Category Archives: History & Politics

The economics of Jawaharlal Nehru

Niranjan Rajadhyaksha in mint has this piece on economic thinking and its critics at the time. It is quite a short summary of history of the time and times to come

Nehru was essentially a economic modernist, who believed in industrialisation for poverty elimination. 5-years plans was formulated at the time. Inspite of being highly impressed by the growth in Russia in 30’s and 40’s he regarded socialism rather than communism to be soul of new India.  Niranjan put forward the contributors and critics of the time.

The statistician P.C. Mahalanobis built on a model developed by Russian economist G.A. Feldman to provide a theoretical core to the Second Five-Year Plan. An early discussion of the technical details underlying the Indian plans is available in a survey by economists Jagdish Bhagwati and Sukhamoy Chakravarty in the September 1969 issue of the American Economic Review. A clear analysis of the economics of Nehruvian planning was written in 1997 by Ajit Karnik of Mumbai University, who taught me growth models at university.

The theoretical debates about Indian planning models are numbing. Here, I try to focus on four broad principles in the Nehruvian economic strategy to show how Nehru was a hostage to the development economics consensus of his times, both in terms of its insights as well as its policy flaws.

First, the development economists of the day said that the basic challenge for a poor country such as India was to increase its stock of productive capital as well as absorb modern technology. This was in line with what many other nationalist leaders believed in the decades preceding independence. The Estonian development economist Ragnar Nurksehad put capital accumulation at the very centre of his 1953 book, Problems of Capital Formation in Underdeveloped Countries. A.K. Dasgupta, a renowned scholar who taught Amartya Sen, also argued that the primary challenge was capital accumulation, drawing inspiration from classical rather than Keynesian economics.

Second, the speed at which capital could be accumulated depended on the domestic savings rate. The West Indian Nobel laureate W. Arthur Lewis had succinctly presented the problem in terms of how a poor country can raise its voluntary savings rate from 5% to 20% of national income. In short, the main focus of the development strategy was on increasing savings to create resources for asset creation. The Harrod-Domar model that was popular at the time also sought to explain economic growth in terms of the savings rate and the productivity of capital. It is interesting that you will struggle to find subsidies or entitlements in the Nehruvian plans to lift India out of poverty.

Third, the government was to take the lead in industrialisation. This was very much part of the development consensus of those years. The early success of the Soviet experiment had, unfortunately, enchanted many intellectuals. But there was a deeper historical learning as well. The Russian economic historian Alexander Gerschenkron had argued in his theory of economic backwardness that countries that had not yet industrialised did not have to wait for the right conditions to appear. Gerschenkron had studied the development experience of Europe in great detail. He said that institutional innovation was the way forward for those who were late into the game: Germany had used investment banks to push its initial industrialisation, while Russia had used the state (he was referring to imperial Russia before the communists took over).

The Nehruvian plans had a similar logic of using the state as an entrepreneur as well as providing capital to private industry through special development banks in the absence of deep financial markets. This is the famous quest of controlling the commanding heights of the economy. A more technically correct explanation would be that Nehru wanted the state to dominate the production of capital goods and intermediate goods so that the Indian economy has enough strategic depth to withstand any future attacks on its political autonomy. It is a theme that still resonates in some parts of the Indian policy establishment that worries about the growing role of Chinese equipment suppliers in Indian power and telecom sectors. But it was eventually the shortage of food in the late 1960s that forced India to compromise on its foreign policy in return for wheat shipments.

Fourth, there was a deep suspicion of foreign trade. Some scholars believe that this was the reaction of a country that had initially been colonised by a trading company, while others argue it was a more practical response to the declining terms of trade for underdeveloped countries thanks to falling commodity prices after the end of the Korean War. Much of this export pessimism was based on the work of two economists: the Argentine Raul Prebischand the Briton Hans Singer. There was no export strategy in the Nehruvian plans—a flaw pointed out in 1963 by a young economist named Manmohan Singh. The main focus was on import substitution: make at home rather than buy abroad. This not only meant that India failed to take advantage of an expanding world economy, but also that it remained dependent on foreign aid to fund its essential imports. The decision to go into a cocoon was perhaps the biggest economic flaw of the Nehru years.

The longer-term report card is far less impressive, as is now well known. The Nehruvian economic model had already run out of steam by the time of his death. India was left with an inefficient industrial structure, too much government regulation of its economy, an inability to compete in the global market and inadequate supply of consumer goods. It also put India at the mercy of foreign aid givers—ironical because Nehru believed a strong economy was essential to protect Indian political autonomy.

Many other Asian countries switched their economic development strategy after 1965. India failed to do so. It became a laggard. Nehru was too impressed by the ability of governments to manage complex economies. He failed to see that the enlightened bureaucracy he hoped for would end up as the corrupt inspectors of the licence-permit raj that C. Rajagopalachari and Minoo Masani of the Swatantra Party had presciently warned against very early in the planning era.

Nehruvian planning failed to meet its grand hope despite an encouraging start. But important parts of the vision are still relevant in India today: the central role given to economic growth in the battle against mass poverty, a relentless focus on capital accumulation, a higher savings rate to fund asset creation, strategic depth to the industrial structure and fiscal conservatism. All this is a far cry from what recent profligate governments that claim to follow Nehru have done.

 

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Why old notes could find takers in bullion market

BS

With demonetisation of Rs 500 and Rs 1,000 notes, bullion dealers expect demand to go up for a few days and cash business of jewellers may increase.

 

Jewellers could show backdated cash sales. Veteran bullion dealers say that those who have cash in hand on their books could also buy such notes at a discount and deposit it in banks later on.

 

Sudheesh Nambiath, lead analyst — precious metals demand, GFMS, Thomson Reuters said, “The move will potentially create a surge in demand for for next few days while the backdated bills would be made to show the transactions as genuine.”

 

Another bullion dealer said jewellers and diamond traders usually show bills while depositing cash generated by sales every week. In cases where very high value deals happen in cash, they split bills in smaller amounts or cite stolen numbers in those bills.

 

“Prime Minister played the Morarjee Desai card,” said a veteran bullion dealer. “In January 1978, all high-denomination banknotes (Rs 1,000, Rs 5,000, and Rs 10,000) were demonetised or withdrawn from the circulation to curb unaccounted money. In those days, traders who were having cash on hand on their books had accepted high value notes even after they were withdrawn because they had facility to deposit them in the banks. In bullion market such notes were sold for 30 per cent discount and those who bought were having arrangements to deposit them in banks, officially showing cash business. But those who could not exchange notes or sell them at discount were forced to use them as tissue papers,” he said.

 

In 1978, then government had issued an ordinance demonetising high value currency notes to unearth black money. The idea of terrorism and currency wars was not common till then. Smuggling was at its peak. Later an Act called The High Denomination Bank Notes (Demonetisation) Act, 1978 was passed to give legal status to the withdrawn notes.

 

Veterans say that Rs 1,000 and Rs 10,000 banknotes, which were in circulation, were demonetised in January 1946, primarily to curb unaccounted money. Later, higher denomination banknotes of Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in 1954.

Free-trade backers turn bashers in US

Ten years back nobody would have believed that people in advanced economies, the evangilists of Globalisation and free trade with turn their backs on free trade. Then we are living in intresting times. This POTUS election, has be one such instances where candidates from both side of divide have pushed for same. NYT summerizes we in below article.

Democrats and Republicans agreed on almost nothing at their conventions this month, except this: Free trade, just a decade ago the bedrock of the economic agendas of both parties, is now a political pariah.

Protesters, many of whom supported Senator Bernie Sanders, swarmed into Philadelphia this week and heckled speakers, even President Obama, over the Trans-Pacific Partnership trade (TPP) deal that was finalised this year. Senator Tim Kaine of Virginia, who has tried to help Obama achieve this signature trade pact, renounced his support for the deal last week when he joined Hillary Clinton’s ticket.
Donald J Trump has made unravelling the Trans-Pacific Partnership, the largest regional trade accord in history, the centrepiece of his campaign, upending more than half a century of Republican orthodoxy.

The fragile pro-trade coalition on Capitol Hill once led by Republicans is also unspooling, and congressional approval of the Trans-Pacific Partnership, which would include 12 countries that together account for roughly 40 per cent of the global economy, seems increasingly unlikely during the Obama presidency. Republican leaders in both chambers are not planning to bring it up this year.

Opponents of multilateral trade agreements, convinced that they have unduly harmed American workers, have enjoyed a stunning success that may signal a long-term political and policy realignment in both parties.

Republicans, proponents of free trade for decades, have found their base this year expanding to include anti-trade voters from poor and working-class areas who have joined forces, if not voting habits, with the Democrats’ most liberal voters.

“The primaries created seismic changes,” said Senator Chuck Schumer, Democrat of New York. “It will never be the same again. Neither Republicans nor Democrats will ever again be unabashed advocates for trade.”

Candidates often turn against free trade only to embrace it as president, as Obama notably did. Clinton also changed her position on the Trans-Pacific Partnership during the campaign after championing it as secretary of state. Govenor Terry McAuliffe of Virginia suggested this week that Clinton would reverse as Obama did if elected, only to be strongly batted down by campaign officials. Trump’s criticism of the trade pact is far more frontal. In addition to tearing up the deal, he has said he would slap a 45 per cent tax on imports from China.

He believes he can attract liberal voters with this pitch, which he posted on Twitter this month, “To all the Bernie voters who want to stop bad trade deals & global special interests, we welcome you with open arms.”

In some ways, Trump is pulling Republicans back to their protectionist pre-war roots. They were the party of the ultimately disastrous Smoot-Hawley Tariff Act of 1930, which raised tariffs on imports, a position that was later reversed.

Democrats, with their deep ties to organised labour, have soured on trade deals in recent decades, especially in the wake of the North American Free Trade Agreement, which was signed into law by the Clinton administration.

They say the deals have cost manufacturing jobs and lowered wages, though global trade accounts for fewer lost jobs than automation and other technological advances. (The apparel and furniture sectors, which employed many of the workers now backing Trump, are exceptions.)

In surveys, most Americans typically say free trade on the whole is positive, a fact often cited by its supporters. But polls also show that people are less optimistic about trade’s effect on jobs at home. Americans are more likely to say that international trade diminishes wages more than it improves them, and that it results in jobs losses.

The anti-trade talk “resonates with people who have been on the short end of the stick,” said Jeffrey J Schott, a trade expert at the Peterson Institute for International Economics.

“There are a wide range of reasons why this segment of the population has been left behind,” he added. “Both the attacks on trade and on Clinton are a surrogate for concerns about globalisation.”

The shift was visible among Republicans early this year when the embattled incumbent Senator Rob Portman, Republican of Ohio and a former United States trade representative in the second Bush administration, came out against the Trans-Pacific Partnership.

Other Republicans have since remained quiet, or also pulled back. Portman, who is in a tough re-election fight against Ted Strickland, the former Ohio governor, recently received the endorsement of the Ohio Conference of Teamsters.

These are positions that worry the administration greatly. “Globalisation is a force, and trade agreements are how we shape globalisation,” said Michael B Froman, the United States trade representative who has been criticised on Capitol Hill all year from members of both parties. “There is a lot of rhetoric in the campaign that reflects real anger and concerns about changes in our economy, but the right prescription is not to get out of trade agreements.” Representative Kevin Brady, Republican of Texas and chairman of the House Ways and Means Committee, said “the White House is making progress, but it needs to pick up the pace and pick it up significantly.”

He added, “Congress has the final say on whether trade is good for our country and workers, and there are outstanding issues that have eroded that support.”

Sanders and Trump have relentlessly bashed the Trans-Pacific Partnership and multilateral trade deals throughout the campaign, pushing Clinton toward Sanders’s position and leaving Republicans largely scared into silence, or equivocating.

“It’s been a one-sided conversation in this race, which is unfortunate,” said Representative Ron Kind, Democrat of Wisconsin, who is a rare member of his party in the House who supports the Trans-Pacific Partnership.

Trade supporters are trying to counter the anti-trade crowd with local advertisements, posts on Twitter, op-ed articles and town-hall-style meetings.

“The current rhetoric about trade is in members’ minds,” Froman said, “but we are working hard to push back against misinformation that is out there.”

The White House is trying to allay concerns in Congress about when and how member countries will change their laws to adjust to the agreement and how the data of financial companies will be treated.

A fight over how intellectual property protections are managed for the biopharmaceutical industry has been sticky, and the topic has been the subject of discussions between the administration and Republicans in Congress.

Still, there is deep resistance to voting on the trade measure. “The chances are pretty slim that we’d be looking at that this year,” said Senator Mitch McConnell, Republican of Kentucky and the majority leader. House leaders are equally indifferent.

Clinton has expressed strong reservations to aspects of the deal, and it is not clear what she would do to move a trade pact forward as president. Even less is known about what Trump’s approach might be, other than his assertions that his deal-making prowess would achieve accords that are better for workers.

Even so, the long-term impacts on both parties seem inevitable.

“We are not going back to business as usual,” Schott said. “If Clinton wins, I think there are feasible ways for her to fix what is broken and make it better. If Trump wins, he wants to just break the china, and once he does that, you won’t be able to put the pieces together again.”

Brexit and the Future of Europe

George Soros has these piece in Project Syndicate.

The EU’s response to Brexit could well prove to be another pitfall. European leaders, eager to deter other member states from following suit, may be in no mood to offer the UK terms – particularly concerning access to Europe’s single market – that would soften the pain of leaving. With the EU accounting for half of British trade turnover, the impact on exporters could be devastating (despite a more competitive exchange rate). And, with financial institutions relocating their operations and staff to eurozone hubs in the coming years, the City of London (and London’s housing market) will not be spared the pain.

But the implications for Europe could be far worse. Tensions among member states have reached a breaking point, not only over refugees, but also as a result of exceptional strains between creditor and debtor countries within the eurozone. At the same time, weakened leaders in France and Germany are now squarely focused on domestic problems. In Italy, a 10% fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis – which could well bring the populist Five Star Movement, which has just won the mayoralty in Rome, to power as early as next year.

None of this bodes well for a serious program of eurozone reform, which would have to include a genuine banking union, a limited fiscal union, and much stronger mechanisms of democratic accountability. And time is not on Europe’s side, as external pressures from the likes of Turkey and Russia – both of which are exploiting the discord to their advantage – compound Europe’s internal political strife.

That is where we are today. All of Europe, including Britain, would suffer from the loss of the common market and the loss of common values that the EU was designed to protect. Yet the EU truly has broken down and ceased to satisfy its citizens’ needs and aspirations. It is heading for a disorderly disintegration that will leave Europe worse off than where it would have been had the EU not been brought into existence.

But we must not give up. Admittedly, the EU is a flawed construction. After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it. I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us.

Egypt for Sale

A informative piece on Egypt by Barak Barfi in Project Syndicate.

  1. When Muhammad Ali defeated the British in 1807, Egypt became the first Arab country to gain de facto independence. But Ali’s grandson, Ismail, squandered that independence with profligate spending, establishing a dependency on external assistance that persists to this day.
  2. Egypt’s dependence on the British continued until Gamal Abdel-Nasser took power in 1952. He welcomed the Soviets, who provided sophisticated weapons in exchange for the same kinds of IOUs that doomed his predecessor. By the time Nasser died in 1970, the Soviet Navy had transformed the port of Alexandria into a virtual Soviet republic, with Russian spoken as a second language.
  3. Meanwhile, Nasser pursued costly populist economic policies. He expanded the bureaucracy by offering every college graduate a government sinecure; today, 24% of the workforce is employed by the state. He introduced subsidies for commodities, from bread to oil, that amounted to 8.1% of GDP in 2013-2014. In 2014-2015, 81% of the budget went to debt service, subsidies, and wages, crowding out education and other investments essential to long-term growth.
  4. Nasser’s successor, Anwar Sadat, attempted to revive Egypt by liberalizing the economy, making peace with Israel, and abandoning the alliance with the Soviets in favor of the US and Western Europe. He was rewarded with an aid package that averaged more than $2 billion per year. But, with Egypt’s population growing at an annual rate of 2.2%, even this was not enough
  5. Egyptians rarely hear about their country’s dire financial straits. Instead, the government-controlled press boasts about new bridges and increased industrial production, while highlighting Egypt’s role in regional affairs, such as the dormant Israeli-Palestinian peace process and the cobbling together of governments in Lebanon.
  6. Instead of delivering on these imperatives, Egyptian President Abdel Fattah el-Sisi has been forced to relinquish territory to the Saudis to secure the aid the country needs to stay afloat, facing considerable mockery in the process. In the zero-sum game that is Middle East politics, however, one party’s loss is another’s gain. And in the case of Egypt today, it is radical Islamists who are reaping the rewards of popular disillusionment with the government.
  7. The Islamists are offering their own narrative: The modern nation-state has failed Arabs and Muslims. This resonates with a population that is experiencing the state’s failure every day. Focusing on restoring past Islamic glory is becoming more appealing than resurrecting a regional power that could never even secure rights for Palestinians.
  8. Egypt’s leaders retain the legitimacy and strength needed to curtail this dangerous narrative. But, if they are to succeed, they will have to acknowledge what Egypt is – and what it is not. In a country where ancient artifacts are deeply cherished, the myth of regional greatness is one relic that should disappear soon.