Archive for June, 2015
Title of an oldish paper (Apr-2015) by WPS Sidhu of Brooking India.
There is little doubt that if there is some policy taken really seriously by Indian PM, it is foreign policy. The kind of interest that has been generated over the various foreign tours of Indian PM and several discussion (a lot of hype though), has been seen after a long time in Indian policy.
The paper is a brief on the things needed to make this agenda more meaningful and result oriented:
Nice article by Shailesh Dhobal on Indian way of doing things. This one is on keeping families interested in their businesses:
A lot has changed with India Inc since the economy opened up two decades ago. The ways of doing business have changed to become globally competitive, and sources of finance, too, have diversified with huge pools of foreign, public and private capital owning a chunk of the big firms listed on the stock markets.
Yet, even a cursory reading of business newspaper headlines of the past fortnight shows how entrenched the old order is as far as families in business go. The Rs 9,000-crore Emami group junked its earlier idea of letting professionals pick successors from the promoter families and instead formed a family board to pick and groom one from the promoter families’ second generation to lead the firm in the future.
The Kapoor versus Kapur fight at YES Bank is playing out in public, with the High Court ruling that went in favour of the bank’s erstwhile co-promoter’s widow, Madhu Kapur, who happens to be promoter Rana Kapoor’s sister-in-law, only accentuating competing positions.
The news narrative at one of India leading food firms, the Rs 7,100-crore Britannia Industries, is how soon the promoter’s son, Ness Wadia, will assume a bigger managerial role at the biscuit maker. Or even at the country’s third largest software firm, Wipro, where Rishad Premji is reportedly being groomed for a role bigger than the one he currently handles.
And when a business scion does decide to take a different path, as Kamil Hamied of Cipla did by quitting the pharma maker recently to purse personal interests, sister Samina Vaziralli is quickly given an expanded role to scotch any rumours of succession plan gone awry. After a glorious three-decade-plus as chairman of the Hero group, when Brijmohan Lall Munjal does decide to hang up his boots, his son, Pawan Munjal, smoothly takes over as the chairman of the group. Yet, elsewhere, the father-adopted son battle over succession only gets uglier at the Rs 10,000-crore Chettinad group.
Now, it will be foolish to suggest that the families stay away from businesses when they still own almost two-thirds of India Inc’s wealth. And it is also true the capitalist system is based on the bedrock of perpetuating ownership.
The author then goes on to criticise the role of families in businesses:
But how about divorcing ownership from management? Yes, the debate is old but it is time to revisit it. There is one argument that separating the ownership from the management model does not work for an emerging market like India where the rules of the game are not well-defined. And more so, the firms are running all right, and if it ain’t broke, why fix it, goes another argument.
How about the pernicious influence that family-led management invariably brings out in the best of firms? When was the last time you heard an Indian firm sack its owner-manager, or his or her spouse, parent or progeny, who were involved in the business, even if mismanagement is proved beyond doubt? Maybe in some start-ups but rarely in an old, entrenched businesses. Surely, that can hardly be a case for promoting accountability or merit down the line.
And why should the majority shareholder get to pick his progeny as a successor to run the business? Isn’t it a ‘related party’ transaction, in principle, at least, if not in law currently? Why should management succession have a corporate governance carte blanche when all other related transactions of a firm – from sales, investments, loans or leveraging information – are under strict scrutiny and regulation?
Imagine if tomorrow one of the big family-owned firms in the country were to announce that the race for the top job is open for all, including non-family insiders. That will truly herald a corporate democracy. Well, the Tatas did that when a committee was formed to look for Ratan Tata’s successor, though finally the son of the biggest individual shareholder in Tata Sons, the group’s holding firm, was chosen to lead the salt-to-software conglomerate.
Not sure that the criticism is really right. Worldwide too, most companies are family owned as well. There are ways to hide ownership and that is what it is. And then despite separating management from ownership, latter continues to influence the decisions in a big way. Cometh a crisis in the firm, family calls the shots. And then in Asia, we value the family bit much more than the west. We are more comfortable to give businesses to progenies than to an outsider.
The issue actually is similar to debate we have on private vs public ownership. Based on Anglo Saxon dominance, we are always made to believe that private ownership is better than the public one. This is partly due to different history of Anglo Saxon countries and partly a creation of the media. The governments have played a much lesser role in Anglo Saxon world compared to other countries. So private ownership has traditionally played a larger role in these countries. But it is not that private ownership has not had its moments of failure, There have been quite a few but the attention is much more on public ownership failures.
The question is not private vs public or family vs professional,, but how to make the firm perform better given the constraints.
It was shocking to see Anshu Jain resign so quickly as a head of Deutche Bank. The Indian media had gone gaga over his appointment (as it always does) celebrating another Indian at the helm of global affairs.
And now there are reports that he was actually asked to go as he had misled the bank.
One does not know how to even sum up the Greece crisis. Despite nearly 5 years of Greece under stress, not only there is no solution. But it has only become worse overtime. All kinds of expertise is being offered and most is actually asking more questions than giving answers. Draghi magic is over and hard reality has sunk in.
The ongoing crisis has many narratives from history. The obvious one is Great Depression which has been an overkill. People have argued on both sides for stimulus and against stimulus and there are both +ves and -ves with each point. Then there are comparisons with 1907 panic and so on.
The Greece crisis and coming agreement is now being compared to similar such events.
In this vein, Prof. Amartya Sen has a piece comparing the upcoming agreement to the one held in Versailles in 1919 which sowed the seeds of second world war. He argues by forcing countries towards austerity and really harsh conditions, we could be in for trouble again. Prof Simon Wren Lewis says Amartya Sen is right.
What times we are living in. Anything can happen..
A lot is being written on state of Indian railways and the need to change it. This book is a must read for those who are interested in railways beyond the usual LPG of Indian railways (liberalisation, privatisation and globalisation). Apart from many ways to figure economic and social history, one way s to pick history of some technology like railways in this case and see how it has evolved over the years. It tells you a lot about how things have transpired over the years.
This book is really an encyclopaedia on railways in just about some 300 plus pages. It hardly leaves a single country which built railways or a single technology which changed railways for the better (or the worse). The author even mentions the various railway stations built across the world which were showcased as a country’s strength back then (even now for that matter).
TCA Srinivasa Raghavan ponders over this question.
He starts with this interesting Churchill quote which actually applies to quite a few things in economics:
Never in the field of human conflict was so much owed by so many to so few,” said Winston Churchill in 1940 when a few hundred British fighter aircraft were fending off a few thousand German bombers.
In a like manner, where economists are concerned, never in the field of human endeavour has such a small group of intellectual charlatans inflicted so much damage on so many. Many examples of the harm they have done can be given. But here, let’s only examine the notion that the ideal level for a country’s fiscal deficit is three per cent of its gross domestic product (GDP).
I have tried, for the last 25 years, with the futility of a fool, to find out why it is three per cent and not 3.5 or 2 or 4.1 or 5 per cent. Where did this three per cent come from? Who thought it up? What’s so special about it? Above all, who made it the prevailing orthodoxy? If someone knows, please let me know through the comments column on this paper’s website. I will be eternally grateful.
Personally, I think it was the International Monetary Fund(IMF), in the aftermath of the Latin American debt crisis in the 1980s, which invented this level. Before that it was generally agreed that government debt must not be “excessive”. But no number was put on the ratio. If it was, tell me and I will stand corrected.
IMF shares a blame for many a things wrong in world economy. Using their bully pulpit, they have forced all economic policy thinking on simplistic and homogeneous targets. (Despite this, IMF officials are much sought after and continue to drive policies worldwide). Same thing applies for inflation targeting as well. Where did the number come from? What started as an experiment in New Zealand Central Bank is seen as a gold standard for all monetary policy. Here also we have put all kinds of targets without really looking at the nature of the economy. But thankfully, unlike fiscal deficits where 3% is the standard across countries here inflation targets are divided into country-wise – developed country, emerging economy, developing country and so on.
The pressure probably came from American banks, which had been doing a lot of short-term lending to developing countries. They had burnt their fingers, hands and feet in Latin America. They realised then that they needed a benchmark figure that their loan officers could use. (The invention of that figure, by the way, was why the East Asian countries hid their short-term borrowing levels in the late 90s. As long as no one knew, the US and other banks would continue to lend.)
Simultaneously, the people who were manning the incredible financial globalisation that started in 1985 via the institutional investors also needed a number to look at. Thus, by the mid-90s a new notion of good and bad had been born. If a country was at or around three per cent fiscal deficit, it was good; if not, it was bad. This number became what body temperature is to a doctor. Borrowing countries had no choice in the matter. They either adhered to this norm or went with less and more expensive credit.
India, having taken a severe knock in 1991, accepted this number, not least because so many of its economists owed so much to the IMF and its sister, the World Bank.
Don’t get me wrong. I am not arguing that the fiscal deficit does not matter. I used to do that when financial globalisation had not assumed the scale it has now. But since it is a reality now, the deficit does matter. But why put such a low number on it when it constrains governments so badly?
It is useful to remind the regression-obsessed economists that it was Keynes who legitimised the idea of a budget deficit. Before that the orthodoxy demanded a balanced budget, that is, a zero deficit.
Moreover, Keynes never laid down a number. Nor did his academic followers, like Alvin Hansen, do that. All they said was that when demand is depressed, governments must spur it along even if it means running a deficit, even a very large one.
The whole idea always has been to constrain the government badly. First constraint the govt and then ask govt to do much more for the economy. This is classically happening in India currently.
He says the govt should read LK Jha instead. This is surprising as we hardly read any of these guys anymore. Indian history of economic thought is a banished thought. The whole obsession is to just follow what the western experts have said over the years (despite being wrong):
In 1981, fed up with what Raj Krishna had jokingly described as India’s “Hindu rate of growth”, the highly influential L K Jha wrote a book (Economic strategy for the 80s) in which he said India needed to give up its obsession with more-or-less balancing the Budget. That recommendation could not be adopted during 1980-84 because of the huge IMF loan, of around $5 billion, India had taken in 1981. But 1984 was an election year and Indira Gandhi needed to spend more. So, India told the IMF that it would not use up the entire loan.
But while Gandhi wanted to spend more on giveaways, Rajiv who became prime minister after her assassination decided to expand the budget deficit – as it was called then – to spur growth. The results were dramatic. India finally broke out of the low-growth syndrome in 1986. But then a terrible drought in 1987 and a contrived political crisis intervened. The deficit continued to expand, but not for financing investments.
In 1991, thanks to poor management by Bimal Jalan, who was finance secretary during an unstable government in 1990, India went bust. Since then India has adopted three per cent as key to fiscal nirvana.But the time has come to give up this obsession. Jaitley should adopt five per cent as the floor level. Otherwise, there is little hope.
Where does 5% come from?
There is a need to rethink and rewrite this standardization of economics around macro targets. The whole pink media goes berserk if the targets are missed by a % or so. Whereas things like water, air, education etc targets are barely mentioned.
(And Bimal Jalan? Did I read that right? He seemed to have only grown despite poor management. And was recently the chair of expenditure commission as well..)
Such books cannot be reviewed. Just recommended.
An autobio of late Neslon Mandela(some say ghost written by American Richard Stengel). It is a must read for all our politicians and policymakers especially in today’s environment where all humanity and humility has been lost. There is a strong belief amidst all these members of polity that they are here to change the world and so on. Here is a story of a person which just humbles you given the years of struggle and horrible experiences one has to go through in his fight.
The best part about the book is that it is a breezy read. Such books usually awe you and be preachy. This book is nothing of the kind and despite being 600 plus pages, is just so light.
- Srinath Raghavan says Emergency was actually a blessing for businesses. They really liked the stable economic environment during the emergency. What was actually a tragedy for the political system seems to be a good thing for the economic system. Parallels for today’s times?
- Kuldip Nayar never thought emergency could happen
- GK Gandhi on majoritarianism and emergency
- How some teachers from Gaya fought emergency
- Ram Guha warns that too much centralisation and eulogising central leadership can lead to build up of emergency kind of situation:
He tracks how eco thought has evolved from Age of enlightement (1650s) to Neoliberalism (1990s to 2007).
In the end, he says the process of ideas has hardly settled. It has only become more bitter due to the crisis:
A huge controversy has erupted ever since US Treasury Sec made this speech. There was a view that Alexander Hamilton will be removed from the note and be replaced by a Woman (who has done commendable work).
However, Treasury Sec did not really make this comment. He said we are exploring options and want to keep Hamilton on the note:
Bernanke responds to this (how the world’s most powerful econ has moved to a role of a blogger is amazing, this happens in US. In India all our central bank chiefs remain part of the system for eternity). He says removing Hamilton is not right. At best we should replace Andrew Jackson from the $20 note:
Hamilton also played a leading role in creating U.S. monetary and financial institutions. He founded the nation’s first major bank, the Bank of New York; and, as Chernow points out, Hamilton’s 1791 Report on the Mint set the basis for U.S. currency arrangements, which makes his demotion from the ten dollar bill all the more ironic. Importantly, over the objections of Thomas Jefferson and James Madison, Hamilton also oversaw the chartering in 1791 of the First Bank of the United States, which was to serve as a central bank and would be a precursor of the Federal Reserve System.
In the nineteenth century, a principal public role of central banks was to control banking panics, as the Bank of England would do quite successfully. Unfortunately, in large part because of populist opposition, neither the First Bank of the United States nor its successor, the Second Bank of the United States, would have their charters renewed. President Andrew Jackson led the opposition to the Second Bank, vetoing a bill passed by Congress to continue its operations. The expiration of the Second Bank’s charter in 1836 likely worsened the very severe Panic of 1837, which was followed by a prolonged economic depression. The United States would go on to suffer numerous banking panics that would hamper its economic and financial development over the rest of the century.
Hamilton’s demotion is intended to make room to honor a deserving woman on the face of our currency. That’s a fine idea, but it shouldn’t come at Hamilton’s expense. As many have pointed out, a better solution is available: Replace Andrew Jackson, a man of many unattractive qualities and a poor president, on the twenty dollar bill. Given his views on central banking, Jackson would probably be fine with having his image dropped from a Federal Reserve note. Another, less attractive, possibility is to circulate two versions of the ten dollar bill, one of which continues to feature Hamilton.
I was in government long enough to know that decisions like this have considerable bureaucratic inertia and are accordingly hard to reverse. But the Treasury Department should do everything within its power to defend the honor of Jack Lew’s most illustrious predecessor.
Mark Thornton of Mises, a leading advocate of free banking and no central bank reacts to Bernanke’s post:
Hamilton should get some credit for the Constitution and for being a policy maker. But the Constitution was an inferior form of government compared to the Articles of Confederation and his economic policy making was all geared toward bigger government and monetary nationalism, the two problems that are arguably the greatest threats to the American people, their prosperity, and their liberty. Bernanke then goes on to present a convoluted history of National Banks and bank panics during the 19th century. However, he does provide a suggestion for resolving the $10 bill controversy. Leave good old Hamilton on the $10 and take President Andrew Jackson off the $20 bill and replace him with a women.
This is probably the only idea of Ben Bernanke (removing the anti-central banking Jackson from the $20 bill) that I can agree with. And while you are at it take the image of Thomas Jefferson off the $2 bill and replace him with Paul Krugman or Ben Bernanke.
Both suggest to remove Jackson but for different reasons. Bernanke an advocate of central banking believes Jackson should not be there. Thornton an advocate of no central banking also believes Jackson should not be there as when we have private bank money, there is no need to put govt officials pictures on the notes. It is also interesting to see how central bankers are criticised in US. Here we just pray them..
Just a couple of months ago, the govt announced that a new IIT will come up in Karnataka. This led to political battles over which city/place will host the new IIT. It was as if the new IIT was some kind of a industrial project which will lead to huge income and welfare for the local public. The relation is actually the opposite. It is the overall development of city which keeps these educational institutions humming. One can compare IITs in Kanpur, Kharagpur, Guwahati with IITs in Mumbai, Delhi, Madras etc to get some ideas.
This politics moves to IIMs now. Despite poor logic to set up more of such places, the govt announced yesterday to set up 6 new IIMs. This was in line with the Union Budget proposal to set up new IIT/IIM in the states. In the budget, it announced the states that will have these new entities. Y’day the note specified the places in the same states:
Sucheta Dalal ponders over this question. She points to recent appointments by the Prime Minister and is not too happy with the choices.
Well, time will only tell. But this is a large feeling most have. Those on the other side might say, were these institutions any effective at the first place?
An interesting paper by William Cline of PIIE. Lately, there has been some research which shows that too much finance leads to lower growth. The author critques such research.
He says much of this has been shown using a kind of econometric trick. What people have done is added a quadratic term (of say financial deepening) in the regression equation. This shows a negative coefficient leading people to make their claims that after such and such ratio/percentage (of say bank assets to GDP), finance leads to lower growth.
Fair enough. The author says one could actually do the same for doctors, telephones, R&D and so on. His analysis shows the coefficient is negative here as well. So, after so many doctors, so many telephones etc growth becomes lower. Does this sound plausible?
This Policy Brief shows that these recent fi ndings warrant considerable caution, however, because the negative quadratic term may be an artifact of spurious attribution of causality. I fi rst show that correlation without causation could similarly lead to the conclusion that too many doctors spoil growth (for example). I then demonstrate algebraically that if the variable of interest, be it fi nancial depth, doctors, or any other good or service that rises along with per capita income, is incorporated in a quadratic form into a regression of growth on per capita income, there will be a necessary but spurious fi nding that above a certain point more of the good or service in question causes growth to decline.
Fascinating. This quadratic term is an old idea (or a trick now) in econometrics and amazing to see how it has been used this time. It usually shows a negative term just to limit the same excesses (have limited understanding of this though).
Though, the author misses the main point. People used same tricks before the crisis as well. All kinds of fancy regressions were invented to show that only finance matters for growth. This was used to push policy agenda. So all kinds of financial indicators (bank assets, equity markets, bank accounts etc) were used to show how they lead to GDP growth. This was a phase where GDP growth was rising generally and by fitting such regressions, positive relationships were not difficult to find. So the mantra was simple. Just let financial sector grow. And hence, finance professors became the new dons and got huge fame. They were appointed to all kinds of committees to drive financial sector of respective countries. Same with the finance sector.
Post-crisis, we are now questioning these findings and arguing the opposite. After all, we have to show that the discipline is responsible and knows things. Nothing could be further from truth. It is even more bizarre that the professors who argued for finance earlier have only seen their fame grow!!
Another point is it is not right to compare finance with medicine/telephones/R&D etc. Finance interacts with the economy in many more ways than all these other factors. Too many doctors, telephones etc hardly impact the economy adversely but finance surely does. This is nothing new. For ages, speculations and manias in finance have impacted economies.
For any development, one needs several factors and finance is just one of them. We had overdone the analysis earlier and are perhaps overdoing it now.
Interesting anecdote by Michael Tanner.
Lately, there is a concern over rising inequality in US and developed world. Politicians feel growth is only rewarding those at the top. The author says we are mixing these two things. High growth should be welcome at all costs and if inequality is rising we should use different tools for the same. But to say growth should be lower does not get us anywhere. In this context he quotes this story from Prof. Milton Friedman :