The naivity of financial markets about U.S.- China trade negotiations

6 May, 2019

Only a few days ago, I read all the positive comments on the ongoing progress of trade negotiations between the U.S. and China. A trade deal any time soon was almost anticipated by financial markets.

However, new signals and threats are now coming in about the trade war between the U.S. and China which may be even escalating in the near future – developments that I have pointed at several times before in this blog (e.g. on chinaresearch.se from March 18 on the last page).

A big problem is that many analysts neither understand the psychology of the American president sufficiently since he regards China really as a major and unfair competitor nor do they understand the psychology and culture of China very well.

This means indeed poor conditions for interpreting the negotiations between the world’s two largest economies. One should be careful. Trade talks continue to be complicated.

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

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India election 2019 – the economy and Modi versus Gandhi

17 April, 2019

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Indien – maktkamp mellan Modi och Gandhi i det pågående valet

Svensk sammanfattning

Det stora och komplicerade parlamentsvalet i Indien pågår för närvarande för fullt. Sittande premiärministern Narendra Modi rankas alltjämt som favorit. Gandhi-dynastin är dock på väg tillbaka. Många eller rentav flertalet västerländska finansmarknadsaktörer verkar tydligt starkare sympatisera med Modi än med Gandhi. Vissa ekonomiska framgångar har Modi också uppnått. Dessa är dock inte riktigt i linje med alla västerländska applåder. Behovet av omfattande strukturförändringar kvarstår som mycket stort.

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The big election event

India is currently heavily occupied with its ongoing election for the federal government, the Lok Sabha (“House of the People”). 900 million people have the right to vote but as much as 300 million of them are illiterate. The result of this major event is expected for May 23. “Major event” seems even underestimating the magnitude of the Indian election with its 11 million public election workers and more than 1 million polling stations in 29 federal states and 7 territories – in all respects also an enormous logistic challenge. Election costs are estimated at incredible USD 10 billion.

In PPP terms, total Indian GDP is already the third largest economy in the world after China and the U.S. (but, of course, not when measuring as GDP per capita). India has indeed developed into a global player in the past 10-15 years or so. On the other hand, comparing India’s total GDP to China’s also shows that India – with almost the same population as China but a younger one – not even reaches half of China’s GDP. Regarding this fact, India’s current GDP growth of around 7 percent is not particularly high as India’s former central bank governor and outstanding economist – Raghuram Rajan – has been pointing at more lately.

More about the political background

Certain economic and political background information was already given in my blog from February 26 this year, including the probable need of a broader majority in parliament – both with re-elected Prime Minister Narendra Modi (BJP) or with Rahul Gandhi from the oppositional Congress Party as the new Prime Minister.

There is no doubt: The Gandhi Dynasty is moving forward again. More recently, this is true of Rahul, the son of assassinated former PM Rajiv Gandhi and grandson of assassinated former PM Indira Gandhi. But Rahul Gandhi’s charismatic and empathic sister Priyanka Gandhi right now is gaining new sympathy points even faster than her brother. Many observers see her as a future prime minister. This time, however, a potential Rahul Gandhi-led coalition must find extremely strong support from Modi opponents. On the other side, the BJP suffers from sensitive losses in two important federal state elections at the end of last year. Generally spoken, Modi’s overwhelming victory from 2014 will not be repeated this time even if he remains in office.

When it comes to foreign policy, Modi achieved obviously some improvement of India’s relations to the U.S. and to China. However, tensions with Pakistan escalated more recently again, including some exaggerated noise from India.

Remaining homework

Going back in history 20 years or so, there is no doubt that India has achieved remarkable economic progress. When I came to India for the first time in the early 1990s, India was in many respects a different country. Progress is visible at least in the urban areas. Modi managed, for example, the implementation of a unified VAT system (after attempts during many years before him), revised bankruptcy laws, achieved re-capitalization of banks, FDI reforms and improved water (toilet) quality. However, the puzzling money reform was not really successful and damaged many small companies.

Altogether, reform needs are still enormous, partly because of India’s mostly very slow legislative procedures through all the federal states. Provided the assumption that no very negative exogenous or domestic shock occurs any time soon, reform velocity between a Modi or a Gandhi government will not make any dramatic difference. This means continued moves forward but in most cases cautiously and relatively slowly. In other words: the remaining homework is substantial.

Finally, some examples of areas that need real improvements (the sooner the better):

¤  institutions (corruption, etc)

¤  infrastructure,

¤  education on a broad scale,

¤  youth unemployment (also for academics) and other job creation,

¤  agriculture (employs still around half of the working population),

¤  conditions for small businesses,

¤  energy,

¤ national health,

¤  tax system and government finance/debt,

¤  efficiency of the political system.

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

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Russia – visible disparities in regional growth

3 April, 2019

Many countries in the world are characterized by regional production and growth disparities, both when it comes to advanced and to emerging market countries. Sometimes regional growth statistics may be characterized by good quality, sometimes the quality of officially calculated growth numbers seems to be less illuminating. Regional disparities can also mean different conditions for (foreign) corporate investors what concerns demand and size of the market (for sales), wage levels (for production costs) and educational quality (for access to human resources, better innovation and research and, thus, corporate development).

Regional developments in China and Russia

In China, for example, the addition of all provincial growth results mostly shows higher accumulated economic growth rates than the corresponding weighted numbers for China as a whole. The reason for this discrepancy is frequently explained by better possibilities for the professional promotion of provincial political leaders when good economic results can be shown for the own geographical area of responsibility. Obviously, the central political leadership tries now to change this approach (somewhat), for example by considering environmental improvements as well. However, more exact results in this specific approach still seem to be unknown – at least to me.

Recently, I found very interesting results for the economic performance of Russian regions, published by BOFIT (The Bank of Finland Institute for Countries in Transition) https://www.bofit.fi/en/monitoring/weekly/2019/vw201913_1/ and originated at the Russian Federal State Statistics Service (Rosstat). The graph published in the link above shows clearly the outstanding positive role of Moscow, the Moscow and the Central region, also compared to St. Petersburg and to the North-West region and even more clearly compared to the Volga and Ural regions. Despite visible improvements in manufacturing production and investments, retail sales still remain sluggish almost over the whole country after the sharp drop in 2015 – with the Moscow region giving a brighter picture also here.

One can also single out by these statistics that the above-mentioned regions counted in 2018 for 81 percent of all Russian manufacturing production and for 70 percent of all fixed investments and retail sales – which certainly can give some guidance for (foreign) corporate planning.

It could be added that BOFIT publishes a lot of interesting news and research, particularly on China and Russia. I never omit their BOFIT Weekly and their other publications. https://www.bofit.fi/en/monitoring/weekly/

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

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