. 

China has been the most successful economy, post 1990. It deserves a Nobel Prize for overcoming massive poverty and low levels of human development to become the factory of the world. It accounted for 1.5 per cent of world GDP in 1990 — the same as India. Since then it has cornered more than a fifth of growth in world GDP. By 2015 it accounted for 15 per cent of world GDP and has liberated nearly 300 million people — almost as many as the population of the United States — from poverty.

The Chinese story is of a single-party-managed mega-nation. By mixing market principles of merit and competition with the political energy of a proactive state, it has fashioned a massive politico-industrial machine. China has little patience with the effete romance of liberal idealism. Theirs is the classic hunter’s approach to life — smart strategy matters more than social ideology for filling your belly and remaining stronger than your adversary. This approach resonates in a world where persistent vulnerability to poverty; falling real income and increasingly skewed income distribution clouds even the rich world.

Where is the leadership in India?

tamil-nadu

Reverence for the absent trumps concern for the living, for gathering votes, in mystical India

Mr Modi’s world is that of realpolitik. Performance and outcomes matter the most. In contrast, the other national parties seem dated. The Congress — once a people’s movement, albeit led by professionals — is dormant. The Left is trapped in ideological echo chambers, seemingly unaware that organised, permanent workers are a diminishing vote bank. That economic forces have moved value addition beyond the spatially focused, integrated work areas, of the industrial age. The Lohia movements of the late 1970s rallied the backward castes into regional parties. But these lack vision, credibility or sustainability, beyond their narrow vote banks. The dalits have been transactional in their support for parties, although Mayawati has tried to substitute the Congress with a rainbow-style coalition. Muslims remain boxed into a defensive stance, perpetually seeking the status quo rather than transformation.

Where then do we turn to for leadership in India? The BJP is a clear and credible option. The mantra is that the government must focus on economic inclusion and social inclusion will follow. To take a practical example — higher government revenues from a more efficient tax regime can enable transfer of universal basic income to the poor and marginalised. This neatly avoids the clunky and inefficient option of physically providing cheap goods and services to the poor and caste or community-based support for the marginalised. It may also reduce corruption significantly by around one per cent of GDP.

A new social compact – trade entitlements for opportunity

taxi

The existing social compact between citizens and the State should be reworked. Will citizens be ready to give up their entitlements and de facto freedoms, in return for the State providing more economic benefits — security, macroeconomic stability, jobs, infrastructure and access to healthcare? With money and smartphones in their pockets, people — including the poor — will be able to shape their own societies, without being clouded by the past seven centuries of civilisational shibboleths dumped on them. Can Mr Modi get past the elites who benefit directly from the status quo? 2019 will tell.

Adapted from the authors article in Asian Age March 2, 2017 http://www.asianage.com/opinion/columnists/020317/can-modi-revise-social-compact-2019-will-tell.html

 

Book Review: Just erratic not deranged

ghosh

Amitav Ghosh’s latest book—The Great Derangement—is an exploration of why contemporary culture, imagination and political systems have failed to prevent global warming, despite its cataclysmic long-term effects and disruptive short-term outcomes.

His choice of the book’s title reflects the conundrum facing poor nations. They are not the ones who benefited from the carbon economy. But to aspire to do this now, when there is no carbon space left, is a one-way ticket to self-annihilation. Hence, the derangement of the modern world, racing towards a future, where consuming itself becomes the only option. Curbing global warming means debunking the fundamental values on which the modern world is built. Central to this artifact is the notion that man is the centre of the universe. Non-human forces, like nature, have no place in this calculus of liberty and modernity.To recognise global warming as a problem, you first have to reject the paradigm that the unconstrained liberty of man is a leitmotif of human progress. Hence the unwillingness and the inability to face or deal with the problem.

Nature’s pawns

This is a cleverly crafted book, as would be expected from a novelist extraordinaire. Divided into three parts, it starts with “Stories”. This segment situates humans as powerless, organic sub-systems of a larger force—restless and dynamic nature. Stories of his family—climate refugees from Bangladesh; of self-doubt after a sudden, destructive tornado in Delhi; of raw beauty and sudden death in the muddy, torpid, densely tangled greenery of the Sundarbans reinforce that we are not masters of the universe.

Inequality and the urge to splurge

The second section on History, draws together three defining strands of the late 17th to the early 20th centuries. First, the availability and use of fossil fuels which were an important precondition for wealth and power. Second—the use of technology to improve productive capacity. Third—the growth of modern empires as the political mechanism for extracting the supply of raw materials; controlling access to technology and keeping overseas markets open for exported manufactured goods. Empires faded in the late 20th century but the extractive process continued. The elite—foreign and domestic—comprise not more than one fourth of the world population, but continue to become wealthy at the expense of the bottom three fourths.

gas-guzzler

The third section is on Politics. Ghosh argues cynically that so little has been done to mitigate climate change because the rich world will be able to insulate itself from the horrific outcomes. The shock will primarily be borne by the poor. Littoral countries like Bangladesh, Seychelles and Vietnam and poor communities, within countries, will be the worst affected.

A captive media

Ghosh believes the deafening silence in the media around climate change is because it has been bought out by the huge corporates who own fossil fuel assets. The silence in literature is because his peers—writers, poets and intellectuals—are bludgeoned into conformity by the formulaic path to success of shunning the unpredictable and situating a story within the predictable activities of everyday life, with the individual as the central character.

Can religion help where politics has failed?

Not much can be expected from politicians either. They are so immersed in “bio-politics”—catering to the short-term interests of a defined population of voters—that they have little appetite for long-term global risks. For what it is worth, differences in economic ideology across parties have become minimal in India. All the political parties which have ruled India since 1991 have adhered to the broad neo-liberal construct of economic development. So, quite possibly, the devil lies in the incentives created by this economic model to produce and consume in larger volumes. He cites the December 2016 Paris Agreement as subterfuge and doublespeak, promising to do much without, in effect, doing anything.

He compares this shallow and evasive, politically negotiated international agreement with the direct and forceful Encyclical Letter of Pope Francis issued at the same time. The latter fingers the ruling “technocratic paradigm” and the objectification of endless growth as the problem rather than the solution. It calls for tempering individualism with the balm of social and ecological justice. Ghosh notes that similar voices are being heard within the Hindu, Muslim and Buddhist faiths. This leads him to believe that greater community activism led by religious leaders could be the answer to mobilize opinion for definitive steps to abate global warming.

naga

Ghosh’s stand is unusual for a secular rationalist. But this is consistent with an approach which absolves religion of its divisive outcomes. He speculates (page 150) that Mahatma Gandhi was assassinated by a former member of a Hindu party because he was perceived as weakening India by opposing industrialisation and consumerism. No references are quoted to support this “economic” explanation. The more usual view is to attribute the killing to Hindu apprehensions that the Mahatma was too politically accommodating of minority interest.Ghosh also seems to step lightly away from the conundrum that using religion for secular purposes is akin to riding a tiger, particularly in India’s surcharged environment, perpetuated by religious faultlines. Indira Gandhi paid the price for doing just that.

The world is increasingly more not less sustainable

 

cyclists

Ghosh’s rhetoric is elegant and elegiac. His reasoning is impeccably logical. But his morbid assessment of where we are today and of our future prospects does not triangulate with reality. The world is becoming less carbon-intensive. Every incremental unit of output requires less energy than the previous one. It is true that explosive economic growth in Asia since 1980 has negated this advantage and the global mean temperature continues to increase. But renewable energy options are being developed for air, road and marine transportation, thereby further diluting the link between the use of fossil energy and economic growth. Similarly, technology developments like LED lighting have vastly improved the efficiency of energy services. Climate risk is increasingly being factored into the cost of insurance and the hurdle rate of return for investors. This will drive smart green investments.

We are winning the war on poverty

International aid agencies, governments—of which China is the exemplar, and communities, all working in tandem, have successfully reduced poverty and are on track to eliminate it by 2030. Yes, inequality is on the rise but at a significantly elevated base income level. The opening up of international trade has diluted the link between political domination and market access. Even small nations like Vietnam or Mauritius have benefited from international markets. International trade has democratised resource endowment by making petroleum, minerals and metals available to resource-poor countries. Three out of the four largest economies today—China, Japan and India—are natural resource-poor. They have grown over the last half century by importing fossil fuel and technology. None of the three tops the charts in military might.

child

Choice and progress

The spread and deepening of democracy has expanded opportunities for the disadvantaged and smashed earlier glass ceilings, including for women. Adoption of the open economy model has expanded imported competition while deregulation has nurtured domestic competition, for the benefit of consumers. There is more choice today than at any point in history.The world is a more peaceful place than a century ago. That this holds true despite growing sectarian violence in India’s near abroad and an increase in the number of nations armed with nuclear weapons, illustrates the high stakes everyone has in an enduring peace.

Plurality rules

Today, plural models for progress exist. These models are not country or culture specific. They are instead domain specific. Of the top 20 corporates in the world which accumulated the maximum value over the period 2009-2015, not a single company was in oil or gas; as many as eight were in technology or health care. All of them excelled at the capacity to innovate, communicate and compete. It’s a new world out there which defies explanation using traditional paradigms.

None of this means that we are on top of the problem of global warming, yet. But just as surely, there is more light visible, at the end of the tunnel, than has ever been seen before.

telescope

Adapted from the authors essay in Swarajya October 7, 2016 http://swarajyamag.com/magazine/its-not-that-scary

 

India’s “green” moves

solar-shade

Solar powered sun and rain shades in India!

India formally ratified the Paris climate agreement on Sunday, notwithstanding that Donald Trump trashed global warming, last week, as a hoax and efforts to control it as expensive and ineffective.

The United States contributes around 16 per cent of world carbon emissions. Truculence in its approach to manage global warming can scuttle the efforts of the rest of the world. Mr Trump’s cavalier approach to climate change can only be explained by his belief that a slowing US economy should not be the one which pays to set the world’s climate right.This abdication of international leadership appears to resonate with his not inconsiderable supporters.

Clearly, the expectation is that China, which contributes 28 per cent of global emissions, needs to step up to the plate of international burden-sharing. China is now the world’s second largest economy. Despite the slowdown it is growing at three times the rate of the American economy. That is reason enough for higher expectations from it to play the role of a global leader.

china-smog

Photo credit: huffingtonpost.com

India is also a fast-growing economy. In the long term we may be where China is today. But not for a while yet. We are just one-fifth of the Chinese economy. Our emissions are just six per cent of world emissions. Our global ambitions should be commensurate with our constraints. This is why, unlike China, we have not committed to cap our emissions at a predetermined level.

Paris – the agree to disagree concord

Under the Paris climate agreement countries have agreed to disagree. It is now left to individual nations to exercise “strategic direction” in developing their future energy profile and “tactical restraint” in energy consumption.The decentralised responsibility is welcome but worrisome on two counts. First, countries which are too small to make a difference but which will face the wrath of global warming like island countries now have to depend not on covenant but on the generosity of others to survive. Second poor, technologically deficient countries will now pay more to mitigate global warming since there are no pressing compulsions for the rich to change consumption patterns or develop carbon benign technology for domestic use.

India’s challenge is to remain green

green-house

Laurie Baker’s characteristic green building in Kerala

Altogether 37 per cent of India’s energy consumption is non-fossil fuel based. This is fairly similar to the world non-fossil fuel energy consumption of 33 per cent. But the big difference is that bio energy accounts for only two per cent of the world’s green energy consumption, unlike in India, where biomass accounts for 92 per cent of the renewable energy used.Hydro power and new renewables — solar and wind- account for just six per cent and nuclear for two per cent of our green energy profile.

india-cooking-2

The challenge for India is to ensure that as incomes grow, poor consumers – who use non commercial biomass sources today like dung, firewood and agricultural residue for heating and cooking – should graduate to new renewables like solar and wind, rather than go down the fossil fuel route, as the OECD countries have done. This challenge is principally for the government, not consumers. Consumers typically want energy services — cooling, heating, cooking and transport. They don’t really care about the fuel that provides these services. It is for the government to put in place the incentives which drive energy suppliers to provide renewable energy services.Energy users are underserved in India particularly in dispersed habitations. This presents the opportunity to use renewables to bridge the gap in innovative ways.

To be sure, domestic compulsions like smog do compel us to clean our energy profile. India already has economic incentives in place for this. High energy prices induce energy efficiency in industry. High taxes on petrol and diesel are expected to result in frugal consumption for personal transport. Scarce public funds are allocated to subsidise renewable electricity. Investment in public transport is being stepped up to substitute high energy-intensity personal vehicles. Rail freight has been reduced to stem the shift to the more energy-intensive road transport. Bulk public purchase and supply of low-energy intensive LED bulbs help manage domestic electricity peak load. The path to carbon sustainability is fortunately closely aligned to the the path to make our economy competitive by squeezing out the fat along he supply chain. But gains in the efficiency with which energy services are delivered  can only mitigate, at best, around 20 percent of our additional energy needs.

The compulsions to consume more energy services are stark.India’s per capita energy consumption is just 0.6 tons of oil equivalent (toe) versus global per capita consumption of 1.9 toe. India will likely consume four times the energy it does today to provide welfare enhancing energy services to its citizens. Similar compulsions face most developing countries in South Asia and Africa.Only a technological revolution in clean energy and in energy storage systems can delink the growth led increase in energy consumption from unsustainable levels of carbon emissions.

Target renewable energy services

Setting up clunky publicly owned entities to research and transfer renewable technology to industry is not the way to go. Backing selected private firms willing to invest in renewables in anticipation of an assured domestic market is also tough. We don’t have the democratic space in India, unlike South Korea, to back industrial winners.Transparent subsidies on the “viability gap funding” template will suit the private sector best to innovate, implement and increase the consumption of renewable energy. Shifting the subsidy from energy generation to the provision of energy services can enlarge the pool of potential investors whilst retaining the objectives of efficiency and effectiveness in subsidy provision.

solar-bus

Prime Minister Modi flags off a solar bus service for MPs

Link green subsidies explicitly to revenue – social cost based levies on fossil fuel and a green cess

India’s clean energy strategy is built around the principle of minimising environmental damage whilst maximising economic growth. But the implementation of good principles also needs accurate and timely monitoring mechanisms to ensure that progress is along the desired trajectories. One such mechanism is to monitor the social cost of our fossil energy consumption and to use the data for fiscal allocations. The Arvind Subramanian report on pulses has suggested the inclusion of social cost, with respect to water intensity, while determining the maximum support price of agricultural food products, to ensure that subsidies do not deplete our water reserves. This is a good way of allocating public resources.

Social cost filter for resource allocation

If a social cost filter is adopted for allocating finances, public investment in the railways and in coastal shipping would surely trump investment on road transport. This is also a good mechanism for making users pay differentially for the energy they use. Charging more from those who use electricity at peak time is justifiable beyond the additional financial cost it imposes, to being an affirmation of commitment to going green. Habitats, offices and homes all impose social costs and must be taxed in proportion to the extent of their footprint. This “green tax” should be used to directly subsidise green energy and energy conservation.

A green balance sheet – green tax revenue and expenditure 

The government should consider including a green fiscal resources allocation and tax collection balance sheet along with the annual financial budget. This would provide, at a glance, the revenues collected by taxing fossil fuel and the capital allocated for green energy initiatives. Similar green fiscal resource balance sheets at the state and municipality level could feed into a green national fiscal framework.

India has traditionally punched above its weight in international affairs. Preserving the global commons is a lofty goal; an opportunity to upstage the international economic Goliaths and to improve well-being at home.

laurie-baker

Laurence Wilfred “Laurie” Baker 1917-2007 – architect & practioner of the science of living comfortably with nature. Seen here with his wife Elizabeth, in their home in Thiruvananthapuram, Kerala.

Adapted from the authors article in Asian Age October 4, 2016  http://www.asianage.com/columnists/green-taxes-cleaner-india-600

Dirty money: Joining the dots

Which of us does not enjoy pulling down the high and mighty? And the thrill is even sharper if these are people who may have breached laws whilst rising to dizzy heights. And so it was with the recent Panama Papers leak which opens a window into the morbid financial gymnastics of the amoral, global elite. There are five hundred Indians also in the list. But no “A” team players have yet been disclosed. Of course there is considerable overlay between unaccounted money and simply “smart” money which is avoiding not evading tax- the former is illegal but the latter – well it is just good financial management. The Panama data leak does not sift out the latter.

The scale of dirty money

cash

photo credit: gizmodo.com

Global Financial Integrity (GFI) – a United States-based entity, which tracks and campaigns against black money – ranks India fourth out of 149 developing countries, after China, Russia and Mexico, on the basis of the volume of illicit outflows. But this metric is fuzzy. It relates outflows to the size of individual economies and consequently fails to reflect the severity of the problem in each country.

Conflating the GFI data on illicit flows with the World Bank data on GDP at current market prices results in a more useful metric. The average annual illicit outflows as a proportion of GDP for India, according to this metric, was 2.7 per cent over the period 2004 to 2013. Within the BRICS countries cluster, South Africa was at a whopping 23 per cent, followed by Russia at 5.6 per cent. Brazil was the lowest at 0.9 per cent, with China the second lowest at 1.8 per cent.

Out of the other large developing economies, illicit outflows out of Malaysia stood at a worrisome 14.1 per cent of GDP, Thailand at 5 per cent, Mexico at 4.5 per cent, Nigeria at 4.1 per cent and Indonesia at 2.1 per cent. In South Asia, Bangladesh is the leader with illicit outflows at 4.2 per cent of GDP, followed by Nepal at 3.1 per cent and Pakistan at a low 0.1 per cent.

Dirty money links

So, how do illicit outflows, tax evasion, corruption and crime link up? Simply put illicit flows legitimize the proceeds of any of these activities. In the hawala transfer route, an individual or entity, resident in India, desiring to transfer dirty money overseas, makes a payment in cash in India to a hawala agent whilst a designated counter-party overseas gets paid in foreign exchange.

The source of the cash in India could be from income on which tax has not been paid or the proceeds of crime, including corruption. The foreign exchange overseas could be similarly sourced from corruption, crime or from Indians remitting money home (remittance of invisibles, including by overseas Indians of their earnings, was around $223 billion in 2013). Remittances through hawala get a better exchange rate than those via bank transfers. Foreign exchange overseas could also be the proceeds from under-invoicing Indian exports with part payment being made by the foreign importer to an overseas account related to the exporter.

Such illegal caches of foreign exchange overseas can be legitimated by bringing them back to India by over-invoicing Indian exports. Such funds can also be masked as foreign portfolio investments from foreign jurisdictions where obscuring the ownership of funds is a fine art, as in Panama. GFI estimates that under and over invoicing of trade flows accounts for 83 per cent of global illicit outflows. Usually a combination of several illicit transfer mechanisms may be used to obscure and mask the direction and ownership of the net flows.

The drivers of dirty money

Crime, corruption and the ability to avoid tax are all the outcome of poor governance aided by low levels of financial intermediation and digitization in the economy. Identifying the real ownership of bank transactions using biometric tracers, reducing cash transactions, embedded red flags and alerts which identify and monitor irrational transactions and sniff out a mismatch between income and consumption or income and savings, are standard tools for clamping down on the extent of black money. But we have started down this path only very recently.

Till the 1990s, when India had a chronically precarious balance of payments, the loss of foreign exchange through illicit transfers was a major concern. Today with foreign reserves at around one year of imports this is less so. But the loss of potential tax revenue hits us hard. Assume the value of tax lost on illicit outflows of $83 billion at a conservative 30 per cent or $24 billion per year. This equals around one-fourth of the average fiscal deficit during the period 2010 to 2013.

Lost tax is just one of the problems associated with dirty money. Other downsides are less tangible. Strong political and business interests get entrenched which obstruct enhanced transparency, the reduction of discretionary administrative powers and systematically subvert the formal governance systems and the informal norms which bind society.

Where this happens over a period of time, societal norms shift towards a new normal which actively subverts the rule of law. Prolonged conflict creates a similar loss of cultural and social capital. Government loses credibility as the provider of security and the arbiter of equity and fairness. Citizens look to informal structures like caste, clan or even professional alliances for social support.

Triangulating the evidence

Can we substantiate this link between poor governance and enhanced illicit outflows? The World Bank’s Worldwide Governance Indicators (WGI) provide a ready index which maps six drivers of good governance across multiple data sources. For our purposes we look at two of these – Rule of Law and Control of Corruption. A close and negative correspondence between illicit outflows and the country WGI score can validate both the WGI and the GFI methodologies. High illicit outflows should correspond with a low WGI score.

The WGI ranks Brazil, Malaysia, South Africa and Thailand high on both upholding the rule of law and exercising control of corruption. India edges in only into the Rule of Law category in this ranking. But good performance in the WGI has not helped Malaysia, South Africa and Thailand curb illicit flows which are high, relative to GDP. In comparison, China and India with lower ratings in the WGI have far lower illicit outflows relative to GDP.

Similarly, Pakistan and Indonesia have minimal illicit outflows relative to GDP but score very low in the WGI index. The bottom line is that either the GFI assessments need to be improved or that good governance- at least as it is measured to day needs to be reviewed.

The trend going forward

GFI estimates that the aggregate outflow of illicit money for the set of 149 countries grew at 6.5 per cent per annum during the period 2004-2013 – more than double the rate of economic growth. This is worrisome because it illustrates a looser than desirable link between growth and tax revenues. If economic growth is leaky and does not boost tax revenues in developing countries, achieving social protection and human development targets can be severely compromised. Is India sliding down this slippery slope?

In India, illicit outflows more than doubled overnight from $29 billion in 2009 to $70 billion in 2010. During the period 2010 to 2013 – the latest year for which data is available – it averaged $83 billion per year or around 4 per cent of GDP. This period coincides with the second term of the United Progressive Alliance government, which was marked by serial scams in telecom and coal. But whilst it is tempting to deduce a causal relationship between the two, this is difficult to substantiate.

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Better tools can help

What we do know is that we need better tools to monitor, in real decision time, the origin, magnitude and direction of illicit outflows, which are a vital red flag for poor governance. Achieving this is closely linked to professionalizing the government and rapidly digitizing the economy and government processes. We are doing far more on the latter, than on the former. This could be a costly and careless error. Till advanced robotics and artificial intelligence kick in sometime around 2030, the effectiveness of government servants will continue to matter

Adapted from the authors article in Swarajyamag April 12, 2016  http://swarajyamag.com/economy/joining-the-dots-on-dirty-money-and-how-india-can-become-clean

African “big men” in India

African heads of State will don Modi kurtas and party in New Delhi, October 27 to 29. The occasion is the third meeting of the Indo African Summit. It would be quite a sight to see Robert Mugabe, age 91, President of Zimbabwe for the last two decades, take a turn or two on the dance floor. But we may have to make do with the more agile President Jacob Zuma.

zuma

President Jacob Zuma of South Africa at his agile best

Hopefully, the parallel with ASEAN will not extend to Minister Sushma Swaraj having to sing at the concluding party, just to liven up the proceedings, along the lines of Madeline Albright, US Secretary of State in 1997, who crooned her version of “Don’t cry for me Argentina”.

swaraj

Minister Sushma Swaraj with members of parliment

Beyond the theatrics, it is tough to figure out what we want to achieve with the possibly forty heads of state or governments and many more senior politicians and officials from Africa who are expected to participate. Similar summits were held in 2008 and again in 2011.

Claim the 21st century for Africa and India

Demographics suggests that the second half of this century belongs to Africa and India. But to claim this “historical destiny” India and Africa have to do the right things. One such is to put the right institutions in place.

This “mirror” long term need is what binds India to African countries far more than the standard diplomatic fare; trade and investment, terrorism and security. These are merely the transactional outcomes of sound institutional development and better dealt with at specialized fora which already exist like the World Trade Organization, the United Nations and the Bretton Woods institutions and their offshoots.

Context is key for developing “best fit” institutions. Context varies enormously between India and Africa and even more so within Africa. But one common theme across most African countries is a rich endowment of natural resources (except Rwanda and Burundi) which distinguishes them from resource poor India.

In contrast, adherence to broad democratic norms is increasingly the preferred option across Africa. Swaziland and Lesotho remain the only kingdoms in sub-Saharan Africa. Yesterdays “dictators” are today’s leaders, who test their popularity in elections.

museveni

Presidents Yoweri Museveni of Uganda and Paul Kagame of Rwanda

India has been the world’s largest democracy since 1947. In Africa Senegal has similarly been a multi-party democracy since 1960 when it became independent. Senegal had its “Indira Gandhi moment” in the first decade of this century when then President Wade tried to unduly empower the executive through constitutional amendments. The democratic backlash was strong and he lost in elections to his own Prime Minister in 2012- President Small still leads today. Mauritius, Kenya, Tanzania, Zambia, and later South Africa, Botswana and Namibia also have stellar democratic records.

African public service structures have evolved unlike ours which have atrophied

The institutional architecture within which government functions is critical for achieving developmental goals. Within the broad institutional architecture the manner in which the civil service is structured is key. India has much to learn from select countries. South Africa, Ghana, Senegal, Mauritius, Kenya, Tanzania and Ethiopia for instance, have developed and maintained outstanding public service structures and traditions.

These bureaucracies have weathered far more tumultuous times than we in India have ever encountered in the post- World War II period. But they remained committed, motivated and deliver results- three characteristics that are iffy to apply across the board in India.

India presents a fascinating case study of asymmetric development. On the one hand we have scientists sending space expeditions to Mars. At the other end poor villagers still rely on traditional healers and “bangali” doctors- sometimes out of choice and habit but mostly out of compulsion since the public health service is so poor.

It is fashionable today to advocate the case for asymmetric development- getting reform in through the door wherever possible without attempting an across the board improvement in the civil service. India is a good example of how this does not work. Islands of excellence remain just that cordoned and insulated from the ills that afflict service areas not considered critical from the short term (sighted) point of view.

India manufactures or assembles more brands of cars, scooters and motorcycles in India than it is possible to remember. We pride ourselves on our in-house capacity for developing infrastructure. We have embarked on a “make in India” mission. Foreign students come to India to study management, medicine and engineering.

Yet, within the government, it is rare to find an official with the relevant technical qualifications, in a senior position with decision making powers. This is not to say that our top bureaucrats are not highly educated. Invariably they do have these credentials, in a general way. Many may even be a PhD. It doesn’t get better. But rarely is it that the academic qualifications and the experience overlap. This disregard for “technical excellence” as a driver of good public administration is at the root of our inability to apply the vast knowledge reserves we have built up to improving public services on the ground.

We should learn for countries in Africa which have done away with the hierarchical, cadre based, colonial administration systems they inherited and have moved on to a position based meritocracy. South Africa, Mauritius, Ghana, Senegal, Kenya and Tanzania are examples.

Our federal structure is an outstanding example of contextual decentralization

Whilst our Constitution is a Union of States rather than being a federation like the US Constitution, it is a dynamic yet robust instrument. It has been amended one hundred times since 1952 but it remains the driving force for growing the “Idea of India” as a single nation comprising unparalleled diversity in religion, ethnicity and culture.

Much of richness of the Indian public management experience derives from the significant levels of devolution to the thirty state governments. Around 40% of the Union government’s revenues are made available to state governments as their share of tax. An additional 15% of funds are transferred to state governments for executing national development schemes. State governments also have their own sources of revenue.

The size and character of states varies enormously in India. These range from the mammoth Uttar Pradesh (UP) with a population of 200 million (the next biggest state is Bihar with pop. 100 million) to tiny Sikkim population 600,000.

Uttar Pradesh is larger than the largest African nation-Nigeria-pop. 189 million, renowned for its oil rich economy, entrepreneurial people and pluralistic society.

Sikkim, sticking out like a “thumbs up” between Nepal and China in North Eastern India with streets neat as a pin and people, as disciplined as the Rwandans closely resembles the well governed, gorgeous, North Western African island nation of Cape Verde.

verde

Cape Verde

Africa manages regional co-operation exceedingly well

India should look closely at the cross country arrangements within Africa which facilitate development based on the comparative advantage of countries. Power pooling across the Southern Cone countries and West Africa is one such example. Access to sea routes for land locked countries like Zambia, Zimbabwe and Uganda via rail, road and pipelines provides good models for cost sharing across Indian states. Truth and reconciliation type negotiations are another African specialty.

bashir

Presidents Bashir of Sudan and Salva Kiir of South Sudan- friendly foes.

The Indian institutional arrangements for regional integration have fallen into disuse and are ineffective. Water sharing arrangements are particularly dissatisfactory and legal disputes linger for years, increasing conflict and retarding development. Similarly implementing the Goods and Services tax- a single, value added tax, to replace state level taxes on the production and sale of products, to which all parties are agreed in principle, has become harder and more painful than extracting a tooth.

It may have been really useful to arrange sessions where state chief ministers could have interacted with heads of state depending on areas of mutual interest with their officials following up on the detailed areas of cooperation.

We are not China

aarti

aarti” evening prayers on the banks of the Holy Ganga

Finally how can we  differentiate ourselves from China whilst dealing with Africa? Clearly the worst option would be to emulate the muscular Chinese style of economic diplomacy. For one we just don’t have the firepower. For another the principle of comparative advantage advocates that everyone must play to their strengths.

China’s comparative advantage is cash-lots of it. But the Chinese model of development is not something which is easily replicated because of the size of its economy, the homogeneity of its population and its long history of splendid isolation. Also it is unlikely that exporting workers in droves to implement projects overseas is a sustainable or effective developmental strategy for the beneficiary countries.

Our comparative strength is that we are the “Constantinople of Parliamentary Democracy”. We straddle the democratic heritage of the West and the traditional Asian democratic principles. In doing so we have evolved a home spun democratic model. Like all jugaad (learning by doing) the ends of this model are a bit jagged.

parliament

The Indian parliament on high alert post a terrorist attack in 2001

Nevertheless, it is a model which works- both for economic growth and to uphold the human liberties of speech, association and property. Within this generic model of development lie gems of granular achievement at the state government and local level, which provide solutions to the universal development barriers of elite control, low initial capacity, nascent institutions and less than adequate rule of law mechanisms.

India must use the Summit to share these nuggets of experience which are at the heart of building institutional resilience for sustainable development in poor countries.

1542 words

The San Jose window

apple 2

photo credit: http://www.morror.uk.co

So what did the Silicon dudes, collectively representing around $500 billion in purchasing power, think of the case placed before them by the self-made, roughhewn yet charismatic Indian Prime Minister — the man with a penchant for the dramatic?

From the looks of it, they thought he was kosher. Someone they could talk turkey with. Of course they are pretty constrained in what they can do. They are businessmen — oddly all of them are men. Inflating their egos and appealing to them for “help” can soften them a bit. But, ultimately, business folks live and die by the shareholder wealth.

The good news is that India fits in well even on this metric. We have the numbers. We shall be the most populous country by 2030. More importantly, each of us would also have decent purchasing power by then — Prime Minister Narendra Modi wants each of us to have $13,500 per year in today’s value terms.

This is improbable. But even if we get to just half of that, which is possible, we would be as “well off” as China is today. That is not very rich by the standards of the rich, but definitely upper middle class — no mean achievement for a country whose diplomats still, habitually swear by the begging bowl approach in international negotiations.

An additional $50 trillion in purchasing power over 15 years makes all business drool — not just in the Silicon Valley. The annual revenues of the Fortune 500 companies is $ 12.5 trillion — a tidy sum that’s more than nine times India’s GDP. Okay, so now we know why all those kind business folk turned up dutifully to be with

Mr Modi. But why then did the Indian Prime Minister bother to go through with the dance? After all, if India is such an irresistible market, then shouldn’t the Fortune 500s be rushing in to occupy the 500,000 apartments which lie unoccupied today in India?

Two factors explain the asymmetry between the hubris at home and the fizz abroad.

First, Team India is a big ship. Stoking the fire in its oversized belly and changing course takes time. Until the crumbling “plumbing” is fixed, citizens will react to the bad smells reaching them. Fixing the leaks is still a work in progress as illustrated by the sermons delivered to the Prime Minister at his meet with the Fortune 500 crowd.

In contrast, business overseas view visitors much the same as co-passengers on a flight. This goes for both the older, preachy Fortune 500, who are classic bullies, or the more gentle, other-worldly yogis in Silicon Valley, adept at the “rope trick” of quietly raking in billions without a bottomline to support the extraordinary valuations of their stock. They will engage whilst the flight lasts, knowing they can end the conversation when they please. But anything more substantive is only on mutually acceptable terms — these being the “bottomline” for the “sunset community” in the Fortune 500 group and the “top line” for the Silicon geeks.

India presents more immediate potential for the “top line” obsessed Silicon entrepreneur. Their escalator is founded on growing the business, not solely much on growing profits. This is not to say that there are no profits to be made in India. But Asian companies from Japan, China, and Korea in sunset industries, are better placed to be responsive to the fragmented Indian market than a Fortune 500 corporate, which survive on scale not agility.

apple

photo credit: http://www.dailymail.co.uk

It is no wonder then that whilst Prime Minister warmed up instinctively to the Silicon Valley crowd. The interaction with the “500 dinosaurs” was stiff, formal and somewhat resigned, as in a divorce case, where both sides talk at each other rather than with each other.

Thankfully, Silicon Valley is more vital for India’s urgent “development” needs than the czars of Wall Street, Detroit or Houston. San Jose and New Mexico is about disruptive innovation. This “value” shapes business processes, supply lines and determines who the next “legend” will be. This resonates well with the “individualistic” Indian.

The electron is the best antidote for exclusion — the proverbial mongoose to the snake of elite privilege and patronage. Digital access democratises access to information and knowledge especially if customised in India’s 22 languages. Connecting 600,000 villages and all educational institutions with broadband will provide Internet access to all.

Nandan Nilekani’s UID is a game changer which is being actively expanded for the direct transfer of subsidy and to ease public transactions. Its power lies in its ability to target public interventions narrowly, much like a micro-surgeon.

Digital access enhances communication and remote participation even in local events, a feature crucial for a country of domestic migrants, where 25 per cent of the people live away from where they were born.

The proposed digital archiving of individual data-identity, health and education records in secure “lockers” liberates the marginalised in particular who have no permanent residence, live in insecure places and are frequently required to produce these documents for temporary jobs and to access public services.

For the elite personalised service via human interaction elevates their own sense of entitlement. But a dalit, whose very shadow is abhorrent to some, may prefer an impersonal, indeed robotic, neutral, service provider, like an ATM which is available 24×7 to suit varying work schedules. Street dwellers will be the first to benefit from lower pollution if tele-meetings and remote work cuts the need to commute. The primary beneficiaries of tele-medicine will be remote villages where all they have today is the village “Bengali” doctor.

Information trawled from social media by specialist apps helps to counter terror, manage disasters better and get real time feedback on the quality of public services.

Digital India is the key to critical aspects of inclusive development, enhancing the “efficiency” of public investment and more “decent” jobs.

But this is not the real reason why Prime Minister Modi is happiest talking “new” technology. Behind his stern “Samurai” exterior lies a romantic, who believes that empowered individuals — the quintessential “Marlboro” person can change the world. To do this San Jose is a far better door to walk through than Wall Street. Don’t be surprised if you see him at the “Burning Man” festival — the new technology parallel to the old world Davos — a fun meet of the free spirited and those who imagine a better world, held annually in the Nevada desert, over the Labor day weekend.

burning man

photo credit: heraldsun.au.com

Adapted from the article by the author in Asian Age October 1, 2015

Climate “warriors” head for the December 2015 Paris joust

Paris in December is not quite what it is in springtime. But who cares if someone else is footing the bill! Paris is the venue of the next Conference of Parties (COP), from November 30 to December 11. An annual jamboree that has been trying, since 1992, to limit carbon emissions and save the planet from what scientists predict will be the drastic impact of global warming and associated climate change. They have not succeeded thus far in taming emissions.

The plain truth on climate change

How much carbon space is left before disaster strikes is somewhat iffy and mired in science, negotiating stances and the “precautionary principle” which advocates that if danger lurks it is best to run rather than hang around assessing the extent to which you personally are at risk. Except that there is no place to run to.

Who’s to blame?

The problem is that whilst Americans and others in the rich countries are reducing emissions slowly, China, India and the rest of the developing world are eager to do exactly what the rich did earlier — use energy to grow their economies. This is fair, just and inevitable.

Can climate change be stopped?

The only way this can stop is if money is spent to junk the existing technology for producing and using energy and less carbon intensive and more efficient options are developed.

europe energy

photo credit: http://www.wikipedia.com

But no one has a commercial incentive to do so. Most technology is developed in the rich world, which uses the most energy per capita and is the most heavily invested in traditional inefficient, carbon intensive energy chains.

They — Australia, Russia and the US are good examples — have preferred to milk their past investments in fossil fuel-based technologies rather than switch over rapidly to clean energy technology even though they have been talking about the problem in annual COP meetings since 1992. Thus, 20 of the 100 years available since 1995, to act, have been wasted.

To be fair, the northern European economies, including France, have been more conscientious than the rest of the rich and have reduced carbon emissions significantly by bearing the additional cost of doing so. Singapore is a stellar Asian example. It reduced per capita emissions by 66 per cent of its 1990 level.

But the rest, particularly the poorer, developing countries, have no incentive to divert their meagre fiscal resources to clean energy other than efficiency and local environmental benefits. But with so many competing priorities: stopping mothers and infants from dying due to poor health care; educating the young; creating basic infrastructure for trade and industry, just keeping energy — the life blood of a modern economy — flowing is tough.

India energy

photo credit: http://www.dalberg.com

Existing agreements are insipid and ineffective

The Kyoto Protocol 1997, the framework guiding the interminable Conference of Parties meetings, lacks teeth. It fixed emission targets for rich countries till 2012 which were weak and inadequate because nothing more stringent was acceptable to the rich — a 6 per cent reduction over 1990 levels. But countries can opt out of the agreement. US, Russia and Canada did just that, making COP even more toothless and bureaucratic.

It’s now 2015 and the world has changed. Extremely wealthy people are to be found everywhere, not just in the earlier “rich” countries. Ruling political, industrial and commercial elites in developing countries have incomes and consumption levels which rival those in the “developed” countries. Poor countries often have very rich governments, though fiscal resources do not filter down to the poor. Traditional archetypes have transmuted. A billionaire from the Forbes List could be living on your street rather than in far off London or New York.

emelda

photo credit: www. blogs.artinfo.com

So the continual “fingering” of rich countries as evil carbon emitters is unlikely to resonate. We are all responsible collectively for the mess we have created. To cut through two decades of verbiage and accumulated legal baggage two things must change.

Two options for delinking development from carbon

First, Paris must agree a common aspirational emissions target which all countries buy into. The level of the target, whilst important, is less so than all countries agreeing to shoulder the burden according to their capacity.

Second, till now we have depended on charity — aid from the rich world — to fund the technology transformation. This is degrading for the poor who have a right to access the available carbon space and inefficient, because allocation and priorities get warped when dealing with “free” money.

Next steps

Agree a common emission target

The world per capita carbon emissions were 4.2 metric tons (Mt) in 1990. This increased to 5 Mt per capita by 2011. The 1990 level is an excellent aspirational level to target. Most developed countries are above the 8 Mt per capita level whilst most poor countries are below 2 Mt per capita. Halving emissions in the developed world and allowing space for carbon emissions to grow two to three times in the poor countries seems a fair deal and a realistic target till 2030.

Improve the science of climate change

We also need to establish with greater the nature of the relationship between carbon emissions; global warming; extreme climate events and the distributional impact thereof. This is sorely needed to establish a sustainable aggregate emissions level which is neither unnecessarily restrictive nor ineffective in stabilizing climate. The next 15 years on top of the 20 years which have passed should be sufficient to hone the science.

Find the money: tax international capital transactions

A transactions tax to fund climate mitigation and adaptation is best. In depressed economic times, such as the present, a new generalized tax is abhorrent. But if the incidence of tax is tiny per transaction, individuals and entities may not feel its pinch. If it has a massive tax base on which it is levied the tax collection could be huge despite the low incidence. Mumbai lunch places, serving a simple, low priced, thali are as profitable as an expensive niche restaurant. The miniscule profit earned per thali is more than made up by the massive turnover. Of course the tax must be progressive and tax only the rich, who enjoy a disproportionate share in wealth creating growth-the root cause of climate change.

A tax on outbound international capital transfers from all countries meets all these criteria. A 0.01 per cent tax can net close to $300 billion annually. This is three times the volume of the 2015 replenishment of the Green Climate Fund proposed at US$ 100 billion.

The bulk of capital-outflow happens from rich or newly rich countries (like China). The purpose is to mitigate risk and increase returns. To insulate poor countries from the tax it could be levied only on those countries which are non-compliant with the emissions target. Since all developing countries, but very few rich countries, will be compliant, this leaves the poor countries out but snags the non- compliant rich. The tax collected would be transferred to a fund manager and overseen by an inclusive and representative board.

A tax puts a tangible cost to not meeting emission targets and creates a reasonable financial incentive for the rich countries. For example, it would reward Singapore for its stellar performance, whilst penalizing newly rich countries, like China, for exceeding the agreed level of emission.

Shared benefits follow shared responsibilities

China tellingly, has already announced that it would reduce emissions going forward. By 2030 they would be 60 per cent below their 2005 level. This should reassure all developing countries that it is possible to grow in double digits every year and still beat the carbon ceiling in future.

Developing countries should consider adopting the carbon ceiling volunteered by China. By volunteering a carbon ceiling they would be emboldened to press for a tax on outbound capital from non-compliant countries-mostly the rich. Of course ultimately every tax is paid by the final consumer- which will be the capital deficit poor countries. But a differential tax on capital flows does have advantages- it levels the field for domestic capital providers and dampens the fluctuating flow of destabilizing hot money into emerging markets.

Climate “warriors” headed for Paris should consider this proposition as they savour the Crottin De Chavignol served to them. Sometimes, the cobwebs have to be swept aside to see the light. There is much cleaning to be done at Paris.

Adapted from the author’s article in the Asian Age, September 17, 2015 http://www.asianage.com/columnists/climate-warriors-head-paris-015

1415 words

Some more onions please

Onions comprise less than 1% by value of India’s agricultural production. The average Indian consumes less than 800 grams of the stuff per month. Onion is a seasonal fruit. Supply traditionally dips during July to September as only the stored winter crop, harvested around March, is available for consumption.

No dearth of onions

onions

photo credit: http://www.washingtonpost.com

India is the second largest producer of onions after China. We produce more than we need and export around 10% of production unless weather events adversely impact the crop. This year unseasonal rain, during harvesting, damaged the winter crop.

But demand is inelastic

Demand is relatively inelastic. Why don’t consumers say no when prices increase? First, onions are to palates in the North, Central and Western parts of India, what fish is to Bengal and curry patta and coconut is to the South. Food, chips even Uttapams taste better with onions. Onion, like Garlic, is also valued for its therapeutic value. Second, onions give a big bang for the buck. An average family spends around Rs 100 per month on the stuff. If price doubles, the burden is irksome but not a killer. Just economizing on pre-paid phone calls can make up the difference. But onion is the key savory for low income households.

It’s the politics stupid!

The fuss about onions is more about politics than economics. The political footprint of onions was established in the 1980 elections. Mrs. Indira Gandhi, on her comeback trail, after her post-emergency election debacle, shrewdly used the price rise in onions to drive home how uncaring of the ordinary person and how incompetent, the government of then Prime Minister Chaudhary Charan Singh had become. This clicked. The Congress won 67% of the Lok Sabha seats. In 1998, a sharp price rise in onions, dethroned the BJP government of Chief Minister, Madanlal Khurana in Delhi thereby establishing a new metric for good governance – the price of onions.

Delhi CM Kejriwal fingers the BJP for price rise

Delhi Chief Minister, Arvind Kejriwal has fingered the Union government for failing to control hoarding and speculation leading to the current price rise. Delhi government flooded Delhi markets in mid-August with onions at Rs 30 per kg. It plans to hold the price line just below Rs 40 per kg through public sector retail supply versus a market retail price of Rs 70 to 80 per kg.

Union government on the back foot

But the Union government claims this is too little and too late. More nimble footwork by the state government could have prevented the steep rise in onion prices in Delhi. The Union government had made available a Price Stabilization Fund of Rs 500 crore in April 2015 which state governments could use by contributing an equal amount to buy onions for retail supply at reasonable rates.

On July 2, when wholesale prices were still around Rs 20 per kg in Lasalgaon, Maharashtra-India’s largest onion mandi, the Union government brought onion under the Essential Commodities Act, thereby enabling stock limits to be enforced on wholesale agencies. It also enforced a Minimum Export Price of Rs 30 per kg to discourage exports.

In todays’ intensely adversarial, no-holds-barred competitive politics no government can ignore a public challenge. The traditionally business friendly BJP government, at the center, is particular sensitive when “hoarders” are fingered for the price rise. Maharashtra, Madhya Pradesh, Gujarat, Haryana, Andhra Pradesh and Punjab- all BJP/allies governed states – account for more than 60% of national onion production.

Grow more onions, reduce trade margins & transaction costs

Per a NCAER 2014 paper selected productivity enhancement can boost roduction. Three big onion producing states- Maharashtra, MP and AP- account for 50% of production but produce less than 17 kilo gram per Hectare against 27 and 21.5 kg/Ha in Gujarat and Punjab respectively. Again all three are ruled by BJP/NDP. Increasing productivity in just these three states can boost production by 20% ensuring sustained exports and no domestic shortages. Doing more on reducing the trade margin (better storage, faster transportation, lower market fees) can also leave more of the money with farmers whilst lowering domestic prices.

Clearly the government needs an effective and transparent mechanism, which provides the right price signals and rationalizes expectations for both farmers and consumers.

Killing export or killing farmers

Increasing the Minimum Export Price, as the government has done again this year, is the standard response. But such intervention in the market, even as it helps consumers by diverting supply to the domestic market, robs farmers of the gains from export. It also disrupts any attempt to develop export markets. Similarly, importing onions to keep consumer price low reduces the incentives for farmers to grow onions.

The fall back-leaky public distribution

But both these options are less intrusive than using the public procurement and subsidized retail supply template used for food grain. Such publicly managed mechanisms are invariably highly inefficient and ineffective with cascading losses in procurement, storage, transportation, distribution and retail sale. Sometimes inept government managed imports flood the market after the seasonal supply dip has passed and just as the new crop arrives- with disastrous impact on farmers’ incomes.

Can private distribution agencies do better?

Why not appoint a private trading agency for marginal but politically sensitive food crops, mandated to import, export or arrange for domestic distribution to balance market led demand and supply and keeping retail prices within a pre-defined retail trading band, which meets the twin needs of both farmers and consumers. This is what the RBI does for our currency to avoid excessive volatility.

Private trading agencies would charge a hefty commission for their services but it would be considerably less than the cost of direct administrative action to purchase, stock and supply onions along the Food Corporation of India model.

Onion diplomacy anyone?

Alternatively, use onions as a vehicle for building bridges with our neighbours – particularly Pakistan, which loves the stuff almost as much Punjabis. Why not negotiate a stand- by, bilateral onion supply agreement to meet onion deficits in either country on preferential terms? A similar arrangement is possible with our larger northern neighbor- China whose onion productivity exceeds ours’s. Onions can add a savory flavor to Track 1.5 – B2B- diplomacy.

Say no to expensive onions

Isn’t it high time the government bit the political bullet and said no to being bullied about the price of onions? They are not a necessity, which the sovereign is obliged to supply. The Jains don’t even touch the stuff.

To show that onions are dispensable, the entire cabinet should voluntarily say no to fresh onions during the lean period. PM Modi could launch a social media campaign to entreat well-off folks to substitute fresh onions with dried ones or switch to other seasonings, during the lean period. This can reduce demand and hence prices for those, to whom onions are the only savory they can afford other than salt and chilies.

The core of sustainable living is to adapt to what is seasonally available locally, rather than store, pack, can or transport food compulsively to cater to a menu plan made universally available but at a high cost to the environment.

Politics trumps economics hands down

But the catch is that Bihar is a big consumer of onions. People are unlikely to be amused if they can’t get their daily fix of onion, before they go to vote in November. This is one election the BJP needs to win. Visible, strong, centrally managed administrative action to lower retail prices is therefore likely to win over better options – after all the metric of good governance has to be met.

Adapted from the authors article in Asian Age August 31, 2015

Barbarians in the temple of Dionysus

dionysus

For rational people, if this breed actually exists other than in the imagination of economists, the most logical way out of the Grexit logjam was for Greece to vote “yes, we can”. Just by agreeing to take the pain of austerity measures, they would have got the amount required for this year, estimated at around 80 billion euros.

Banks would have re-opened, ATMs would have started functioning and Greeks could have happily gone back to sipping their Ouzos in their favourite cafés. Meanwhile, negotiations could have carried on with Brussels and the International Monetary Fund on the minutiae of the minimum austerity measures required to access the 240 billion euros bailout package.

Negotiations and a hot head do not mix

If only the Syriza government had the foresight to seek technical assistance from the bureaucracy of any Latin American, African or Asian country on how to deal with agitated lenders, they would never have got into the mess they are in now. Developing countries, which went through the notorious IMF “structural adjustments” during the 1980s, have mastered the art of walking the thin line between throwing the bath water, but keeping the baby.

This is not an art the Greeks are skilled in. Greek theatre dating back to 500 BC has a tradition of keeping the two main genres — tragedy and comedy — strictly separate. Compare this with Indian theatre and Bollywood where the surefire mantra for success is to mix and match, masala. This is the underlying core of Indian flexibility and the omnipresent gene of jugaad.

But all is not lost. Greece and the rest of Europe are bonded by more than economics.

Greece is not alone

First, it’s not just Greece. Greece is beautiful, sunny and laid back. But it is not the only one. Italy, Portugal, Malta and even rainy Ireland, have all benefited from northern Europe’s largesse and subsidy. These partners in destitution are honour bound to press for softening the terms of the austerity measures. Whilst they don’t have much weight in decision-making, they can be the medium for an honourable back down, both for Greece and the lenders.

A group of southern Europeans (Spain, Italy, Portugal, Malta, Cyprus) pleading for mercy on behalf of Greece would allow Germany and the hard-working northern Europeans to back down without abandoning their harsh standards with respect to performance, keeping promises and fiscal discipline — the things prosperous countries care about.

Italy and Spain, the two big economies (together they account for 27 per cent of Eurozone GDP), are sunny, hot-blooded Mediterranean countries with an iffy record of fiscal rectitude. It would serve them well to make common cause with smaller economies in southern Europe just in case they need similar fiscal accommodations in future.

Sellers need buyers

Second, remember, the world faces a demand recession and growth is slowing. What could be better for Germany’s Northern Alliance than to show some noblesse oblige and allow Greece to continue to buy manufactured goods sourced from them, with borrowed money, in return for “progress on reforms” — making it easier to hire and fire workers and adjusting the liberal social security downwards?

After all, this dance of fiscal profligacy by borrowers and fiscal fundamentalism by lenders is not new. Developing countries have routinely needed and received such accommodation, paid for by taxpayers in the developed world. Generations of developing country citizens have suffered and endured precisely such privations brought about by the actions of their profligate, corrupt and inefficient governments. Why then should the developing country assistance code not apply to Greece?

Street fighters are rarely credible as administrators

Third, mind the credibility gap. History establishes that “Dutch courage” is difficult to sustain. The negotiating strategy of the Syriza government has been built around the assumption that Brussels would blink before they do.

This did not happen and Greece defaulted on its loan repayment to the IMF on June 30. Desperate to seek time, the Syriza government sought refuge in a referendum to support their hard talk. Many must have hoped that the people would betray them and vote “yes”, thereby enabling them to negotiate a surrender with the lenders, ostensibly out of deference to the will of the people.

They were thwarted in this plan by the campaigning of their charismatic, media-savvy finance minister, Yanis Varoufakis, who tapped into wounded Greek pride and induced the massive “no” vote. He subsequently resigned and left the people he incited to their own devices. This is a familiar ploy of street fighters who live on in public memory by seemingly heroic actions which burnish their esteem, never mind that people bear the consequences thereof.

But the civilizational glue still sticks

Fourth, the Syriza overestimated the value of the glue they provide to the Eurozone. Greece is less than two per cent of the Eurozone GDP. Turkey, now with an increasingly hard-line Islamic government, has been waiting to accede to the EU since 1987. Its GDP is double than that of Greece. But the problem is not economic; it is civilisational. An EU without Greece — the cradle of European civilisation — would be like Ramlila minus Ram or Bhairavi sung at midnight.

A new deal is needed to thwart the Russo-China combine

Whilst a departure by Greece does open a door for China or Russia to consolidate their influence in the Mediterranean, the burden of history is against this happening just yet. If the proud Greeks will not bend before the Germans, can one possibly imagine them in bondage to China?

Cosying up to Russia would be far more acceptable. But low oil prices constrain the oil-dependent Russian economy from becoming even more profligate than it already is in foreign adventures.

No room for those who don’t tie their own bootstraps

Truth be told, the Syriza’s strategy was audacious and imprudent. Here is why. The world no longer suffers those who do not help themselves. For the multilateral and bilateral lenders and banks to depart significantly, just for Greece, from the fiscal rectitude economic mantra they espouse worldwide, would mean different strokes for different folks. This would be unconscionable and overtly iniquitous in these politically correct times.
Adapted from an article by the author in Asian Age July 7, 2015 http://www.asianage.com/columnists/barbarians-temple-dionysus-026

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