When right meets left

Paul Krugman's recent article on emerging market inflation continues to blame the regulators of these emerging countries for not penalizing their population by slowing GDP growth. Krugman writes:

So what the world economy “wants” to do is have large capital flows from North to South, and, correspondingly, large current account deficits in the emerging world — which would, of course, help the advanced economies recover.

But ... the transmission mechanism by which capital flows get translated into trade balances has to involve a rise in the relative prices of goods and services produced in the emerging nations. The natural and easy way to get that would be via currency appreciation; but governments don’t want to see that happen. So the invisible hand is in effect getting the same result — gradually — by pushing up nominal prices in these countries.

In other words, emerging economies should allow higher imports and lower exports (the consequence of a rising exchange rate) thereby reducing their own GDP growth - since this policy would "help advanced economies recover". I wonder if the prescription would be the same if the economist were to be based in Asia rather than Princeton.

The idea that the US needs to cut back its own consumption, and pay down its debts - is not on the table. It is not "keynesian" after all. That this ruinous policy is leading to inflation is completely negated - "core inflation" remains sub 1% according to official estimates. Notwithstanding that "core inflation" eliminates all prices that have a propensity to go up. Shadowstats.com estimates CPI at close to 10%!

This propensity to blame others for protecting themselves against the economic mismanagement unleashed by the USA exists not only in academia, but also in the seeming loony fringe of USA society. I came across this apparent "right wing" website - that seems to see everything that the world does with the "if you are not with us, you are against us" prism that has now become the touchstone of US policy. So the recent "BRIC" meet that concluded with a statement of the need to find an alternate to the US dollar is a conspiracy of Russia and China to undermine the US economy. The same aticle points to another paper: Economic Warfare - risks and responses whose central thesis seems to be that it is Al-queda that is indirectly responsible for the collapse of the US financial system, and high oil prices (thrown in for good measure). Talk of conspiracy theorists!

Forgotten lessons of Economics

Pranab Mukherjee, the finance minister, last evening again repeated a falsehood in the hope that if you repeat a false statement enough times, it will appear to be true – he mentioned that if inflation were to be tamed, growth would have to come down.

This reflects the lack of ideas that the government has in increasing production. Supply side issues abound. Complex land laws prevent quick transactions relating to land, and create an artificial scarcity that raises land prices beyond what any legal economic activity can support. Poor legal administration increases the cost of all economic transactions, while raising the cost of credit. Bureaucratic delays and complex compliance prevent entrepreneurship from flourishing without flouting some arcane rule. Tax compliance is reliant on interpretation of officials empowered to harass the tax payer without adequate redressal mechanisms. All this leads to large scale unemployment, resulting in corruption and an environment where government appears to don the role of a “largess distributor” rather than that of a servant of society.

Other capacity building measures – good quality and high availability public health system, and education systems are conspicuous by their absence. Instead, the economic survey and planning commission – the economic “think tanks” of the government – continue to propagate irrelevant ideas of increasing foreign investment limits in health insurance, and in multi-brand retail.

One has to only look at the disaster that the USA is heading towards in its Medicare and Medicaid programs to see the problems that arise from unrestrained private sector growth in health insurance, and from a patent law that protects corporate profits over the need of human life. The economic rationale for foreign investment in multi-brand retail is even less obvious.

A government that is mired in corruption, increasingly dependent on the support of regional parties for its existence and devoid of any ideas on how to progress India’s aspirations is going to present challenges to India achieving its true potential. If India does well inspite of these challenges, one has to believe that there is a God somewhere – more importantly someone who has Indian citizenship!! 

Anna Hazare - India's greatest hope

The fast that Anna has undertaken has focused the attention of the nation on the greatest internal threat - that of corruption. The popular response that this has generated can only restore faith in India's democracy. There is one aspect which I find very puzzling. In countries like Egypt entrenched autocracies needed popular movements against them to change. In India, we can simply vote them out. Why is the people movement not focused on demanding that their representatives take the lead in Parliament in championing the Jan Lokpal Bill - the focus of current attention. Instead, the focus seems to be on ignoring the political class.

A true reflection of the maturity of Indian democracy would be to have each constituency summon its representative and question him on his stance on the bill and demand that he support it. I think that would make it difficult for any government or party to NOT pull in the same direction.

Another possibility would of course have been for the "honest" PM to accept the demand to set up a committee to evaluate the bill. However, that would require a thinking man - and a leader, something this country certainly lacks.