governance, political economy, institutional development and economic regulation

Posts tagged ‘Southern Europe’

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

The budget of small things

jaitley 2015

(photo credit: dailymail.uk.co)

February is when the Indian Finance Minister (FM) gets flooded with unsolicited help from well-wishers on how to get his job done of presenting the Union government’s annual budget on the 28th.

This time, the flood is a Tsunami as a consequence of the Delhi state assembly electoral debacle for the BJP on the 10th February. Some fears are imagined. Others are real.

BJP only for the rich?

The BJP has traditionally been a party which works well with the private sector. If viewed through a “zero-sum” filter, this strategy could be perceived as working against the immediate interests of the poor. The classic example is whether electricity supply should be subsidized and if so to what extent and in what manner and whether the private sector’s bottom line concern for profitability can be consistent with an electricity subsidy for customers?

The “Davos mafia”- banks, big business and “growth” fundamentalists are keeping a hawks eye on everything the FM now says to detect signs of his wavering from the hard path of economic reforms announced by him last year. Their expectation is that he will resort to “populism” to placate the poor, with an eye on the nearing state elections in Bihar.

Will Bihar drive the budget?

The BJP cannot afford to lose Bihar. Doing so will surely crack the political invincibility of PM Modi. Some believe it is already dented by an ill-advised, last minute tactic in Delhi of pitting the PM versus Kejriwal, even though it was known as early as January 15th when the elections were announced, that the BJP was unlikely to win.  None of this environment is of the FMs making. But it hampers him greatly in being bold, outspoken and visionary on economic reforms- as he has shown an inclination to be.

Statistical flights of fantasy

It does not help that the Indian Statistics establishment has further queered the pitch by an ill-timed release of a new formula for calculating GDP which shows that the UPA government was doing fairly well on growth (6.9%) even in its last year (2013-14) accompanied by reduction in the trend rate of inflation (consumer price index) to 9.5% from 10.2% the previous year.

This raises the bar for the FM in FY 2015-16 to unrealistic levels in growth (>8.5 %?) and possibly also inflation expectations (<5% ?).

The dilemma of the FM is that if he follows a tough approach to economic efficiency he gets branded as heartless and gutless if he doesn’t.

Privatization can soften the subsidy cuts

Privatization of our clunky 277 publicly owned industrial companies; poorly governed 7 public insurance companies and 27 banks is a no-brainer to calm both the heart and the gut of the FM.

The share of publicly owned companies in the Indian stock market capitalization is 48%. If more of them were publicly listed this proportion would increase further.

The capital gains from privatizing- selling at least a 50% plus 1 share in publicly held equity to private investors is sufficient to meet the existing annual aggregate subsidy outlay of around Rs 4 lakh crores (USD 66 billion) for the next five years till 2020 with linked fiscal benefits from tax revenue on higher growth and profitability of these entities. Associated economic benefits like more jobs and employment would be additional.

The FM has the choice of either being fiscally profligate or remaining cautiously courageous whilst perturbing the entrenched interests which feed-off the public sector; a small proportion of unfit employees who would lose their secure jobs; petty contractors who have developed a nexus with public sector contracting authorities and Trade Union leaders. None of these are part of the 300 million poor people of India. Nor are they part of 90% of the workforce, which operates in the unorganized sector as contract labour.

The FM would be well advised to err firmly on the side of “financeable equity”. This objective points him to generate additional revenues to finance selected tax breaks and subsidies.

Here are three suggestions that could set the tone of the FY 2015-16 budget.

Metric of administrative efficiency

First, the FM should announce that this government intends to demonstrate its credentials of being an efficient administration by collecting more revenues from the existing taxes despite offering selective tax relief. This fits well with the already publicized drive against “black money” and the return of undeclared foreign assets of Indian national, residents.  This also reassures tax payers that the government intends to retain stability and predictability in the tax regime.

There is nothing like burning ones bridges to bring out the best in oneself. The FM did this last year by taking up the challenge of meeting a 4.1% Fiscal Deficit target for this year and 3.6% of GDP for the next. He should carry through this resolve now without opting for the “lazy” alternative of using the new, inflated GDP data to project a rosy revenue estimate.

Surplus income with small tax payers boosts demand

Second, the FM should demonstrate the government stated preference for “small government”; private finance lead investment and the market.

One equitable way of doing this is to leave more income in the hands of the small tax payer by increasing the income tax-free level from Rs 2 Lakhs per year (USD 3300) to Rs 5 Lakhs (USD 8200). This simple measure takes 90% of the existing assesses (around 29 million in numbers) out of the tax net but impacts only 10% of the revenue.

Pancaked, indirect taxes on consumption (customs/excise; sales tax; municipal taxes) drain 50% of the disposable income of such tax payers in any case, so there is an equity view point also along with the argument for the greater efficiency of a more focused and selective tax effort.

Increase tax revenue equitably and efficiently

India’s tax revenues need to be increased by at least 1% point of GDP but not by continually “milking” the narrow tax base available historically. This approach is neither efficient nor does it build political credibility amongst the tax victims –the salaried middle class. Imposing a new, low tax with a huge tax base as on stock or commodity market transactions and siphoning off a part of the windfall due to the crash in oil prices could be two such option.

Extending income tax to the creamy layer with huge agricultural assets on a presumptive basis is a must. Tax free agricultural income is the easiest refuge for rebranding “black money” as “white”. This loop hole needs to be stamped out.

Agricultural income tax is a tax resource reserved for the State governments. But the Union Government could incentivize States by offering a higher share of GST to states willing to introduce agricultural income tax. This would be in the spirit of efficient, equitable, cooperative federalism.

Third, the Jan Dhan Yojna for financial inclusion has opened 125 million new bank accounts during the last few months. The bulk of these accounts remain dormant. But despite such caveats, this is a good scheme. Recent work, including by Thomas Piketty illustrates that personal wealth is the biggest asset in incremental wealth creation. Why not extend then, albeit in a small measure, the key to wealth creation to the poor also?

Endow the poor for wealth creation

Dhan” (wealth) is an asset-something you own. It is a pre-condition for wealth creation. Why not open bank or Post Office accounts for the poor also? Of course the poor have no surplus to put into a bank. But the government can fill this gap by depositing Rs 10,000 (USD 164) into each of the bank accounts of all “poor” account holders as a 10 year fixed deposit from which only the interest income would be available to the account holder till maturity. To narrow the ambit and the financial implication of the scheme initially, only poor women and poor senior citizens (the most marginalized of the poor) could be eligible.

Fiscal fundamentalists will deride this measure as irresponsible in an environment when subsidies have to be contained, if not reduced. There are two reasons why their apprehensions are unfounded.

First, the small value of the deposit and its unavailability for withdrawal for 15 long years reduces the attractiveness of the scheme for would be scammers. The annual interest earned of Rs 800 (@8%) per account is not enough to attract fraud but sufficient to keep a genuinely poor person interested in the account as a source of additional income. For the Bank this provides a pool of valuable long term resources for their Treasury operations.

Second, the fiscal outlay, whilst significant, is not unmanageable. The likely pool of “poor” women and senior citizens would be around 200 million. If full coverage is targeted over a three year period, an annual budgetary allocation of around Rs 70,000 crores (only 18% of the existing aggregate allocation for subsidies) would be required. The spread effect, both political and economic, is hugely significant.

In comparison, the Union government alone spends an estimated Rs 4 lakh crores (USD 66 billion or 4 % of GDP) on subsidies. Much of this outlay is either lost in transit to the beneficiary (as in food subsidy- refer to Ashok Gulati, India’s brilliant agricultural economist) or the targeting of the subsidy is so vague (fertilizer and energy subsidies) as to benefit the poor only marginally. A “wealth and income transfer” scheme aided by the Unique Identification mechanism, where available, is likely to be more efficient and effective.

The recent developments in Southern Europe and now in Delhi should convince Mr. Jaitley that “demonstrated equity and inclusion” as a “brand” is in. Citizens do appreciate a tough “reforms” stance. But it must be balanced by effective instruments for income transfers to the poorest of the poor.

Tag Cloud

%d bloggers like this: