Archive for June 4th, 2015

Don’t trust the economic oracles..

June 4, 2015

 of Mises Institute says it nicely:

The positivist ideas dominant among economists led them to agree that, as stated by the motto of the Econometrics Society, “Science is prediction.” We are surrounded by forecasts about numerous economic indicators. “Experts” reveal the rate of growth with .1 percent precision as if they were reading the oracle or seeing the future in chicken entrails.

In the nineteenth century, people used to believe everything which was written in the newspapers. With time, they became more skeptical and began to question what has been considered as a reliable source of information. After that came television. Images have real power over the minds, but after a while, people began to mistrust the news and exercise their critical judgment. Oddly however, government statistics and economic predictions are held as truths since they exist and people only too rarely question the figures.

But if we can’t trust the government to produce safer rail travel or more affordable health care, why should we trust it to produce better economic predictions? Why would things be different for statistics and predictions?

Blame it on human psyche. We always believe that there should be someone taking care of us. Oracles have always amazed and fascinated humankind. Just that the fortune telling oracles have been replaced by economics oralces. Needless to say, both have mostly duped their followers..

Remembering Prof. BR Shenoy..

June 4, 2015

It is such a shame not to even mention Prof Br Shenoy in India’s economic history books. Most people do not even know him, leave even discussing what he wrote. Indians usually remember people for heroics  and none better than refuting the givt order. Prof. Shenoy did the same by dissenting against the Second Plan risking it all. He was obviously ignored.

Someone who had all the right credentials (read PhD from abroad: that too under Hayek at LSE) but did not look for any big policy roles which seems to be the single most aspiration for most India’s so called top economists. After his RBI stint (which was a surprise choise given how RBI was just another govt extension), he chose to  be at a university in Gujarat.

So here is a tribute on his 110th birthday (June 3, 1905).

Though, this blog disagrees that we should make a big deal of Shenoy because he disagreed with the govt on the 2nd plan. I mean those were times when most govts went the highly restrictive way and India was not alone in the list. There are certain ideas and thoughts which can’t be implemented given the times. I mean even the always talked about  liberal economies like US were mostly restrictive during those times. Theyb don’t celebrate Reagan for nothing (only to ridicule him now). And then Indian history panned out very differently with a very strong centre and huge suspect for anything foreign given the deep imprint of colonial rule.

But we should surely study Shenoy (and others) for their views and thoughts on Indian economy. The dissent note was just one of the several things he wrote. I have scanned some of his writings on money and finance which are quite good as well. We just do not have a history of Indian economic thought sort of subject which is really sad for students. We are given a standard course on Indian economics starting from how bad second five year plan was and how 1991 changed everything. That is a very lame way of looking at things. It just misses the key debates and key figures who shaped or resisted these key developments.

We are lost too much in discussing Keynes and Friedman and have very little know how of our own developments. There are some Indian economic history of thought books but stop at independence like most of our history. In our post-independence economics accounts, we just keep picking villains and heroes which keep changing with times and background of the author. We need a more pragmatic approach and realise that policymakers do not have the benefit of hindsight with them.

So may be we could use opportunities like Prof Shenoy’s birthdate to reflect and build on our economic history and learn some lessons.  But we just look to project him as one hero who stood against the tide which can only take us so far. That might be a more useful way of celebrating India’s lost economist…

China’s attempt to create multipolar world : Silk Routes versus Sea Lanes

June 4, 2015

This is an absolutely brilliant piece by Atul Bhardwaj of Institute of Chinese Studies.

He goes on to explain how and why Chinese are trying to revisit their Silk Route in an attempt to build a multipolar world.

Grapes from Astana can reach Amritsar in just 28 hours by train through Pakistan—a fact recently reinforced by an economist from Tajikistan1 in his talk about land routes connecting Central Asia to India. A few years ago, the idea itself would have been relegated as impractical to a mind conditioned to think of international trade as synonymous with ships and sea lanes of communication (SLOC). Until, of course, the Chinese proposed their signature idea of “One-Belt-One-Road” (OBOR) which is fast gaining currency.

For long, the Chinese story was devoid of ideas that could develop an emotional rapport with the world. OBOR has injected a new dimension to the Chinese growth narrative. The primary aim of OBOR is to connect China with Europe through Central Asia and Russia. The purpose is to limit the maritime component in the global supply chain and thereby reduce dependence on the international merchant fleet of bulk carriers and tankers.

Beijing understands that making Southeast Asia the world’s factory and building international financial infrastructure like the Asian Infrastructure Investment Bank (AIIB) are not adequate to lead the global economy, what is equally important is control over the channels through which business travels.

……

OBOR is not purely land based; it also has a maritime component. The ports and harbours in Indonesia, Africa, Myanmar, Bangladesh, Pakistan, Sri Lanka and possibly India are part of the scheme to shorten sea time that the to-and-fro trade from West Asia and Africa has to traverse to reach China. This ensures that China-bound oil first lands at Gwadar port in Pakistan or at Kyaukphyu port in Myanmar, from where it is carried through tankers, pipelines and rail network to western China, thus opening up new vistas to create wealth for populations all along routes that have remained backward for centuries.

Generally, ocean trade between two ports bypasses many nations along the passage. For example, oil coming from West Asia to China using the conventional SLOCs is largely a bilateral transaction that benefits few littorals en route. OBOR, backed by $140 billion funds, is creating a comprehensive network of ports, railways and roads that would open up new business synergies all along the route.

What will China gain from this?

The question is, why is China diversifying trade routes? Why cannot the Chinese continue to use the well-established SLOCs? If their goods can easily ply on relatively peaceful high seas then why do they want to move them through well-populated national territories? Why are the Chinese increasing their vulnerabilities by increasing the number of stakeholders along the proposed trade routes? One plausible answer is that Chinese trade does not feel safe using American-dominated SLOCs. An economic reason could be the desire to garner a greater share in the global service sector that is currently under American dominance.

Reopening the old silk route is an open defiance of the American “command of the commons.” Commanding the commons entails controlling the $375 billion shipping industry and the shipping insurance and reinsurance business, that includes vessel hull, war risk and cargo insurance premiums. This business has been the bedrock of the Western dominance of the world. The Chinese challenge is non-confrontationist, to the extent that it does not involve naval battles to physically dethrone the United States (US) from the command.

This raises an obvious question, if China is turning its back on the oceans then why is it investing in building a blue water navy? The Chinese are building more surface ships than submarines because they see medium navies as a diplomatic force that is used more for advancing flag showing than fighting wars. According to media reports, China plans to have 351 ships by 2020 and every year it is building or launching roughly 60 naval ships. The Chinese are building warships merely as a show of capability much in the same fashion as the US had built a large cruiser in 1925, merely to puncture British naval vanity. Another reason seems to be to induce America to spend more on its navy.

The Chinese also do not seem to want to meddle with the well-protected Anglo–American insurance markets. The Chinese strategy hinges on bringing down the usage of oceans for trade. Once trains and road links become extensive, global trade will not employ 55,000 ships to move cargo. Lower volumes will lead to a sharp fall in the revenue generated from insurance and reinsurance premiums that accrue to the Western world and also have an impact on the derivatives market at the London-based Baltic Exchange. Reduced trade through oceans will automatically lead to decline in the importance of Western navies. This would hit the maritime nations hard. The pain will aggravate when Chinese capital creates more favourable insurance and reinsurance regimes and fragments the market along the new trade routes that it is creating.

Hmm fascinating..

As this blog keeps saying. Knowing history and politics is so crucial to figuring economics. But here in India we are just lost in debates over GDP and inflation numbers.

Chinese have never really cared for such meaningless discussions and are looking at a much much bigger picture.

So how do we compare this with what US did?

Many analysts have compared OBOR investments with the $17 billion Marshall Plan that the US had executed for Western Europe in the aftermath of World War II. However, the two are fundamentally different because the historical context in which the Marshall Plan was conceived is totally at variance with circumstances in which OBOR is germinating. The former was a by-product of war and a superpower’s geostrategic game to contain the Soviet footprint in Europe by giving a fillip to Western war-devastated economies. On the other hand, OBOR is promoted by China, which is not yet a superpower and is not using war surpluses to catapult itself to a hegemonic position. The Chinese initiative is more towards creating a multipolar world by breaking the Anglo–Saxon vice-like grip over global trade.

…..The twin factor that differentiates China’s rise from that of the US is the role that the American military and private capital played in influencing the contours of the postcolonial order. America emerged on the global stage after two bloody wars. The entire post-war planned development and industrialisation model that America introduced to the world was designed to cater to the war industry. Therefore, the American military–industrial complex played a massive role in shaping the post-war world order. Currently, the Chinese government has kept its Peoples’ Liberation Army and its billionaires, who control 3% of Chinese wealth, on a tight leash.

How did British kill Chinese supremacy?

To understand the nuances of the critical changes that China is introducing to the international political economy, one needs to peep into history; the way the British closed traditional land routes and introduced the notion of “landlocked” in transnational exchanges. As Nimmi Kurian argues in India-China Borderlands (2014: 30), the British security establishment created the concept of “buffer zones” on borders that “flew in the face of both economic logic and social reality.”

China, a continental power in Asia, was dissuaded from using the Silk Road and forced to open its ports through a series of “Opium Wars” and the invasion of Tibet. China resisted but eventually relented due to domestic strife created by the decline in trade. For the British it was essential to use their navy to make ocean routes more attractive, because since the 18th century “navy and credit” had been the bulwark of their global reach (Kennedy 1981: 46). By the middle of the 19th century, the British lost monopoly over manufacturing with the rise of Germany, the US and Russia. In 1870 the United Kingdom (UK) contained 32% of the world’s manufacturing capacity; this share was down to 15% by 1910 (Kennedy 1981: 47).

Undeterred by changed circumstances, the English used their capital to underwrite the ocean trade. They encouraged free trade and earned money by extending services like shipping, insurance, commodity-dealing, banking. By 1914 they had reached a stage where the Lloyds of London provided insurance cover to German merchantmen that were sunk by Royal Navy guns. The fall in international trade in the wake of the Great Depression of 1929 led to a fall in British annual earnings from shipping, commissions, insurance and overseas investments; they fell by some £250 billion (Kennedy: 53).

America is palpably perturbed by the development of the AIIB and the OBOR. These twin Chinese creations are likely to do to America what the two world wars and the Great Depression had done to Britain. These could reduce their share of global service trade, which currently is double that of China (Romei 2014). The reduced shipment of oil from West Asia to America due to the shale gas revolution and the growth in renewable energy avenues coupled with new trade routes will cause a severe dent in American revenues. It is for this reason that America is mobilising its allies to refrain from joining Chinese-led initiatives.

One wonders what America will do to stem the slide. Will America go to war, relying on the money and goodwill of its allies? The UK also entered the World War II on borrowed money—both India and the US extensively lent money and equipment to the UK to fight the War; which it won but Britain was bankrupted. Will India be the American ally in a misadventure that takes on China?

Brilliant. Explains so much about emergence and shaping of world economy.

It further discusses India’s stance and why it should join China in this initiative.

Superb stuff..

Prisoner’s dilemma (not the game theory one)..

June 4, 2015

Imagine—for a moment—you are in prison. You may have committed a crime which has thrown you into the slammer, or you may not have. You may be innocent and should not be where you are. A violation of traffic rules, a momentary lapse of judgment, an egregious act by the moral police—anything could have landed you behind bars. But there you are—inside a jailhouse alongside convicts, ordinary “criminals,” even “hardened criminals.” But, rest assured, you have a title, a description. You are a UT—an “undertrial.”

According to Amnesty International, India has 4.11 lakh prisoners, going by statistics from the National Crime Records Bureau for the year 2013. Nearly 70% of those who populate our congested prisons—now called “correctional homes”—are under trial and could well be found—after an unspecified period of time—not guilty, and discharged.

Imagine you’re one of them—stripped of your right of movement, locked up in a cell with or without others, many in deep depression, silent, dazed, almost comatose, especially the women prisoners.

The stories of those in prisons deserve to be told and heard. I am not talking of their crimes—established or yet to be determined—but of the tales of their lives in prison.

At a conference of governors in 2006, the then Prime Minister, Manmohan Singh, said something I will never forget. The governors were expecting to hear him speak on national security, terrorism and law and order. While he did not disappoint them, he departed from his written speech to urge them to do something about the condition of prisoners and undertrials. “We do not need to run jails, prisons and correctional homes as they were in the middle ages. We have to be a law-enforcing State, but a humane one as well,” he said.

The Prime Minister’s suggestion that day prompted me to visit some of the prisons in West Bengal.

The inmates I met were not uninterested in prison reform but their priority was simple: release from jail. One undertrial—a young bearded man—told me in Urdu that he was a Pakistani who had come with a visa to India on a pilgrimage when he was rounded up. “I am completely innocent, I have nothing to do with politics…,” he pleaded. “That is not in my hands,” I told him. “There is a law in our country and that law will give you every opportunity to explain what you’ve just said…”

He remained unconvinced. Changing the subject, I asked, “How are you spending your time here?” The answer surprised me: “The place is beautiful, whatever I can make out from the sky and the tree-tops that I’m able to see…but I spend most of my time reading the Holy Quran…I did not know the Quran in Pakistan, when I was free…now I do, as a prisoner in India.”\

In the end:

And yet—I told myself—amidst this stoic silence, we must remember that we need to let prisoners speak out for themselves and their ilk through, in this internet age, a blog, perhaps, or a page on a website or a portal, run by state governments, which could be a platform for expression of their experiences of prison life. The writings need not be about the cases pending in court or the “criminal” histories of the prisoners, but only about their perception of living in prison. And the outpouring must include creative writing. The great books of our time by Tilak and Gandhi and Nehru were authored in jail. Bhagat Singh’s magnetic “last letter” from prison is an admirable piece of literature. Azad and Rajagopalachari wrote masterpieces from behind bars. Why should our prisoners not be given such a chance today? Who knows what creative writing geniuses may emerge from such an opening up?

Hmm.. These guys were in jail fighting for very different reasons. Nevertheless, something to ponder on..


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