Archive for the ‘Growth and development’ Category

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..

Which countries were stuck for the longest period in the upper-middle-income category before moving to high income?

June 2, 2015

Greece and Argentina.

Prof Andres Velasco explains that apart from poor macro policy, both countries also share this aspect.

Aside from an established tradition of bad macroeconomics, what do Greece and Argentina have in common? One answer is that they were the world’s longest-held captives of the so-called middle-income trap – and remain within its reach to this day. With countries in Asia, Eastern Europe, and Latin American fearing that, having reached the international middle class, they could be stuck there, Greece and Argentina shed light on how that might happen.

A recent paper by economists from Bard College and the Asian Development Bank categorizes the world economy according to four groups – with the top two categories occupied by upper-middle-income and high-income countries – and tracks countries’ movements in and out of these groups. Which countries were stuck for the longest period in the upper-middle-income category before moving to high income? You guessed it: Greece and Argentina.

Correcting for variations in the cost of living across countries, the paper concludes that $10,750 of purchasing power in the year 1990 is the threshold for per capita income beyond which a country is high income, while $7,250 makes it upper-middle income. (These thresholds may sound low, but the World Bank uses similar cutoffs.)

By these criteria, Argentina became an upper-middle-income country all the way back in 1970, and then spent 40 years stuck in that category before reaching high-income status in 2010. Greece joined the international upper middle class in 1972, and then took 28 years to reach the top income group, in 2000. No other country that became upper middle income after 1950, and then made the transition, took nearly as long. In fact, the average length of that transition was 14 years, with economies such as South Korea, Taiwan, and Hong Kong taking as little as seven years.

It does not end here. The crisis poses several issues for the two countries.  Greece might have moved back to middle income:

Data in the paper stop at 2010, but the story may well be worse today. According to IMF figures, Greece’s never-ending crisis has cut per capita GDP (in terms of purchasing power parity) by 10% since 2010, and by 18% since 2007. Indeed, Greece may have dropped out of the high-income category in recent years.

Argentina’s per capita income has risen, albeit slowly, during this period, but the country was never far from a full-blown macroeconomic crisis that could reduce household incomes sharply. So it seems fair to conclude that both countries are still caught in the middle-income trap.

What kind of trap is it? In Greece and Argentina, it is both political and economic.

The usual story..

Education is important for growth – an idea which is just a hype..

June 2, 2015

Prof Hausmann has this food for thought piece on the relation.

He says we usually say education is critical for growth. But data/trends suggest otherwise:

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Changing the rules of game for US economy..

May 28, 2015

What should be Hillary Clinton’s economic agenda? Should she be on right of the centre (like her husband) or lean towards the left (as developed world is increasingly moving to)?

This report by Prof Stiglitz et al suggests rules for American economy have to be rewritten. Over the last few decades, post policymakers have followed market ideology but that has only led to wealth piling at the top. All that talk of market being the best mechanism to distribute resources has not worked. Markets may be more efficient than govt but poor at equity allocation.

This article by Dylan Matthews sums up the report:

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From MDGs to Post 2015 SDGs..

May 28, 2015

Trust all these UN type organisations to keep coming out with one buzzword after the other. I mean buzzwords are fine if some work actually gets done. But this is usually not the case.

Anyways as tenure of MDGs is going to be over in 2015, UN is coming out with a new development buzz – Post 2015 Sustainable Development Goals (SDGs). The question is what should these goals be?

Bjorn Ljomborg of Copenhagen Business School, who has been associated with such projects writes on SDGs.

Over the next 15 years, the international community will spend $2.5 trillion on development, with national budgets contributing countless trillions more. In September, the world’s 193 governments will meet at the United Nations in New York to agree on a set of global targets that will direct these resources. With so much at stake, it is vital that we make the smartest choices.

Because it is only natural for politicians to promise to do everything, the UN is currently poised to consider an impossibly inclusive 169 targets. The proposed targets range from the ambitious (“end the epidemics of AIDS, tuberculosis, and malaria”) to the peripheral (“promote sustainable tourism”) to the impossible (“by 2030 achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities”).

But promising everything to everyone provides no direction. In truth, having 169 priorities is like having none at all.

That is why my think tank, the Copenhagen Consensus, asked 82 of the world’s top economists, 44 sector experts, and UN organizations and NGOs to evaluate which targets would do the most good for every dollar, euro, or peso spent. A team of eminent economists, including several Nobel laureates, then prioritized these targets in value-for-money terms.

It turns out that not all targets are equal. Some generate amazing economic, social, and environmental benefits per dollar spent. Many others generate only slightly more than a dollar per dollar spent. Some even generate a net loss, doing less than a dollar of good per dollar spent.

If the world were to spend money equally across all 169 UN targets, it would do about $7 of social good for each dollar spent. That is respectable, but we could do much better.

The panel of eminent economists has produced a much shorter list of just 19 targets that will do the most good for the world. Every dollar spent on these targets will likely produce $32 of social good – more than four times more effective than spending on all 169. Being smart about development spending could be better than quadrupling the global aid budget. The short list covers a lot of ground; what connects the targets is the amount of good they will do for people, the planet, and prosperity.

…..

 This list of smart targets will not solve all of the world’s problems; no realistic list, however ambitious, can. But the 19 targets identified by the Copenhagen Consensus can help the world’s governments to concentrate on key priorities. These targets will do more than four times as much good per dollar spent as spending across all 169 targets would do. Governments should stop promising everything to everyone and start focusing on delivering the most possible.

MDG had 8 goals with 21 targets. And now we have 19 targets. I don’t think this is a really short target list. Just that these 19 targets are under three Ps – People, Planet and Prosperity. Who said only Business Schools believed in Ps, Ss and so on?

Eric Hanushek and Ludger Woessmann suggest just one taregt – basic human skills:

Kinnaur’s curse? Environmental threat from Hydroelectric projects

May 19, 2015

Interesting article which takes you to the perennial debate between environment and development.

This article is on Kinnaur in Himachal Pradesh:

Kinnaur, one of Himachal Pradesh’s most ecologically fragile regions, is under threat from widespread construction activity for hydroelectric power projects. Landslides have become a common occurrence putting lives of villagers to severe environmental risk.

Are lessons being learnt from several environment disasters?

Japan isn’t just a knockoff nation..

May 7, 2015

The big challenge for Asian countries like India and China is to innovate the next gen products and services.

Noah Smith has this interesting piece on how Japan achieved this transition. People in the west ofen complaint that Japan is just an imitating country. Reality could not be more different:

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A new buzzword – frontier economies?

April 30, 2015

I was reading this recent post on capital flows from IMF in frontier economies. I assumed frontier economies to be another name for emerging economies. But no, it is a different class as explained here:

There is a group of fast-growing low-income countries that are attracting international investor interest—frontier economies. Understanding who they are, how they are different, and how they have moved themselves to the frontier matters for the global economy because they combine huge potential with big risks. 

Get to know them  

The first thing to note is that some of these countries already have moved to the lower-middle income group. While a working definition of frontier economies is subject to further discussion, broadly speaking, these countries have been deepening their financial markets, such as Bangladesh, Kenya, Nigeria, Mozambique, and Vietnam.

Some also have been able to tap the international capital markets, such as Bolivia, Ghana, Honduras, Mongolia, Nigeria, Senegal, Tanzania, Vietnam, and Zambia. Their markets are, however, not as deep and liquid as those of the emerging markets, but compared to the latter, they offer higher returns and the benefits of a diversified portfolio.

Really? Another buzzword called frontier economies. IMF is another champion in all these naming gaming and creating buzzwords.

Further:

Many frontier countries are growing at a fast pace, in most cases helped by sustained efforts to achieve macroeconomic stability, and by building business-friendly institutions ( Chart 1). These economies have also made significant efforts to lower inflation through prudent fiscal and monetary policy ( Chart 2).

Most of these countries have made progress in strengthening their policy making apparatus, reducing excessive red tape and lowering trade restrictions. Reforms to change their economic structure have helped them unlock their potential, including  greater weight on the services sector, such as in Tanzania and Kenya.

In many countries, alleviation of their debt burden over the past decade has freed up money for investments in physical and human capital. Several countries received debt relief under the Highly Indebted Poor Country Initiative, but others reduced their debt outside this initiative, such as Kenya, Mongolia, Nigeria, and Vietnam.

These countries have deepened their financial markets at a fast pace—they offer more domestic financial services and products than their peers. Some have attracted international investor interest in their domestic bonds market and several have issued sovereign bonds in the international capital markets ( Chart 3).

Access to international capital markets means these countries can attract financing to address gaps in infrastructure, such as roads and railways, which could provide further impetus to growth. But as described below, market access also poses new financial risks that countries need to carefully manage.

Influences from outside their borders

Low interest rates combined with advanced economies shedding debt have pushed investors to search for higher returns on their investments, which has expanded their interest to invest in frontier economies.

The quest for resources by emerging economies has contributed to improved terms of trade and a surge in both domestic and foreign investment in resource-rich countries, such as Bolivia, Ghana, Nigeria, and Mongolia.

Domestic public investment has increased as the low debt burden, favorable external borrowing rates, and high commodity prices have increased access to private financing sources outside their borders. 

Just another group of countries which have shown some recent promise.  And all these are countries which soon are called lost ones as well..

Paul Krugman’s Love Affair with France..

April 27, 2015

An article disputing Krugman’s assertion that austerity loving UK grew slowly that stimulus loving France.

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Does Microfinance Still Hold Promise for Reaching the Poor?

April 3, 2015

WB chips in on the hot issue. The research department had a discussion on status of microfinance.

Key findings:

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Book Review – The Birth of Plenty by William Bernstein

March 30, 2015

Finished reading this book by William Berstein. It is  one of those several books which tries to figure why the west grew in the last 200 years and others did not?

Bernstein has simplified the answers to four factor theory:

In The Birth of Plenty, William Bernstein, the bestselling author of The Four Pillars of Investing, presents his provocative, highly acclaimed theory of why prosperity has been the engine of civilization for the last 200 years.

This is a fascinating, irresistibly written “big-picture” work that highlights and explains the impact of four elements that when occurring simultaneously, are the fundamental building blocks for human progress:

  • Property rights, which drive creativity
  • Scientific rationalism, which permits the freedom to innovate without fear of retribution;
  • Capital markets, which provide funding for people to pursue their visions;
  • Transportation/communication, which allows for the effective transfer of ideas and products.

Meticulously researched, splendidly told, and featuring a new preface and introduction, The Birth of Plenty explains the interplay of the events, philosophies, and related phenomena that were nothing less than the crucible of the modern age. This is one of the rare books that will change how you look at the world.

Further

In the tradition of Peter Bernstein’s Against the Gods: The Remarkable Story of Risk, comes Dr. William Bernstein’s The Birth of Plenty. This newsworthy book sheds new light in the history of human progress. Bill Bernstein is no stranger to McGraw-Hill. He has written two successful investing books for us and both have exceeded expectations; The premise of Dr. Bernstein’s book is fascinating as well as provocative. From the beginning of civilization until 1820, mankind experienced zero economic growth (0% GDP). This basically means that life for the average individual was no better in 5 A.D. than in 1555 A.D or 1555B.C. But after 1820, the world rapidly becomes a much more prosperous place for the average individual. What happened in 1820? Bernstein contends that there are four conditions necessary for sustained human economic progress: Property rights. Scientific rationalism. Capital markets. Communications and transportation technology. Holland, and by 1820 they were securely in place in the English-speaking world. It was not until much later that all four had spread over much of the rest of the globe. Global GDP since then has consistently been around 2%. And that 2% of growth has allowed most of the world to live in a much better place than our ancestors. While the historical aspect of Bernstein’s story will appeal to certain history buffs. His book is also full of implications for today’s society. Bernstein asserts that the absence of even one factor endangers economic progress and human welfare. He uses the beleaguered Middle East as one example – where the absence of capital markets and scientific rationalism have deterred the quality of life from improving. And Africa is sited as a dire example, where tragically in most of Africa all four factors are essentially absent

The book is written in a very nice and simple way trying to connect the dots. The examples picked from history are quite informative and tell you quite a few things.

Now one is not disagreeing that these four factors are not important. But to say these four sum up whatever it is to economic development, takes the story too far. All these books for instance have no answer to Chinese growth in the last 30 years It neither had property right nor very great capital markets. Likewise many Asian countries which have developed have not really followed these recipes for growth.

Overall, the book is a decent read given the various stories and ideas the book gives. Mixing technology with economics is quite interesting. It clearly has lessons on how to write an ambitious book like this.

Political economy behind resurgence of development financial institutions across the world..

March 20, 2015

Jaimini Bhagwati has a piece on this interesting development in world political economy. This time the instrument is DFIs (development financial institutions), a concept which was dying a slow death.

China has taken a lead in setting some Asia based DFIs which is crating ruffles in world polity:

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Do Place-Based Policies Matter?

March 9, 2015

David Neumark and Helen Simpson reflect on place based policies. These policies favor a region/location for development.

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How Brazil is using music therapy to alleviate poverty?

February 19, 2015

World Bank points to this:

It seems unlikely, but promoting the arts can actually help lift young people out of poverty. Some of Brazil’s poorest communities are using a rural development fund to provide cultural activities for their youth. Young people say playing music keeps them from the streets, teaches them new skills and gives them an opportunity to make friends. Take On what you want to change to end extreme poverty.
Check the short video on the webpage..

 

Do the Scandinavians really have it all figured out?

February 12, 2015

Interesting article on the Scandinavian way of life.

It is written by this American author Nathan Heller who compares these two styles:

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Unintended consequences of malaria bed nets — used as fishing nets

February 11, 2015

Gulzar points to this interesting article on unintended consequences, something which econs love to ignore.

So what is the story here?

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The productivity of trust between state and private firms

December 26, 2014

Ricardo Hausmann has a nice article on the topic. There is always this uneasy relationship between big businesses and government.

Both believe that they are distant from each other which is just that – a belief:

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Why rapid growth is a strong predictor of future slowdowns?

December 11, 2014

An interesting piece by Larry Summers and Lant Pritchett (detailed paper here).

They say low growth after high growth is just a mean reversion. There is no reason why high growth shall continue forever. This is a harsh reality countries have to face and accept:

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Economic development and the effectiveness of foreign aid: A historical perspective

November 28, 2014

Sebastian Edwards of UCLA updates the evidence on one of the controversial topics on development  — Does foreign aid work?

He says there are three schools of thought:

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Living in two Colombias (just like two Indias, two US..)

November 27, 2014

How most countries have become divided into two halves — one the prospering and the other decaying (in some cases ever decaying).

Andres Velasco writes of two such Colombias:

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