India will rise, regardless of its politics

There is a relatively stable consensus over the value of market-oriented reforms

Martin Wolf

India is an important country. It will soon be the world’s most populous. It has the world’s fastest growing large economy. Not least, it remains a vibrant democracy. What happens in India is going to affect everybody on the planet. What, then, are its economic prospects? Has Narendra Modi, its prime minister, made a big difference? How important are the general elections due in the next few months?

The decisive change in India’s economic trajectory came in 1991, when a foreign currency crisis caused a fundamental shift away from the “license Raj” towards a market-led economy, but one with a strong role for public ownership, and constant government interference. This is today’s broad Indian consensus. Mr Modi has operated largely within it, albeit introducing significant further reforms, most of them uncontroversial — at least in principle, if less so in practice. The exception has been demonetisation — a shocking decision, taken on Mr Modi’s whim.

A recent paper from the World Bank offers an overview of the record. Over the past five decades, it notes, growth slowly accelerated and became less volatile. The post-1991 era, in particular, can be divided into three periods. First, between 1991 and 2003, the economy grew at an average annual rate of 5.4 per cent. Second, between 2004 and 2008, growth reached an unsustainable rate of 8.8 per cent, partly driven by excessive credit growth. Finally, an extended slowdown followed the global financial crisis. This period was marked by weak growth of investment, credit, industrial output and exports. The disruption caused by demonetisation in 2016 and poor implementation of the Goods and Services Tax (GST) by Mr Modi’s government extended this slowdown.

Recently, however, the economy has returned to its potential growth rate of about 7 per cent. Growing faster than that would require big improvements in performance — at the least, a revival in investment and manufacturing, together with better external competitiveness. Nevertheless, annual growth of India’s real gross domestic product per head has averaged 5.5 per cent since 2000. Now it is growing faster than China’s, mainly because of the latter’s slowdown. If recent growth were sustained, India’s real GDP per head would reach China’s current levels in the early- to mid- 2030s. India would still be a relatively poor country, as China is now. But it would be a superpower. The potential for such growth exists: India’s real GDP per head is only 12 per cent of US levels and 40 per cent of China’s.

What has Mr Modi’s government achieved in economic policy? The World Bank paper lists its new inflation targeting framework, reform of energy subsidies, containing the fiscal deficit, improving the business environment, introducing and strengthening a new insolvency and bankruptcy framework, and, not least, introducing the GST.

Nevertheless, some of what it has done is merely clean up messes it inherited, notably in banking and finance, and even there only partially. The problem of inefficient and politicised public-sector banking remains. This is one example of the absence of deep reform. The government is also accused of distorting or suppressing statistics, notably on GDP and unemployment.

Yet failings in the economy itself must not be exaggerated. India has a debt problem in the private sector, but overall leverage is still low. India’s ratio of trade to GDP has fallen recently, but is still far higher than it was three decades ago. The investment rate has fallen, but it is still within the Asian range. It does need to rise, but China’s exaggerated rates are not a good model.

As in any vibrant democracy, debate between politicians and their supporters is heated out of proportion to the real differences. This is particularly the case as an election approaches. In economic policy, however, a reasonable conclusion is that this government has followed the line of policy since 1991, bringing in useful improvements in some areas, yet being quite conservative in others, notably on privatisation, market liberalisation and promotion of competition.

In an excellent recent collection of his essays, Arvind Subramanian, former chief economic adviser, describes the evolution from “crony socialism to stigmatised capitalism”. India has chosen a market-oriented economy, but it does not much like it. That shows in the failure to liberalise labour markets and exploit opportunities in trade. Even so, we should be modestly optimistic about India’s economic prospects over the next decade.

Does the forthcoming election matter for economic policy? One reason why it could is the recent “interim budget”. It offers an understated fiscal loosening, yet not one of great significance. It offers some important giveaways, notably a reduction in income tax for middle-class taxpayers. But it also offers direct income support to small and vulnerable farmers and a pension scheme for workers in the informal sector. Some of these ideas are good ones, others less so. If the government is not re-elected, they will not happen. Yet if they do happen, the world will not end. In some ways, it might be rather better.

The big issues in this election are not economic, but political. On the one side lies a centralised and disciplined party led by a strongman with a ruthless streak. On the other lies a chaotic coalition. The risk of the former is to democratic norms, institutional independence and communal relations. The risk of the latter is to basic probity and effective policymaking. Recent state elections suggest the contest could be tight. Its outcome might not alter economic policies all that much. But it might alter India.

Whatever happens, remember this: India is an important country.

Can Trump Make a Deal with China?

In the ongoing US-China trade talks, considerable progress has been made on several key trade issues, such as intellectual-property rights protection. But to defuse tensions in any sustainable way will require a more comprehensive approach, based on a fundamental shift in mindset.

Andrew Sheng , Xiao Geng

trump xi jinping

HONG KONG – Trade negotiations between the United States and China are closing in on the March 1 deadline, after which the bilateral tariff war will resume – beginning with an increase from 10% to 25% on $200 billion worth of Chinese products. While global financial markets are fluctuating wildly, investors seem to assume that too much is at stake for the US and China to fail to reach a deal. Their optimism could prove short-lived.

To be sure, there has been considerable progress on several key issues, such as technology transfer, protection of intellectual-property rights, non-tariff barriers, and implementation mechanisms. But to defuse tensions between the US and China in any sustainable way will require a more comprehensive approach, based on a fundamental shift in mindset.

Over the last 40 years, Sino-US engagement has been largely cooperative, reflecting a holistic approach that takes into account the interests of the entire global system. US President Donald Trump’s administration, however, does not seem to believe that engagement with China (or anyone else for that matter) can benefit both sides. As Trump’s “America First” agenda shows, the US is now playing a zero-sum game – and it is playing to win.

For example, the US has threatened to punish or desert its closest allies unless they increase their defense spending. Under pressure from the Trump administration, South Korea just agreed to increase its contributions to US forces in Korea by 8.2%, to $923 million, in 2019.

Similarly, Trump has repeatedly disparaged fellow NATO members for insufficient defense spending. Most recently, Trump has criticized Germany for spending only 1% of GDP for defense, compared to America’s 4.3%. German Chancellor Angela Merkel responded by condemning US isolationism at the Munich Security Conference, and calling for the revival of multilateral cooperation.

The Trump administration’s myopic approach is also apparent in its preoccupation with bilateral trade imbalances. Any US deficit with another economy is, from Trump’s perspective, a loss. Given this, if China agrees to cut its bilateral trade deficit with the US, other economies with bilateral surpluses vis-à-vis the US – including close allies, such as the European Union and Japan – may find themselves facing intensifying pressure to do the same.

The weakening of trade that could result in this scenario would compound existing negative pressure on global growth, hurting everyone. A global economic downturn is the last thing the world needs at a time when it is already beset with risks, including a possible no-deal Brexit and populist gains in the European Parliament election in May.

Of course, while Trump does not spare his allies, his primary target remains China. After all, the competition between the US and China extends far beyond trade. Although the US maintains military, technological, financial, and soft-power superiority, China has been steadily catching up, leading to bipartisan support in the US for a more confrontational approach.

Last October, US Vice President Mike Pence bluntly accused China of technology theft, predatory economic expansion, and military aggression. Pence’s stance echoed the fears of the US national security community. As former US Defense Secretary Ashton Carter put it, “Because it is a Communist dictatorship, China is able to bring to bear on US companies and our trading partners a combination of political, military, and economic tools that a government such as ours cannot match. This puts us at an inherent disadvantage.”

And yet America’s tools are hardly useless. The US authorities have mobilized a broad range of domestic and international resources – from law and diplomacy to national security measures – to stop the overseas expansion of the Chinese telecommunications giant Huawei. If Western countries allow Huawei to build their 5G infrastructure, America’s hawks and their allies argue, they will be vulnerable to cyberattacks from China in some future war.

All of this has shaken business and market confidence to the core, wiping out trillions of dollars in market capitalization. And the Trump administration’s apparent insistence that countries choose sides in its dispute with China is further heightening fears. As the rest of the world’s trading countries understand, Trump’s approach will fragment business and reverse the globalization-enabled economies of scale that have fueled growth for decades.1

More broadly, the Trump administration’s rejection of multilateralism undermines the global cooperation needed to confront a range of issues, including migration, poverty and inequality, climate change, and the challenges raised by new technologies. Trump’s focus on geopolitical rivalry – and the associated rise in security and defense spending – will dramatically reduce resources available for global public goods, such as infrastructure investment and poverty-reduction programs.

Ending the Sino-US trade war will require considerable statesmanship on the part of Trump and Chinese President Xi Jinping. But, beyond that, both sides need to recognize that supporting global peace and prosperity requires less ideology and more respect for diversity of political, social, and cultural systems. Failing that, the fault lines will continue to deepen – much as they did in the 1930s – potentially setting the stage for full-blown war.

Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing. His latest book is From Asian to Global Financial Crisis.

Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor at Peking University HSBC Business School and at the University of Hong Kong's Faculty of Business and Economics.

Is Japan’s Sun Rising?

At a time of rising populism and authoritarianism around the world, Japan stands out as a relative island of social and economic stability. And though it owes its current situation to unique economic and geopolitical circumstances, it might still have something to teach other developed countries.

Jim O'Neill  

japan sunrise

TOKYO – When I participated in the Chatham House/Daiwa Research Institute conference on the post-Brexit Japan-UK relationship in Tokyo last month, it was my first visit back to Japan since my departure from Goldman Sachs almost six years ago. Prior to this trip, I had been visiting the country regularly since 1988, so it was helpful to see things from a slightly more detached perspective.

By and large, Japan in 2019 feels relatively stable when compared to other advanced economies. A decade from now, I would not be surprised if it continues to show the highest real (inflation-adjusted) per capita GDP growth rate in the G7.

True, Japan’s annual GDP growth has averaged just 1.1% so far this decade; but its declining population and shrinking workforce is already translating into stronger per capita performance. In fact, given the country’s demographic challenges, it might well be outperforming its long-term growth potential.

Moreover, the Japanese government has begun to publicize its efforts to attract certain foreign-born workers, having finally recognized that immigration will be necessary for future growth. That has been obvious for at least 20 years now. Yet, in hindsight, Japan’s long refusal to adopt a pro-immigration strategy no longer seems as mistaken as it once did, given the recent backlash against globalization in Europe and the United States.

Later this year, Shinzo Abe will become the longest-serving prime minister in Japan’s history. Having taken office after two decades of successive Japanese leaders playing musical chairs, he has delivered a remarkable period of stability. In particular, his signature economic strategy (“Abenomics”) has produced a number of successes. In addition to experiencing strong real per capita GDP growth, Japan’s persistent deflation seems to have come to an end, and there have been marked increases in women’s labor-force participation.

Then again, Japan is also nearing the 20th anniversary of its foray into quantitative easing (QE). The remarkable duration of this unconventional policy may owe something to the fact no one can be sure what will happen if it stops. But it also continues simply because, despite massive liquidity injections and measures to cajole companies into raising wages, inflation remains persistently below the 2% target that Abe instructed the Bank of Japan (BOJ) to pursue.

Under these conditions, ending QE is simply not an option. Still, in principle, one can question the wisdom of continuing with it indefinitely. It is obvious that the BOJ cannot achieve 2% inflation without introducing significant monetary risks; and it is not at all clear that a 2% target is sensible to begin with. Even if it is, there are risks to pursuing such a narrow objective at the expense of other policy priorities. Many countries learned this the hard way back in the 1990s.

Nonetheless, the BOJ will maintain its current approach at least until Abe leaves office. The question is what happens after that. With the BOJ having become such a distortionary presence in bond and equity markets, its curtailment of QE could have far-reaching implications across the global economy. Unless the end of QE coincided with a dramatic improvement in the government’s debt position, which is highly unlikely, bond prices finally would be in for a tough time.

That could also be true for equities, given that the BOJ has become one of the top-ten largest shareholders in many Japanese companies. On the other hand, if the BOJ ends its share purchases, equity markets will suffer less distortion, and there could a more important role for individual stock analysis. No doubt, these variables – along with a planned increase in the Japan’s consumption tax – will occupy financial analysts’ minds for some time to come.

As for the broader topic of our recent conference, I have realized that there are more areas for cooperation between post-Brexit Britain and Japan than I had previously thought, owing to the oddities of each country’s economic situation.

For example, with so much experience in managing the tricky relationship with China, Japan probably has some wisdom to offer other developed countries. For governments around the world, the challenge is to strike a balance between reaping the benefits of Chinese growth and avoiding the attendant security, cyber, and financial risks.

I suspect that policymakers in the United Kingdom will share Abe’s enthusiasm for stronger cooperation on data protection and cyber security – an issue that will feature prominently at the G20 summit in Osaka this June. They would also welcome Japan’s advocacy for a better rules-based system of global governance. And, of course, they might have something to learn from Japan’s recent success in striking trade deals across Asia and with the European Union. If the UK is determined to go it alone on trade, strengthening its commercial ties with Japan will be absolutely necessary.

And who knows, if Abe’s overtures to Russian President Vladimir Putin pay off, he might even be able to teach the rest of us something about Kremlinology. But on this issue, at least, we would do well to keep our hopes in check.

Jim O'Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chairman of Chatham House.

Profit and loss

A commission of inquiry reaches a damning verdict on Australia’s Banks

Yet the forced restructuring banks had feared is off the cards

IF A HEALTHY banking system is dull, then Australia’s must be sick to the core. A royal commission with a broad remit to investigate abuses by the country’s financial institutions that opened a year ago has set off fireworks. Hearings revealed that for years banks had hidden fees, swindled money for absent services and docked charges from the dead. Financial advisers earned bonuses for channelling clients’ cash towards underperforming funds. Insurance companies flogged junk schemes to the poor or mentally disabled.

Australia’s four biggest lenders saw their market capitalisation fall by an average of 16.3% while the commission was sitting, knocking A$66bn ($47.1bn) off their combined value. In April the country’s biggest asset manager, AMP, sacked its chief executive and chairman after the inquiry heard that it had not only charged customers for advice that was never provided, but had lied to the regulators about it. More heads may roll now that Kenneth Hayne, the judge who led the inquiry, has handed his final report to the government.

The commissioner has asked regulators to investigate 24 possible breaches of civil or criminal law. The report names institutions rather than individuals, but some people may now come under scrutiny. Mr Hayne expressed particular disgust at those who gouged fees without providing services. Almost A$1bn has already been paid in compensation to their victims.

Offenders may have broken a law against “dishonest conduct in relation to a financial product or financial service”. The report said the Australian Securities and Investments Commission (ASIC), the corporate regulator, should consider the maximum penalties: large fines, or up to ten years in prison for individuals. Thus Australia, a country widely regarded as having had a “good” financial crisis, with a stable, profitable banking system, may become one of the few places where bankers are jailed for institutional wrongdoing.

The report’s 76 recommendations set out to clean up the industry. One is for a new bank-funded compensation scheme for victims of banking misconduct. Some measures target the intermediaries who flog insurance, pensions and mortgages to befuddled Australians. Mr Hayne wants their bonuses slashed, starting with “trailing” commissions paid to mortgage brokers years after they sell a loan. Financial advisers would have to seek customers’ approval when they roll fees forward. It would become illegal to tout pensions or insurance by phone.

These are welcome measures, but many think they do not go far enough. “In the end the banks have got off lightly,” says Michael Rafferty, an economist at RMIT University in Melbourne. The commission exposed the harm to customers caused by conflicts of interest within banks. Yet it stopped short of demanding that they spin off the advisory and wealth-management units implicated in much of the wrongdoing. Three big banks had expected such a ruling and are restructuring along these lines, yet forced separation would be “costly and disruptive”, Mr Hayne concluded.

Nor did he call for stricter checks on affordability before making loans. Lenders have already tightened up here, too, but consumer-protection groups fear they may ease up once the pressure is off. Shares in the four big banks rose by an average of 6.7% the day after the report’s publication on February 4th.

The commission accused industry regulators of being too cosy with the industry. It recommends that they be given more power to punish misdemeanours and curb bonuses, with a new oversight panel set up to ensure they do their job. Yet it is unclear how much authority the panel would have, and the regulators are straitened. “ASIC has been called out for its ineffectiveness since the early 1990s,” complains Allan Fels, a former chairman of the competition commission. “What’s different now?”

Both the coalition government, which looks set for a trouncing in elections in May, and the opposition Labor Party, which is expected to form the next government, have promised to enact all the commission’s recommendations. Little will happen before the vote. But the commission at least gained a hearing from politicians. Banks can count themselves lucky it did not crack down harder.

The American Dream Is Alive and Well

Most people in this country say that they are living it — but what they mean by the phrase might surprise you.

By Samuel J. Abrams

Jairo, Miami: “My American dream lies where courage, freedom, justice, service and gratitude are cherished and practiced. I dream of that America that fought for me to become who I am today. An America where all children can have that opportunity to dream and succeed.”CreditCreditPhotographs by Ian Brown, from "American Dreams"

I am pleased to report that the American dream is alive and well for an overwhelming majority of Americans.

This claim might sound far-fetched given the cultural climate in the United States today.

Especially since President Trump took office, hardly a day goes by without a fresh tale of economic anxiety, political disunity or social struggle. Opportunities to achieve material success and social mobility through hard, honest work — which many people, including me, have assumed to be the core idea of the American dream — appear to be diminishing.

But Americans, it turns out, have something else in mind when they talk about the American dream. And they believe that they are living it.

Last year the American Enterprise Institute and I joined forces with the research center NORC at the University of Chicago and surveyed a nationally representative sample of 2,411 Americans about their attitudes toward community and society. The center is renowned for offering “deep” samples of Americans, not just random ones, so that researchers can be confident that they are reaching Americans in all walks of life: rural, urban, exurban and so on. Our findings were released on Tuesday as an American Enterprise Institute report.

Tamara and Chris Johnson, Centuria, Wis.: “Our American dream is simple," Ms. Johnson said. “The rewards are not things, they are experiences — a meal, a conversation, a walk, a hug. Our American dream is not easy. It requires grit, persistence and drive. Our American dream is not exclusive — it gives. In our American dream no one is left behind.”

What our survey found about the American dream came as a surprise to me. When Americans were asked what makes the American dream a reality, they did not select as essential factors becoming wealthy, owning a home or having a successful career. Instead, 85 percent indicated that “to have freedom of choice in how to live” was essential to achieving the American dream. In addition, 83 percent indicated that “a good family life” was essential.

The “traditional” factors (at least as I had understood them) were seen as less important. Only 16 percent said that to achieve the American dream, they believed it was essential to “become wealthy,” only 45 percent said it was essential “to have a better quality of life than your parents,” and just 49 percent said that “having a successful career” was key.

This pattern — seeing the American dream as more about community and individuality than material success and social mobility — appeared across demographic and political categories. In the case of political party affiliation, for example, 84 percent of Republicans and independents said having freedom was essential to the American dream, as did 88 percent of Dem­ocrats; less than 20 percent of those in either party held that becoming wealthy was essential.

Helen and Jesse, Cleveland: “My family immigrated to the U.S. from China over 25 years ago. They left everything and everyone they knew so that they could give me a better life. That was their American dream," Helen said. “My American dream is the same as my parents'. I want my future children, everyone’s children, to grow up in a country where they have opportunities to create a better life.”

The data also show that most Americans believe themselves to be achieving this version of the American dream, with 41 percent reporting that their families are already living the American dream and another 41 percent reporting that they are well on the way to doing so. Only 18 percent took the position that the American dream was out of reach for them.

Collectively, 82 percent of Americans said they were optimistic about their future, and there was a fairly uniform positive outlook across the nation. Factors such as region, urbanity, partisanship and housing type (such as a single‐family detached home versus an apartment) barely affected these patterns, with all groups hovering around 80 percent. Even race and ethnicity, which are regularly cited as key factors in thwarting upward mobility, corresponded to no real differences in outlook: Eighty-one percent of non‐Hispanic whites; 80 percent of blacks, Hispanics and those of mixed race; and 85 percent of those with Asian heritage said that they had achieved or were on their way to achieving the American dream.

Income did make a difference, with 72 percent of those earning under $35,000 expressing a positive outlook about the American dream, compared with 90 percent of those earning over $100,000 — but those numbers are still overwhelmingly positive. Another difference was generational. Eighty-three percent of baby boomers, 80 percent of Gen Xers and 81 percent of millennials were optimistic about the American dream. But those in Gen Z — Americans born in 1997 or later — were notably less optimistic at 73 percent.

Brothers Chase and Connor LaCoste, Amite, La. “I think the American dream is that all people should be equal, no matter if you're black or white," Chase said. “As an African-American young boy I just hope I can can live to be a black man. Two main things you should always have is freedom and liberty.”

In general, though, the data are clear: Individuality and family, not wealth and real estate, are what Americans seek and believe they are finding in the national “dream.”

What conclusions should we draw from this research? I think the findings suggest that Americans would be well served to focus less intently on the nastiness of our partisan politics and the material temptations of our consumer culture, and to focus more on the communities they are part of and exercising their freedom to live as they wish. After all, that is what most of us seem to think is what really matters — and it’s in reach for almost all of us.

Samuel J. Abrams is professor of politics at Sarah Lawrence College and a visiting fellow at the American Enterprise Institute.