No miracles in India – but improvements

June 7th, 2017

India’s GDP grew by 6.1 percent in the first quarter of 2017 compared to the first quarter last year. This was below expectations and the average annual GDP growth from the second quarter of 2016 until the first quarter in 2017 (7.1 percent).

Both private consumption and investment contributed to the slight downsizing of the Indian economy. Many analysts see the enormous reduction of the money supply last fall being responsible for this development (objective: combating corruption)

This may have been partly the case. But in my view the Indian economy is not as strong as it currently is described by many economists. Still India’s institutional shortcomings are too much of a growth burden.

However, there have happened institutional improvemens in India in the past two decades or so. Thus,  potential growth in India has grown. But it would be the wrong analytical way to continue to compare the ongoing Indian GDP changes with the Chinese ones (which often is done). These countries are in many – or even most – respects completely different.

Pure GDP-growth numbers do not teĺl us too much about the medium-term outlook for the Indian economy either.

Therefore, I also look very much at the annual publication of the World Bank called “Doing Business”. Here we can read quite a bit about institutional changes in different countries – institutional changes that to a high extent determine economic long-term conditions in both China and India (and other countries).

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Will Brazil ever learn?

May 29th, 2017

In 2016, Brazil has been affected by serious worries again. Last year, then president Dilma Rousseff was kicked out of office. GDP shrank by 3.6 percent, after a decline by 3.8 percent in 2015 – indeed a sharp recession. The annual budget deficit amounted to 9 percent of GDP. The need of major structural improvements became therefore very urgent.

For this reason, Rousseff’s conservative successor Michel Temer launched an economic reform programme but is now obviously confronted with major obstacles – obstacles that are directly tied to the president himself, the social consequences of the implemented and planned fiscal austerity measures (spending limit in real terms in the forthcoming two decades), and – above all – his suspected involvement in a dramatic corruption scandal. Bribery allegations are always serious.

Also the “timing” of Brazil’s new crisis is not encouraging since Brazil these days most probably was/is about to leave its long-lasting recession. In the past few weeks, a slight improvement of confidence in the future could be noted again. In vain?

To give an answer to this question urges for more political clarification and details we still do not know anything about. Here we get to another example of the intensifying link between politics and macroeconomic developments. Thus, it is crucial that economists/financial analysts are willing to improve their understanding of political events and trends substantially.

Exactly one year ago – before the impeachment against then president Dilma Rousseff – I wrote the following lines on this page:”… Brazil remains unable to achieve sustained good economic growth…It is really an up-and-down economy…This distorting phenomenon will not be wiped out before Brazil really can manage far-reaching and continuous reforms regarding a broad and good human capital formation, better institutions and a fairer distribution of income – accompanied by more effective and future-oriented political leaders all over the country…”.

Also now – before a possible impeachment against Rousseff’s successor, the unpopular Michel Temer – these lines are applicable. This will be the case as long as Brazil’s political leaders neglect the obvious correlation between well-working institutions and sustained economic growth. They should try to understand and apply the conclusions of Douglass North, Daron Acemoglu, and other institutional economists. According to North, institutional research also includes tradition and habits, both good ones and bad ones. Corruption can hereby serve as very important example for bad institutional conditions.

Unfortunately, the applied question remains in place: Will Brazil ever learn?

 

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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China’s downgrading – motivated or not?

May 24th, 2017

Moody’s has finally downgraded its rating for the People’s Republic of China from Aa3 to A1. For certain people this may have been a surprise, for others not. Anyway, the Chinese certainly do not like this step after all their strong efforts to receive international recognition in the past few years in financial areas as well.

Moody’s motivates the downgrading by mainly pointing at China’s increasing debt problem (private and governmental) and the worsening outlook for China’s GDP growth. This may be two justified assumptions but they are not necessarily interlinked. The central and particularly the local government-debt problems are well known. On this page and in many more extended pieces I have been singling out myself the lagging transparency of the Chinese debt structure and volumes. Now China has to pay a relatively high price for these long-lasting shortcomings, leading to (somewhat) higher funding costs and declining credibility on financial markets.

As regards the other motivation of the downgrading, I do not quite share the view of Moody’s that economic reforms really are moving too slowly. This may be the case – but can we be sure? The Chinese reject such an argument. They may be right. But if Moody’s has committed an error, such an incorrect interpretation may also be based on insufficient transparency by the Chinese. Obviously, Moody’s has already concluded that economic reforms are not strong enough – at least so far.

Again: Moody’s may be right – or not. We still do not know. Because one conclusion can be made for sure: China’s growth has indeed to come down if successful economic reforms shall be implemented to a satisfactory extent. Maybe we can learn more about this during the important National Congress of the Communist Party this fall where a number of new, very important leaders of the Standing Committee of the Politburo will be selected (but not the Chairman and the Prime Minister).

Improving transparency and the quality of statistics would be good answers to the shrinking credibility of China on global financial markets – and, of course, even more important – that decisive economic reforms really take place.

Today, it’s hard to say whether Moody’s downgrading was premature or not. However, it may serve as a warning signal for the political leadership in China. An accelerated and more efficient economic reform process is still possible! And if analysts in Western countries really have not underestimated progress in Chinese economic reforms, better transparency for Westerners certainly would be an appropriate answer.

 

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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