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Lies, damned lies, and economics

In the past few weeks, there has been a flurry of activity in the dismal science of global economics. The International Monetary Fund and the World Bank got together in Washington, DC for their annual meeting: a typical conclave of Armani and Ferragamo-clad bankers. They quarrelled vigorously, blaming each other for the Asian meltdown.

Across the Pacific, speaking from Tokyo, the Grameen Bank's Mohammed Yunus, perhaps the most successful banker of our times, chided them both for their preoccupation with stale economic orthodoxies that paid no attention to the real needs of real people. While Yunus, with his microcredit scheme, has improved the lives of millions of Bangaldeshis, the IMF-World Bank have brought misery to all of southeast and east Asia through their doleful prescriptions.

Browsing idly through reports of the IMF-World Bank caucus, I found that they said something quite astonishing, and I quote the Economic Times: "For the first time in recorded history, South Asia is the fastest-growing sector of the world." They also predicted this state of affairs would remain for the next couple of years.

I had several reactions to all this. First, there is the patronising disbelief in the bit about 'recorded history' that South Asia, and India in particular, could possibly be doing so well economically. This part is irritating, but par for the course -- these international bankers continue to think India is a basket case. They are unaware that India was one of the world's largest industrial nations, accounting for 25% of global industrial output up into the 18th century CE.

Second, the sad fact is that India's growth is good only in comparison to the terrible crisis that has overtaken the Tigers of East Asia. There is no room for complacency; these East Asians have fundamentally improved their value proposition -- the current crisis is merely a blip in the generally positive upturn in their fortunes.

Nevertheless, it is gratifying to note that, contrary to conventional prejudice, India is doing relatively well. However, I have noticed that the Nehruvian Stalinists, those statist descendants of P C Mahalanobis, have been suggesting that India's half-baked socialist-capitalist economy is in fact the right prescription.

The Nehruvian Stalinists, quite simply, are wrong. Instead of being a good via media between dirigiste Communism and laissez-faire capitalism, the Indian model essentially inherited the worst of both worlds. There are massive inefficiencies of the State-controlled 'commanding heights of the economy' -- anybody who has had a chance to deal with the bureaucracy knows the extent of their lack of motivation or effectiveness.

There are also the ill-effects of oligarchic crony capitalism, where a few favoured industrial houses dominate the private sector, keeping out imports and thus competition, and prospering at the expense of the consumer while providing low-quality goods and services. No wonder that phoren goods are so highly sought-after in India.

India's economy has been a chimera -- the mythical half-goat, half-lion creature -- that has not met the expectations or aspirations of its millions. A few years ago, in an outstanding survey, The Economist noted how badly India had performed on almost all objective criteria. GDP growth, the most obvious measure, was crawling along at the Nehruvian Rate of Growth of 2.5% a year. At this rate, in 10 years, the economy only grows by around 30%.

Whereas at the typical East Asian Tiger rate of 8% a year, in 10 years, the economy more than doubles: it grows by 115%. This is precisely what has happened, of course: the South Koreans, who were roughly level with India in GDP per capita in 1947, are now 40 times richer than Indians!

Even taking into account the meltdown, Koreans on average are considerably better off than Indians, be it in literacy, quality of life (physical quality of life index about 90 for South Korea and about 62 for India), calorie consumption per capita, and so forth. India has failed, also, to provide adequate food or education for its people.

Thus, neither did India go in for massive export-led growth as the Tiger economies did, nor did she, through income-distribution measures, make the masses of people better off. Instead, there has been colossal and unpardonable waste -- huge amounts of capital have been tied up in unproductive SOEs (State-Owned Enterprises); and large amounts have been transferred from consumers to oligarchic industrial empires.

Nevertheless, Indians can be permitted some smugness at the fact that India escaped the worst of the currency meltdowns and capital flight that SouthEast Asia experienced. In fact, I believe the Indian finance minister has been, in an ironic turnabout, dispensing free advice to the IMF et alabout how capital controls are necessary to prevent runs on currencies.

Interestingly enough, Paul Krugman, arguably the most perceptive economist in the world today, agrees with this perspective -- that fully laissez-faire globalisation is not the right solution, and that nations need to be circumspect in protecting some of their national interests. It is, of course, true that the Americans and Europeans expend vast sums in subsidising their national interests, for example in the agricultural sector: so globalisation is rather limited in their minds.

Krugman has also debunked some of the Southeast/Asian claims that 'Asian values' or 'Confucian values' make these areas particularly adept at growth. In point of fact, says Krugman, their growth has come primarily from massive investment, particularly in human resources. This provides some hope for India -- there perhaps is no structural impediment to success. But the policy adopted should be something tailored to India's needs, not some theoretical construct.

It is clear that the Indian State has both done too much -- in over-regulating and in dominating sectors of industry where it had no business being, such as steel, transportation; and done too little -- in areas such as agriculture, infrastructure, education and health, where it alone could have been effective. Now that all this is well-known, how does the country throw off the yoke of Nehruvian shibboleths? Should India follow the East Asians?

I don't have the answer, but I believe it does not lie in the blind acceptance of some economic model. Nehruvians, of course, picked up the fashionable Fabian Socialist theory prevalent in the UK in the 1940s. I am afraid others are now likely to pick up the somewhat-disgraced foreign-direct investment/export-led-growth model that was fashionable in the 1980s. I think blind allegiance to this orthodoxy is not the magic bullet, either.

Unfortunately, it appears that Indian policy-makers are finding consultants who are standard-bearers of the export-led-growth model. I read recently that Karnataka and Tamil Nadu have signed up with (and Andhra is talking to) Jeffrey Sachs, an economist whose main claim to fame is the 'shock-treatment' applied to Russia, which has beggared that nation.

Consultants like Sachs are dangerous, because, like the IMF, they have cookie-cutter prescriptions, which, they will demonstrate with the help of colourful pie-charts and presentations, have enabled many countries to climb rapidly out of poverty. This is a compelling argument, but I believe it should be taken with a massive pinch of salt.

For, consider China -- the famous example of FDI and export-led growth that everyone throws around. China, as Sachs points out, has had its per capital GDP grow at 8.3% per year, as opposed to India's 3.2% per year. China has also increased its exports from $18 billion in 1980 to $149 billion in 1995, as opposed to India, which went from $9 billion in 1980 to $ 31 billion in 1995. So far, so good.

Consider, however, the other side of the picture. The Hindu of October 10th carried a fascinating article by Gerald Segal of the International Institute of Strategic Studies, London. Contending that China's "most worrying similarities are to Russia", Segal points out that more money has fled China than has entered it since 1992, and that in 1998 the outflow of hot money has been nearly twice the rate of the inflows. Worried residents are stashing funds abroad.

What, asks Segal, do the insiders know that the foreigners don't? There is "growing capital flight, as in [the rest of] East Asia, but bankers and hedge funds are pouring money in." The overseas ethnic Chinese who account for 70% of the FDI into China are beginning to slow down; however the international bankers are blithely unconscious of this. Chinese banks are also in really bad shape: "bad bank loans are at 40% of GDP".

Just as in India, large State-Owned Enterprises are white elephants. Says Segal, the 'unusable, rusting' products of the SOEs account for as much as 4% of the much-touted 8% GDP growth. He charges that the SOEs are a social welfare net; yet unemployment is 10% and growing. The Economist suggests that there is a dangerous floating population of 100 million Chinese peasants, displaced from the lands and permanently unemployable.

Segal contends, quoting Chris Patten in East and West, that the future of China is not Japan's prosperity, but Indonesia' chaos -- crony capitalism, regional tensions, income inequality and the ubiquitous army. Not a pleasant picture.

Admittedly the Chinese have recognised their problems, and put plans together to address them: however Zhu Rongji's brave reform plans, unveiled with much fanfare a few months ago, have quietly been shelved in the face of strong opposition from vested interests.

In sum, China is "really a puny power with vast problems", and "the analogy with Russia includes the failure to collect taxes, regional power-brokers thumbing their noses at the central authorities, and most disturbingly, growing capital flight". India's Marxists, forever genuflecting towards China, kindly take note -- your gods have feet of clay.

In an interesting side note, my two favourite countries, China and Britain, had a recent love-fest, as Tony Blair visited China. I was amused at their pronouncements on the nuclear issue and south Asia, even as I pondered on their possible break-up.

British-occupied Northern Ireland is more or less lost, and Scotland just voted in favour of greater provincial autonomy, a precursor to eventual independence. I once travelled through Europe with a Scottish colleague, and I was astonished at his level of animosity towards the English occupiers. It is only a matter of time before the 'United Kingdom' becomes the 'Un-tied Kingdom'.

Similarly, the coastal provinces in China are loath to share their prosperity with the interior; the Uighurs and the Tibetans await their chance to liberate their 40% of China's land from the grip of the Han Chinese. Like Russia, the Chinese empire may collapse overnight under the weight of that colonial oppression and the baleful influence of bad economics.

Rajeev Srinivasan