Economics: Enter The Dragon

As everybody knows, there is another global economic recession along the way. Some (including me) would argue that we never got out of the one that started in 2008, never mind what the economists and statisticians say. The UK’s GDP growth last quarter was an anaemic 0.2% and the rest of the year looks worse. I would argue that the developed world (as it is defined currently) is in a state of terminal economic decline and will never recover.

Why do I say this? Looking at Western Europe (the United Kingdom and France in particular), you will notice that there are no great globally competitive manufacturing companies left in these countries. Britain’s largest manufacturing employer is the India-based Tata Group. Britain’s economy is now kept afloat by the healthcare industry which provides jobs, and financial services, which provides profits and tax revenues.

As a result of the recent seismic events in the banking and financial services industry, a host of new banking regulations have been proposed in Britain that would curtail the powers of banks to raise capital and ultimately increase the cost of capital for both banks and borrowers. As a result of these proposed regulations, many of the banking giants based in London are threatening to relocate to other parts of the world. It is unlikely that all banking operations will be moved elsewhere, but investment banking operations would be a probable candidate. If this happens, it would greatly diminish Britain’s economic power in the developed world. And the key question here is – what would replace banking as a generator of jobs, profits, taxes and economic growth in Britain?? There is no replacement for banking at the moment in Britain. Manufacturing is not an option (why would an automotive company want to open a plant in Britain when it can produce cars at a fraction of the cost in South Asia?) and service industries moved out of Britain many years ago.

Southern Europe is in even worse shape. Britain has financial services as an engine for growth. Countries such as Greece, Italy and Portugal don’t. The only way these countries could compete earlier was because they had their own currencies and costs were lower in these countries as compared to Northern Europe. With the advent of a single currency, the euro, the disaster waiting to happen has happened. In one stroke, the competitiveness of these economies was destroyed. They were no longer less expensive economies, the cost of living increased dramatically (with the advent of the euro) and these economies were no longer able to export their way out of recession. The only hope for these countries is if the euro is disbanded, and these countries revert to their original currencies and once again become less expensive economies that can then export their way out of a recession. This will mean incredible short-term pain as these countries default on their debts, but there is no other option. Expecting German taxpayers to pay Greece’s bills indefinitely is not feasible, and there are signs that Germany itself is slipping back into recession.

The United States and Germany will hold out for another decade or so. Both these countries still have reasonably strong manufacturing industries that provide employment. However, as the years go by, more and more large manufacturing companies will move – to China and other places in South Asia that can provide a labour pool with the same skills for a fraction of the costs of production in the US or Germany. And the same key question applies here as well – what will replace these industries once they leave??

It is nothing short of a huge global transference of wealth from one part of the world to the other. It will lead to chaos and the rise of populist, nationalist parties in Europe that will blame foreigners and immigration for all their ills.

India would have been very well-placed to take advantage of this transference of wealth, but will not be able to do so due to frailties and divisions within its political system. A handful of politicians and bureaucrats will prevent India from becoming an economic superpower. When it comes to those who govern India, I agree completely with what Winston Churchill said at the time of Indian independence: “Power will go to the hands of rascals, rogues, freebooters; all Indian leaders will be of low caliber & men of straw. They will fight amongst themselves for power and India will be lost in political squabbles”. This prophecy has come to pass, and unless something changes dramatically, India will continue to be mired in indecision and administrative paralysis that will prevent real change.

So who will benefit the most from this transference of wealth? Beneficiaries will be countries that have an educated labour pool with a strong work ethic and governments that want their citizens to benefit from this transference of wealth. The primary beneficiary will be China. China is already the US’s largest trading partner and owns trillions of dollars of US debt. They are buying up European debt, and the Chinese are the largest investors in places as far-flung as Australia and Africa. The dragon is not rising. It has already risen. The king is dead, all hail the new king!

Economics: Don't Blame The Bankers Alone

I must start this blog by saying that I am conservative in my economic views. So I support liberalization, globalization, an open economy and capitalism. Capitalism may not be perfect, but it is infinitely preferable to socialism. I should know. Like most Indians more than forty years old, I vividly remember the 1970s and 1980s, when there were no jobs and everybody was struggling to make ends meet all the time (except of course for corrupt government bureaucrats, crony capitalists and those with ancestral wealth). Thanks to regressive socialist economic policies, India remained poor and backward for decades after independence (and thanks to the liberalization process being only half complete, large sections of India's population still remain poor and backward).

But India's half complete transition to a modern economy is the subject of another blog. This particular blog is about why it is unfair to blame the bankers alone for the Great Recession, which sees to have reared its head just when you thought it was safe to go out shopping again. I now live in Britain, where it is fashionable to view all bankers (especially investment bankers) as the spawn of Satan. I know several investment bankers quite well, and in fact, worked as one many years ago. Nobody can accuse these former masters of the universe of being softies whose primary concern is the welfare of those less well-off than themselves. However, to blame banks and bankers alone for the current mess is wrong. Allow me to elaborate.

The last time I checked, London contributes a disproportionately large amount to the British economy (30% of Britain's GDP is generated in London). A majority of this wealth is generated by banking, since London (along with New York) is the financial capital of the world. Even in these dismal economic times, it is the banks and bankers (and the tax revenues they generate) that keeps Britain's economy afloat. It is the dramatic expansion of banking and investment banking in particular in the Noughties (circa the years 2000 to 2008) that funded the huge growth of jobs in Britain's public sector in the last decade. The public sector workers in the UK who blame the banks for everything and keep threatening to go on strike would do well to remember this. Had it not been for the buoyant tax revenues generated by London and its investment bankers in the Noughties, these public sector workers would not have found jobs in the first place. Yes, some of these bankers were reckless and did take unacceptable risks with shareholder money, but to blame them alone is wrong.

It is also important to note that some of these public sector workers (such as council heads and BBC television/media heads) make large sums of money (which I define as more than £ 150,000 a year). One of the principal tenets of finance (and life) is - higher the reward, higher is the risk associated with that reward. Therefore, if one wants to take a job that comes with large sums of money, one must also accept the fact that such a job will come with associated risks - such as the risk of getting laid off or being forced to take a pay cut. One cannot expect a guaranteed, very highly paid job for life - in either the public or private sectors. Many of these highly paid public sector worthies are being asked to take a pay cut and some of them have been saying that they could find better salaries in the private sector. Really?? When was the last time they worked in the competitive private sector, and if such jobs are available, why don't they take these jobs up?

I may be an economic conservative, but I am not anti-public sector. The public sector has an important role to play in an economy. I disagree with the Tory plans to cut back on essential services such as police, fire brigade ansd community youth programs. I disagree with any pay cuts that the defence forces may be forced to take. But council heads, fat cat administrative bureaucrats in broadcasting services and the Health Service do deserve to take pay cuts. Everybody in the private sector is taking lower salaries and bonuses home this year and next year as well. So what makes these highly paid public sector workers so special? Why do they deserve to be singled out for differential treatment?

The fact is that the economy (and the health of both the public and private sectors of the economy) will not improve until the banking sector starts making money again. So I urge these disgruntled highly paid public sector employees to start praying for a banking recovery - their own future economic salvation is dependent on the robust economic health of those they hate the most.

Politics: Finding Weaker Enemies

Some years ago, I read a great book called “The Name of The Rose” by Umberto Eco. The book is set in 13th century Italy and France, during the Dark Ages, before the Renaissance changed Europe forever. Europe at the time was a brutal, poor, uneducated place – riddled with disease, superstition and political and religious tyranny.

While the book itself is a classic, one line in the book has stayed with me ever since. The book’s main protagonist, an impressionable young novice monk, is speaking to an older monk who is a poor peasant. The older monk in his youth persecuted Jews and participated in the slaughter of Jewish residents in his village in Northern Italy. The novice monk asks the older man why he killed Jews, when the real oppressors of the peasants were not the Jews but the Church and the King of Italy, who between them, brutally exploited the peasantry. The old monk replies by saying that “when one’s true enemies are too strong, one has to find weaker enemies”. The villains in the piece were the Church and the monarchy, but since they were too strong and powerful to fight, the Jews were attacked instead because they provided an easy, weak target.

That line has stayed with me ever since, and human behaviour does not change. So today, in the developed world for example, when governments start targeting skilled immigrants as culprits responsible for the economic recession, I realize that this is a case of finding weaker enemies. In the United Kingdom, the real enemy is the decline of leadership in the manufacturing and service industries, not the entry of skilled overseas labour. But rebuilding Britain’s leadership in research and development, science and manufacturing is something that will take a decade of focused governmental initiative in primary and secondary education. This is a formidable challenge, and it is so much easier to blame weaker enemies (skilled overseas immigrants in this case). This same principle applies to the US President’s populist outburst last year, where he vowed to stop American jobs from being “Bangalored”

In India, every single political party claims that their foremost concern is for the well-being of the “aam aadmi” or “common man”. But the rhetoric belies the political reality. Every Indian political party, irrespective of ideology, serves only itself. For fifty years after independence, the long-suffering “common man” in India was denied any opportunity for economic advancement. Three generations were condemned to a life of subsistence and mediocrity. Poverty and squalor were glorified in the name of socialism. Wealth, education and economic advancement were looked down upon as consequences of a decadent capitalist society. Then the Indian economy was liberalized in 1991 (out of compulsion, not choice). Over the last twenty years, economic growth has helped raise millions of people out of poverty.

However, many Indian political parties (especially our revisionist Communists) still target economic liberalization as the root of all evil. India’s true enemies remain poverty, illiteracy and lack of economic opportunity, not economic liberalization. However, tackling these substantial problems will require governmental discipline and efficiency. It will require taking hard decisions that will disturb well-entrenched, powerful lobbies within the government who have prospered for decades at the expense of India’s teeming millions. It is so much easier to blame economic liberalization, which is actually the solution to the country’s problems and not the cause. But then, the search for weaker enemies has not changed since the 13th century.