Archive for the ‘India’ Category

India’s infrastructure bottlenecks

June 16, 2010

An excellent New York Times article yesterday discussed how democratic politics and bureaucracy in India prevent the elimination of infrastructure bottlenecks, especially in transportation.  The article focused on India’s railway system, where freight rates are expensive, travel times excessive, and traffic volumes inadequate to the task of fostering strong economic growth…of the pace we see in China.

It is an interesting comparison — China vs. India, one which would require more time and space to adequately address than this blog can provide.  For the moment, I will raise the long-standing dichotomy between two development models — the authoritarian and the democratic.  In Latin America, analysts have often underscored the success of the Pinochet model in Chile, whereby a brutal authoritarian regime from 1973-90 swept away roadblocks and bottlenecks caused by democratic politics, unleashing that country’s growth potential and allowing it to develop more rapidly than many of its historically more democratic neighbors.  Moreover, with a sound economy in place, Chile was able to make the transition to a functioning democracy with two relatively cohesive coalitions of the right and left.  Yet there was a cost in terms of social cleavages, human rights abuses, and at times political stability.  Throwing people out of helicopters is not civilization.

General Augusto Pinochet and friends, the junta that ruled Chile from 1973-90.  Source:  http://acalzonquitao.files.wordpress.com/2008/09/_pinochet_junta.jpg
General Augusto Pinochet (seated) and friends, the junta that ruled Chile from 1973-90. Source: http://acalzonquitao.files.wordpress.com/2008/09/_pinochet_junta.jpg

Arguably, Russia and China have followed the Pinochet model, Russia after the economic disaster created under failed democrat Boris Yeltsin.  China has done quite well with this model, but nervous Chinese leaders understand that unrest, if not social upheaval, is always a possibility in China if the political monopoly fails to consistently deliver the economic goods.  India labors under a vibrant, if at times inefficient and somewhat corrupt, democracy.  Nevertheless, Indians know that if a government fails to deliver economic growth, they can “throw the rascals out” at the next election.  This introduces a measure of political stability into the system, which is often lacking in authoritarian regimes.  And, given India’s enormous ethnic and religious cleavages, it is perhaps this vibrant democracy that prevents the country from tearing itself apart.  Slow trains and slow growth — the price Indians pay for stability (and decency)?

Image above:  General Augusto Pinochet (seated) and friends, the military junta that ruled Chile from 1973-90.  Source: http://acalzonquitao.files.wordpress.com/2008/09/_pinochet_junta.jpg

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India: More on inflation

June 15, 2010

As noted in an earlier post, inflation is a sensitive issue in India.  In addition to worrying about over-heating, today a preoccupation in many Emerging Market Economies (e.g. China and Brazil), Indian politicians are concerned that when food prices rise, millions may starve.  JPMorgan below analyzes the latest inflation report, including double-digit price hikes in the food category.  Moreover, with only modest capital expansion going on in India (outside of infrastructure), the industrial sector is bumping up against supply constraints, which can be inflationary.  Hence, JPM’s conclusion that the Reserve Bank of India will tighten monetary policy sooner rather than later…

From JPMorgan’s Emerging Markets Today, June 15, 2010:

WPI headline inflation came in at 10.16%oya (J.P. Morgan:

10.2%; consensus: 9.6%) in May. In line with the trend

over the last few months, food inflation subsided slightly

(12.1%oya; -0.3%m/m, sa), which was more than offset by

rising non-food inflation (9.4%oya; 1.8%m/m, sa). Core

inflation (non-food manufacturing + non-food primary) rose

8%oya (2.3%m/m, sa). Importantly, the February and March

inflation numbers were revised up. With these revisions,

headline WPI entered double digits in February (10.05%oya).

The RBI in its April policy review projected inflation to

stabilize just below 10% by June/July before declining on

base effects. The economy has seen little in the way of

significant capital expansion outside of infrastructure,

whereas IP has sizzled for the last six months, including as

late as April when it reached 17.6%oya, close to its highest

in 20 years. Indeed, May PMI, which strongly leads the IP

cycle, rose to its highest since June 2008 as did the ordersto-

inventory ratio suggesting that capacity constraints are

increasingly binding. On balance, we believe that the RBI

could raise rates by 25bp before the July policy review,

followed by another 25bp rate hike at the review. To

alleviate the liquidity squeeze, the RBI will likely look at

other options, such as reducing SLR further or opening

special discount windows.

India: Solid GDP growth, weak finances

June 14, 2010
India's fractious politics keeps government debt high.  Source: Google Images
India’s fractious politics keeps government debt high. Source: Google Images

In an earlier post, I discussed  a theory I developed that democratic countries with divided, often coalition, governments generally produce weaker public finances than countries where two dominant parties alternate in power.  India is the posterchild for the former, with government debt at about 80% of GDP, very high for an emerging market economy.  In order to keep weak coalitions together, governments must buy off constituencies, at the expense of sound public finances.  We shall see if India’s current government led by the Congress Party can deliver on promises to reduce the government debt burden.

India’s weak fiscal position (with government deficits at around 6% of GDP)  have constrained its credit ratings to low investment grade.  Below find a press release issued today by Fitch in which the rating agency adjusts the rating outlook on India’s sovereign bonds to stable from negative, not due to improved management of government finances, but to stronger GDP growth prospects.  The one-off positive impact on government accounts of recent telecoms auctions also helped sovereign creditworthiness.

CSFB published a note today (also below) explaining how output growth is starting to bump up against capacity constraints.  Fitch forecasts output growth at a healthy 8.5%, though the Reserve Bank of India might tighten monetary policy, keeping the expansion in check.  This is because of another important characteristic of Indian political economy — political sensitivity to inflation.  India is a populous country with high levels of poverty, so when inflation creeps up even a point or two, especially for food prices, people starve (or at least become more malnourished).  In a place as big as India, this can mean millions more malnourished people.  Complicated policy making…

From Fitch Ratings:

Fitch Revises India’s Local Currency Outlook To Stable; Affirms at ‘BBB-‘   
14 Jun 2010 5:33 AM (EDT)


Fitch Ratings-Mumbai/Hong Kong/Singapore-14 June 2010: Fitch Ratings has today revised the Outlook on India’s Long-term local currency Issuer Default Rating (IDR) to Stable from Negative. At the same time, the agency affirmed India’s Long-term foreign and local currency IDRs at ‘BBB-‘. The Outlook on the foreign currency IDR remains at Stable. Fitch has also affirmed the Short-term foreign currency IDR at ‘F3’ and the Country Ceiling at ‘BBB-‘.

“India’s strong growth prospects and the one-off positive impact from the telecoms auctions underpin Fitch’s forecast that government debt to GDP ratio will decline, easing the near-term pressure on India’s local currency ratings. However, public finances remain a clear weakness, and downward pressure on the ratings could resume if India veers too far off the deficit reduction path as outlined by the Thirteenth Finance Commission,” said Andrew Colquhoun, Director in Fitch’s Asia-Pacific Sovereigns Group.

Fitch projects general government debt to fall to 80% of GDP by end-March 2011 (end-FY11) from 83% at end-FY10, reflecting the impact of strong GDP growth on the denominator and the one-off revenues from the 3G licence and broadband spectrum auctions. The agency has revised India’s FY11 growth forecast up to 8.5% from 7% on signs of strong growth momentum, including industrial production growth of 17.6% in April 2010, year-on-year. The telecom licence auctions together netted the government INR1,060bn, representing about 1.6% of projected FY11 GDP, as against the INR350bn budgeted originally (Fitch’s February review of India took the cautious approach of assuming zero auction revenues). The agency anticipates some pressure on the government to spend some of the revenue windfall and estimates an additional 0.3pp spending in FY11, still delivering a net 1.3pp fiscal saving.

However, fiscal management remains relatively weak. Fitch anticipates that the central government’s deficit on the government basis (including privatisation and auction receipts as revenue and excluding some off-budget items) to be at 5.7% of GDP in FY11, just 1pp down from FY10, despite the 1.6% of GDP reaped from the telecom auction. The report of the Thirteenth Finance Commission (TFC) in February laid out a path of deficit reduction towards a “golden rule” of borrowing only to finance investment by FY15. India’s track record on sticking with medium-term fiscal plans is not good, although the Congress-led government has at least voiced its commitment to debt reduction. If the authorities stray too far from the TFC’s consolidation path and debt ratios resume rising, it could impact the ratings negatively.

A significant drop in the country’s growth momentum to below Fitch’s projections would worsen India’s debt dynamics and put downward pressure on its ratings. However, India’s credit profile continues to benefit from the largely local-currency profile of its debt (95% of the stock), and from the sovereign’s stable access to domestic-currency financing, mainly from the banking system. Signs that India’s banking system was under stress would likely be negative for the sovereign ratings, although this is not the agency’s base case. Inflation remains uncomfortably high, with wholesale prices up 10.2% in the year to May, prompting the central bank to hike rates twice in response so far in 2010. An intensified inflation shock that is severe enough to disrupt macroeconomic and/or financial stability would be negative for India’s ratings.

India’s strong external finances, including its sovereign and overall net creditor status and official reserves of USD271bn by June 4 2010 (up 3.6% on a year earlier), continue to support its foreign currency ratings. By contrast, poor physical infrastructure, underdevelopment reflected in low average incomes, and weak governance indicators relative to rated peers constrains the ratings.

Contacts: Andrew Colquhoun, Hong Kong, Tel: +852 2263 9938; Vincent Ho: +852 2263 9921.

From CSFB today:

India
Devika Mehndiratta
+65 6212 3483
devika.mehndiratta@credit-suisse.com
April IP surprised on the upside, with the index rising 17.6% yoy compared with our and consensus estimates of 14.3%. In seasonally adjusted level terms, the IP index had been flat in recent months – after strong gains from June to December 2009, IP was flat in January and February and then declined in March (Exhibit 6). In April, the IP index increased by a notable 3.4% mom.
The large upward surprise in April IP was not that broad-based, however. It was dominated by a 33% mom jump in the capital goods sub-index. This sub-index has been volatile recently (Exhibit 7). It jumped over 30% in December/January, fell back in February/March and was up again by 33% mom in April. A breakdown by product for capital goods is not available for April yet, but data until March showed that these large ups and downs were limited to only a few goods such as computers, ship building & repair, railway wagons, and oil wells/platforms.
Capacity constraints could become an issue. Even if we assume that the broad trend in capital goods (even though volatile) indicates that corporate investment activity is picking up, it is possible that, in the months ahead, capacity constraints start to show up. Anecdotal evidence suggests that industries such as autos, fast moving consumer goods, steel and power are operating near full capacity (the power sector has been capacity constrained for years). This could slow the pace of month-on-month rises (from around 3% pace in April) in industrial production going ahead.
Could the RBI now hike policy rates inter-meeting before the scheduled July meeting? An inter-meeting hike is not entirely inconceivable, but we would still maintain that it is unlikely. This is because: 1) the RBI has indicated ‘cautiousness’ in its policy stance in recent comments, and 2) monetary conditions have anyway tightened in recent weeks triggered by the large one-off 3G auction-related borrowings by telcos. The short-term call rate has consequently moved up from the reverse repo rate (3.75%) to the repo rate (5.25%) without the RBI having taken any policy tightening action since April.

India: Fiscal worries

April 29, 2010
India: CSFB took a trip there to see what's what.  Source: Google Images
India: CSFB took a trip there to see what’s what. Source: Google Images

Countries with divided democratic government that have to pay off constituencies to hold together coalitions often run up government debt and put at risk not only sovereign creditworthiness, but also economic performance.  I have in mind Italy, Japan, Israel and Brazil.  India, alas, is the posterchild of this phenomenon.  By contrast, governments which alternate between parties or at least between stable coalitions of right and left often manage their debt burdens better.  This is because if you mismanage the economy, you’re thrown out of office.  The U.S., the UK, Germany, Mexico, and Chile come to mind.  Granted, not a perfect rule — Mexico can’t raise much-needed non-oil taxes — but an interesting idea nonetheless.

CSFB took a trip to India to explore how the economy is performing, what the status of reforms are, and what the prospects for infrastructure investment are in this lumbering, rising power that links East to West and has every imaginable problem plaguing Emerging Markets from war, terrorism and ethnic tension, to poverty, growing pains, and inflation.  See CSFB’s trip notes below.

India began reforming its public finances earlier this decade to get its government debt burden on a downward trajectory.  At over 80% of GDP, government debt is high, and with deficits in the double digits, not set to decline.  Luckily, GDP growth has been and is expected to be robust at 6-10% per year.  Yet the country is very poor, with per capita GDP of $1000, making China seem rich with about $3500.  This limits the government’s ability to raise taxes to balance the budget.  Moreover, it imposes a constraint on monetary policy because inflation, especially of food prices, means people starve.  So, an easy money policy has to be considered carefully.  

Like Brazil, India’s problems are domestic — India’s debt is not external.  It has amassed nearly $300 billion in fx reserves and has only a small current account deficit.  The problem of late is that measures to improve public finances over the medium term have fallen prey to politics, as the statement made in the first paragraph suggests they might.  Food subsidies and debt relief for farmers have been increased, and tax rates adjusted down in recent years.  As CSFB noted, a planned direct tax reform is on hold. 

With government finances in difficult straits, the only answer to improving India’s woeful infrastructure situation is through private investment, or at least public-private partnerships.  CSFB writes about these below…

From CSFB 4/29/10:

India
Devika Mehndiratta
+65 6212 3483
devika.mehndiratta@credit-suisse.com
We have just published a new report, India: Trip Notes (with a focus on infrastructure); we summarise our key findings below.
Earlier this month we were in India meeting corporates, banks and the government. Our focus was (1) on-the-ground feedback on sentiment, consumption/investment trends and any updates on government policy, and (2) specific meetings on infrastructure spending prospects in 2010 (year beginning April) given investor interest in this and market optimism that the government is giving a ‘big push’ to infrastructure spending in 2010 (particularly on roads).
Household consumption is apparently quite robust. We met with the CEO of one of India’s largest retail companies, who judged that growth in sales volumes was very strong and that some of the consumer goods companies (e.g., Fast Moving Consumer Goods or FMCG companies) were finding it a challenge to meet demand with their existing capacity. The picture on investment spending is still a bit hazy, however. Overall, while there does seem to have been some pick-up, it is not clear how strong this has been.
Housing prices have run up sharply. As the RBI recently indicated in its policy statement, housing prices in certain areas of Mumbai are already above their previous peak and, in Delhi, average prices are only about 5% below their previous peak. In our view, the RBI could tighten risk weights/provisioning norms for bank lending to the real estate sector sometime this year.
Direct tax reforms could be delayed by a year. In our talks with a senior government official, we learnt that implementation of direct tax reforms (scheduled for April 2011) could be delayed by a year.
On monetary policy, we maintain that the central bank is likely to hike the reverse repo and repo rates by 100bps by March 2011, coupled with more CRR hikes. The RBI stated at its meeting this month that it would like to “calibrate” rate hikes – as we stated then, in our view this implies that the RBI could end up having to deliver some intermeeting hikes in 2010.
We also had focused meetings with key players in the infrastructure sector to try to ascertain if infrastructure spending in 2010 is likely to pick up as strongly as many are expecting. Our meetings suggested that roads (national highways, specifically) is the only sector for which the government is clearly trying to speed up the awarding of new projects. Other than roads, the general assessment is that private sector investment in power is doing well and is likely to continue to do so in the year to come. Investment spending on railways, airports and ports, however, seems to be going on a slow/business-as-usual path.
Even within roads, it is worth remembering the government’s recent thrust is not across all categories of roads but is focused on national highways. Government estimates peg investments in roads (such as national highways, state highways, rural roads) in 2009 at about INR650bn (1% of GDP and 13.6% of total infrastructure investments). Of the total spending on roads, expenditure on national highways is likely to have been around 45%, according to government data.
Although the pace of awarding new highway projects has risen, actual construction activity is likely to pick up more in 2011 than in 2010, in our view. In a typical PPP (public private partnership) highway project, from the time that the project is awarded it takes about six months for financial closure, after which construction can begin. While the projects awarded in the past few months should start from 2Q 2010 (July to September) onwards, the clear step up in highway construction activity is likely to take place more at the end of 2010 and in 2011 (assuming the recent fast momentum in awarding projects is maintained through 2010).
Beyond 2010, many of the specialists we met made the point that financing could become an issue for infrastructure spending. Although land acquisition is highlighted as one of the key constraints in the infrastructure sector, many of the specialists we spoke to were concerned that in coming years financing of infrastructure projects is likely to become an issue, some estimating as early as in 2011. For debt, the Indian infrastructure sector is primarily dependant on credit from domestic banks, and most thought that the banking sector alone would not be able to meet the infrastructure sector’s funding requirements in coming years.

From BRIC to BIC…or even IC?

June 8, 2009

BRIC leaders meeting last year.  Source: www.corporate-eye.com

The Economist published an article this week suggesting that Russia’s slide into recession this year – due to lower oil prices, capital flight, weak banks and greater state involvement in the economy — could mean the fabled BRICs will become BICs. Of the four BRICs that made it into Goldman’s arbitrary moniker for major emerging market economies, Fitch Ratings forecasts only China and India will grow this year. Does that mean the BRICs should actually be the ICs? Does Brazil’s shrinking economy also knock Latin America’s largest country out of this select group? Somehow IC doesn’t sound as good as BRIC. Before the global financial crisis, some had said that Brazil had hit a BRIC wall, due to its much worse economic growth performance. I guess that would have been RIC, right?

Fitch Ratings forecasts Earth’s economy will contract 2.7% this year, driven by a nearly-unprecedented shrinkage of the major advanced economies by 3.8%, much worse than the zero growth of the 1975 and 1982 global recessions. Russia is likely to contract by about 3%, Brazil by a little over 1%, while China and India expand by 5-6% each (slow for these countries). Russia’s contraction is driven by its dependence on energy exports, the price of which has fallen markedly since highs last year. However, should the recent push upward in the price of a barrel of oil to nearly $70 persist, Russia’s contraction this year could be more muted.

As noted, Russia is also buffeted by weak banks, capital flight and the heavy unmet external financing needs of the private sector. In addition, as The Economist points out in an article likening Putin’s Russia to the Ottoman Empire, the greater intrusion of the state in the economy and the corporatist corruption of Putin and his men have stymied, though not uprooted, private entrepreneurship in Russia.

The comparison between Russia and Brazil is interesting. Fitch rates Russia’s sovereign debt “BBB” with a Negative Outlook, and Brazil a notch below at “BBB-” with a Stable Outlook (the Outlook reflects the likely direction of the rating within two years). India is also rated “BBB-” with a Stable Outlook. And China, in a class by itself with its $1.8 trillion in reserves – perhaps Goldman’s next appellation should simply be C – is rated “A+” with a Stable Outlook.

But as I said in a previous note about Moody’s, ratings are notoriously sticky. Brazil is looking better than Russia these days. Its economy is more market-oriented and better structured. Its exports are much more diversified. Its domestic market is stronger, as are its banks. Its only negatives vis-à-vis Russia are: its higher government debt, though its deficits are lower than Russia’s because the latter relies on volatile oil to balance its books; and, Russia’s stronger external balance sheet, i.e. excess of foreign exchange reserves over money it owes foreigners. However, Brazil’s balance between external assets and liabilities is near zero — pretty darn good — so I’m not sure Russia is so far ahead on this front. India likewise has a heavy government debt burden and fiscal deficits (both larger than Brazil’s).

India’s and Brazil’s fiscal woes emanate out of their tradition of coalition politics, a dynamic described in an earlier post. India now has the potential to improve its fiscal performance, given the strength of the Congress Party after last month’s elections. Congress should require less pork to distribute to keep its coalition together. India likewise has external assets in excess of liabilities, but not to as great an extent as Russia. Both Brazil and India benefit from a relatively closed economy (at least during a global meltdown) and a strong domestic market. (China’s openness to trade has become a major vulnerability in this crisis.) So perhaps the ratings of both Brazil and India should equalize with or even best Russia’s. Let’s wait and see.

Fitch regularly publishes an interesting report on banking sector risks across the countries it rates. The last one came out May 11, 2009. They assign a letter grade and a number rank based on the health of a country’s banks and vulnerability to shocks. The letter grade (A-E) is an average of the credit quality of the nation’s banks. The number (1-3, 3 being the worst) reflects the vulnerability of the country’s banks to financial shocks from asset prices (including real estate), excessive growth in bank lending, and exchange rate movements. The risk indicators for the famed BRICs are as follows:

Brazil C-3

Russia D-3

India C-2

China D-1

By this measure, India may be the least vulnerable to a banking crisis. China’s score of 1 for financial shocks is good, but may change given the breakneck growth in bank lending of late. China’s banks are fairly weak, given heavy policy lending to state-owned enterprises. Russia’s banks are also weak and prone to shocks. Fitch’s banking sector indicators were always much better in the advanced industrialized countries than in emerging markets in the past. In late 2006, the US and UK were both B-2, and now they’re both C-3, same as Brazil. Some powers rise and some powers fall.  My email is roger.scher@gmail.com.

Rising Powers Update…

May 18, 2009

China and the U.S. inextricably linked.  Source:  NYTimes Magazine

A lot is going on in the Rising Powers at the moment, so why not begin the week with a survey of key developments and important news articles? 

On China, there was an excellent article by David Leonhardt in the New York Times Magazine, explaining quite clearly the symbiotic linkages between the economies of China and America and the challenging tasks both governments face to correct the imbalances in trade and finance that have underpinned the current global financial crisis.  I applaud Leonhardt’s mentioning Ben Bernanke’s past and present near-blaming of America’s debt-driven trade deficits on China’s savings glut.  I first heard Bernanke make this argument at a Merrill Lynch dinner in 2005 where he was keynote speaker and was angling to be Bush’s nominee for Fed chairman.  According to Bernanke, then Chairman of the Council of Economic Advisers, America’s twin deficits were not the problem; abysmally low American household savings were not the problem.  It was the global savings glut that kept interest rates low in the U.S.  Global capital sought the superior returns of U.S. assets.  It was up to other countries like China to adjust, not the U.S.  The Special of the Day at the Federal Reserve dining room these days is crow.

I disagree with one point made in the Leonhardt article.  He quotes China expert Nicholas Lardy saying that China’s massive current account surpluses were accidental; the Chinese “fell into it.”  As head of Asian Sovereign Ratings at a global rating agency during the Asian financial crisis of the late 1990s, I recall Chinese officials observing the financial dominos falling all over Asia at that time.  They saw governments, from Korea to Thailand, failing to follow a policy of targeting higher foreign exchange reserves.  As a result, I believe the Chinese became determined to run up their surpluses and to bank them, so as never to go hat in hand to the IMF like their neighbors had to do.

Also on China, a Foreign Affairs article called “The G-2 Mirage,” penned by Elizabeth Economy and Adam Segal, argues that prospects for the G-2 cooperatively managing world affairs are not great, given conflicting values and goals, even less so now that Obama is in power.  I heard Economy argue this point in a political salon I attended.  In contrast to Bush, Obama’s team will stress with China reducing greenhouse gases and improving human rights, which could get in the way of coordinating economic policies and solving problems around the world, notwithstanding the best intentions of Tim Geithner.

On an optimistic note regarding China, in a world where relations between (and within) states have been deteriorating (whether it is in Pakistan and Afghanistan, between Russia and NATO, or between Iran and its neighbors), it is encouraging to see China and Taiwan improving relations.  An Economist article discusses the announcement in late April by China Mobile that it would buy a Taiwanese mobile operator.  Taiwanese capitalists have long invested in the Mainland, but Taiwan has restricted Mainland investment in its economy.  With its economy now faltering, Taiwan has liberalized its investment rules vis-a-vis the Mainland.  This is part of a mutual thawing of relations since Taiwanese President Ma Ying-jeou of the KMT party, which advocates closer cross-straits relations, replaced the controversial President Chen Shui-bian, of the pro-independence DPP party, last year. Yet the Taipei Times reports that Sunday tens of thousands of protesters took to the streets of two Taiwanese cities to show anger at President Ma’s pro-Beijing policies.  Organizers had hoped for hundreds of thousands.

In India, contrary to what most pundits had expected, the incumbent Congress Party did very well in national elections and will easily form the next government.  It seems Indians voted for who they believe will run the economy and look after the poor best, not who will take the hardest line on terrorism (the BJP).  Likewise India’s smaller and regional parties had a poor showing overall.  I argued in an earlier post that an election resulting in political fragmentation, characterized by a surge of support for the smaller parties, could lead to higher government deficits and debt.  Let us see if a government dominated by the Congress Party can fulfill its election promises without a deterioration in sovereign creditworthiness.  What is clear is that President Singh is now a giant on the Indian political scene, much like Barack Obama; and, with a likely 260 seats, he needs just 12 more from other parties to govern.

Prime Minister Netanyahu of Israel will meet Monday with President Obama in Washington.  A must-read ahead of this meeting is a NYTimes op-ed by Jeffrey Goldberg, correspondent for The Atlantic, in which he explains what motivates Netanyahu and the consequent challenges Obama will face in dealing with him.  I had extensive meetings with Netanyahu over the years he was finance minister, and there is nothing in Goldberg’s piece that I would disagree with. While it would not be correct to say there has been a deterioration in relations between the U.S. and Israel since the election of Obama in November and Netanyahu in February, the expectation is that they will not see eye-to-eye in the same manner Bush and Olmert did.  However, an AP article quotes Defense Minister Barak suggesting that Netanyahu, who has lowered expectations about his appetite for negotiations with the Palestinians, will reaffirm his country’s commitment to a two-state solution.  This will be a sort of “gift” to Obama, but will there be a quid pro quo?  A commitment to heavier sanctions on Iran on the part of America?  How can Obama promise that?

In the presidential election in Iran, reformist candidates have been knocking Ahmadinejad for denying the Holocaust and ruining relations with the West.  If there is any hope that a reformist can win in Iran with Khamenei lurking behind the scenes, would this presage a détente with the West?  The trouble with this hope is that it may in fact be the case that both reformists and hardliners in Iran are intent on building a nuclear weapon.  Perhaps the only way to stop one, therefore, if that is what in fact the West wants to do, is to sharply curtail the country’s access to petroleum markets worldwide, which is a highly unlikely event.

And in Pakistan, the UN estimates one million people have fled their homes, due to fighting between the government and the Taliban.  Likewise U.S. targeted killings continue, with criticism, including in this country, mounting.  And, a New York Times article on Sunday quoted Admiral Mike Mullen, the chairman of the U.S. Joint Chiefs of Staff, confirming that the government of Pakistan is rapidly expanding its nuclear weapons arsenal.

In Brazil, hundreds of thousands remain homeless after floods ravaged the northeast, and the government is being criticized for not doing enough, reminiscent of criticism of the Bush administration after Hurricane Katrina.

And Friday, Russia and other nations could not agree on a proposal to extend peacekeeping monitors from the Organization for Security and Cooperation in Europe to stay in Georgia beyond June 30.

The world takes one step forward and two steps back…

Are people happy in the Rising Powers?

May 11, 2009

OECD Quality of Life Ranking: Subjective Wellbeing.  % of respondents reporting high evaluation of their life, in the present and future.

Among residents of the BRIC nations, Brazilians are the happiest, followed by Russians, whereas the Chinese are the least happy, followed by the Indians, according to a recent OECD report.

The OECD released its 2009 Factbook with charts and tables of economic and social indicators for its 30 members, countries “committed to democracy and the market economy,”  as well as other countries, many of them applying for membership.  In it, the organization ranks countries based on the relative “happiness” of their citizens. 

The OECD used data from a Gallup World Poll conducted in 140 countries around the world last year, that asked respondents whether they had experienced six different forms of positive or negative feelings within the last day (per a Forbes article). Sample questions included: Did you enjoy something you did yesterday? Were you proud of something you did yesterday? Did you learn something yesterday? Were you treated with respect yesterday? In each country, a representative sample of no more than 1,000 people, age 15 or older, were surveyed. The poll was scored numerically on a scale of 1-100. The average score was 62.4.  The assessment was about happiness in the present and future.

Top ten OECD members in terms of life satisfaction were dominated by northern European countries:

Denmark

Finland

Netherlands

Sweden

Ireland

Canada

Swizterland

New Zealand

Norway

Belgium

High per capita income, low unemployment, a social safety net, a relatively short workweek, and democracy appear to be key determinants of happiness.  Yet culture could play a role as well, as does good family and community life.  One interesting aspect of the study was the divergence of present and future happiness perceptions in some cases (see chart), which could be a measure of a people’s optimism.  Brazilians appear to be an optimistic lot, with one of the highest evaluations of their future wellbeing among the 34 countries in the OECD report.

South Asia heating up…

May 11, 2009

Swat region of Pakistan.  Source: BBC

The temperature in South Asia, often sweltering, has heated up over the last week.  Read a selection of news reports below.

With the peace deal between the government of Pakistan and the Taliban in tatters and pressure on Pakistani President Zardari from Holbrooke and Co. getting heavy, the Pakistani armed forces launched attacks in recent days on the Taliban in the Swat region of northwest Pakistan.  This comes against a backdrop of continued U.S. targeted killings of Al Qaeda operatives in the region. Tens of thousands of civilians are reportedly fleeing their homes, leading the United Nations to call for restraint. 

Meanwhile, in Afghanistan, U.S. air strikes against Taliban positions in Farah may have resulted in many civilian deaths, causing President Karzai, a struggling though still favored candidate in that country’s national elections in August, fresh from a summit with President Obama, to criticize the U.S.  President Obama, as candidate Obama, had been a vocal critic of such U.S. air strikes in that country.  Early last week, President Zardari of Pakistan joined Karzai and Obama for an anti-Al Qaeda summit in the White House.  Finally, elections in India are winding down, opening the door for the Obama administration to pressure the government that emerges there to seek a peace deal with Pakistan over Kashmir.  South Asia certainly qualifies these days as a hot spot.

Read about (and listen to): Obama’s remarks following the meeting with the Af-Pak leaders, praising unity in the war against Al Qaeda; General David Patraeus’s announcement of a policy review regarding air strikes in Afghanistan; a BBC report on the latest fighting in Swat, where 200 militants have reportedly been killed; a NYTimes article over the weekend discussing Al Qaeda’s effort to effect a jihadist takeover of Pakistan;  another Times article about Pakistan’s effective ambassador to the U.S.; an FT opinion piece arguing that NATO is fighting the wrong war in Afghanistan, while hamstrung in Pakistan; a piece in the Economist about how Hamid Karzai, with only 15% support, remains the favored candidate in Afghanistan’s August elections; and finally, further south, off the coast of India, reports emerging of a horrendous death toll of 378 people (over a hundred of them children) in the ongoing civil war in Sri Lanka.

Great Powers: Maintain sound public finances

May 4, 2009

Democracies with weak and/or fragmented party systems seem to produce sub-optimal public policies, including heavy government debt burdens.  From Israel to India, Italy to Japan, Brazil to Belgium, governing coalitions held together by paying off key constituencies have yielded chronic deficits and high debt.  By contrast, countries with a small number of strong political parties – usually ideologically-based — that can form stable governments have tended to mind the public purse better (e.g. the U.S., U.K., Germany, and Mexico are examples). 

Some countries with fragmented multi-party systems have been moving in the direction of two or three ideological groupings in recent years, which could be a positive development.  This has been the case in India, Italy and Japan, with some promising signs in Brazil.  This year the financial crisis will continue to unfold, and elections are taking place in such Rising Powers as India and Indonesia.  The conclusion that weak coalition governments produce fiscal irresponsibility will no doubt be tested. 

Recent debt/GDP ratios of selected countries:

India                77%

Brazil               65%

Indonesia        32%

Mexico            31%

Japan              180%

Israel               76%

Italy                103%

Belgium           88%

U.S.                  62%

U.K.                  50%

Germany         64%

Note: Debt/GDP ratios are not strictly comparable, as wealthier countries have a higher “debt tolerance.”

Weimar Germany was the poster child of a weak democratic system.  Electoral and legislative rules hindered the formation of stable governments, and therefore the public had little faith in democratic government.  To avoid the errors of the past, the architects of Germany’s postwar constitution, the 1949 Basic Law, erected a system that balanced fairness with effectiveness.  It was a mixed proportional representation/first-past-the-post system that excluded parties garnering less than 5% of the popular vote from the legislature and produced two large, ideologically-opposed parties of the right and the left.  Stable governing coalitions alternated in power. 

Konrad Adenauer, postwar Germany’s first chancellor

 

Konrad Adenauer, one of postwar Germany’s architects, and his Christian Democratic Union were able to govern West Germany democratically and effectively from 1949 till 1963, two years longer than his totalitarian predecessor.  His center-right CDU/CSU and the center-left SPD have largely governed Germany ever since.  Currently, these two strong parties cooperate (to some extent) in a grand coalition, but will head back to the polls this fall to see if they can oust their opponents from power.  Germany’s constitution has worked so well that democratic reformers the world over consider adopting portions of it.

The logic of the two-party, or nearly two-party, system is that if one party mucks up the economy while in power, the voters will “throw the rascals out.” Hence, the incentive to mind the public purse.  On the other hand, if a party’s survival in power is based less on success at the polls and more on maintaining complex coalitions, then the dominant coalition partner will be more interested in using the public purse to buy off smaller parties than in maintaining fiscal prudence. 

This is exactly how the State of Israel functions.  In its February 2009 election, the largest party, Kadima, only garnered 22.5% of the vote.  With twelve parties in the Israeli legislature, the six smallest obtained only 2.5%-3.4% of the popular vote apiece.  The German constitution (and by the way, newly reformed Italian electoral rules) wouldn’t even seat these parties.  It can be argued that Israel’s system is fairer, giving voice to the country’s diversity, but it is not very effective.  Only during Ariel Sharon’s popular rule beginning in 2001, when his party reached close to 30% of the popular vote (quite high in Israel), was his strong finance minister, Benjamin Netanyahu, able to implement reforms to public finances that reduced the deficit and got the debt/GDP ratio on a downward trajectory.

Italy functioned in much the same way until the reforms of the mid-1990s.  Belgium, Brazil and India have functioned this way as well, with public debt levels rising as a result.  Although Japanese politics has long been dominated by one party, the center-right LDP has for all intents and purposes engaged in coalition politics and a consequent public spending spree. The LDP is a collection of personality-based factions, interest groups, local constituencies, and patron-client relationships.  As a result, by opening up the public spigot, the LDP holds together these factions, keeping itself in power. 

Interestingly, the U.S. is embarking on a very large increase in its public debt, and this will occur in a two-party system with one party now overwhelmingly dominating two branches of government.  This must be seen as an aberration, however, an exception to the rule, given the size of the fiscal stimulus required to prevent a collapse of the financial system and to support sagging demand.  This unprecedented increase in public outlays is not being implemented in order to keep a coalition together.  Nevertheless, should the Democrats not act quickly, once the economy rebounds, to re-establish fiscal rectitude, an adjustment that will be very painful, then the government’s credibility will suffer, foreign investment will slow, the dollar will fall, interest rates will rise, and American voters will “throw the rascals out.”

As for India’s election, as spelled out by my colleague, David Kampf, the world’s largest democracy is in the midst of a month-long national election that will be tallied on May 16.  Some commentators believe that the two large parties, the center-left Congress Party and the center-right BJP Party, will lose ground to smaller and regional parties.  This will put pressure on the coalition leaders to spend their way into power.  Rulers of Rising Powers be forewarned: history shows that a sustained mismanagement of public finances often precedes the decline of nations.

Brain drain…to India this time…

March 26, 2009
ibm

Source: The Economic Times

 

Serious setbacks in U.S. economic performance are convincing highly-trained nationals from such Rising Powers as India and China to return to their countries from the United States.  Many are not even opting to study in the U.S., worried about financial aid, as well as jobs once their studies are finished. 

In three recent articles, this phenomenon is described as it pertains to India.  One article discusses how, to some young Indians, the American Dream is losing its luster.  Another article discusses the reduced demand for lawyers by corporations in developed countries, which has made practicing law in India look more attractive.  And, finally, there is an article on IBM’s job cuts in the U.S., 5000 soon to be announced, which will likely make the technology company’s U.S. workforce lower, for the first time, than its workforce in the BRIC countries, which represent more than a quarter of IBM’s global workforce.