China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

When will an Asian Win the Nobel Prize in Economics?

October 1, 2014

So far, we have not seen many winners of the Nobel Prize in Economics – or more exactly “The Riksbank’s Prize in Economic Sciences in Memory of Alfred Nobel” – who had their roots in emerging countries. Arthur Lewis (1979) from St.Lucia and Amartya Sen from India (1998) were two positive exceptions. But what about the chances that an Asian economist may win the Nobel Prize this year again?

There are altogether 200-300 serious candidates for the Nobel Prize in Economics. Usually, the award goes to American economists – but not necessarily. Among candidates with Asian roots – Israel and Japan excluded in this context – I see clearly Avinash Dixit as the strongest candidate for 2014(born in Mumbai, India) , nowadays working as a professor at Princeton University, dealing with microeconomics, industrial organization, public economics, international trade plus growth and development theories. Dixit is also included in my own list of the “Top 10 Favorites” that will be published on October 3.

Dixit’s main challengers from Asia should be free trade supporter Jagdish Bhagwati (New York University) from India and Partha Dasgupta (University of Cambridge) from Bangladesh. Dasgupta has done important research on the environment which is so badly needed for emerging countries – but also on poverty, nutrition and knowledge. One should not either forget the very important field research of Abhijit Banerjee (MIT) with focus on development economics, many times taking research results from his home country India. The main outsider with roots in Asia could be Hashem Pesaran (with roots in Iran, econometrics and empirical macroeconomics). Sendhil Mullainathan – born in Tami Nadu/India – can develop to a serious Nobel Prize candidate but is currently still by far too young (research areas: behavioral finance, development economics).

Another well-known and important economist from the emerging-country world is, of course, Hernando de Soto from Peru (corruption, informal economy, institutions). (Almost) the whole continent of South America is still waiting that the Nobel Prize Committee will give him the highest award for economic research. However, it may be the case that de Soto is judged as not being sufficiently anchored in the academic economic world of models and mathematics.

But if this year’s Nobel Prize in Economics is not going to one of the names mentioned above it remains possible that other representatives of “growth and development” will be awarded, probably from the U.S. This would be another way to put more emphasis on emerging markets.

On October 13, we will know more about it. Competition with other economists and research areas is tough.

 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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The Baltics After the Crisis – All Back to Normal?

September 3, 2014

The three Baltic countries have managed a spectacular roller-coaster in the economic growth lead tables of the European Union. Having ranked among the very top in the pre-2009 period, they suffered from the most severe contraction of economic activity anywhere in Europe. But then, just as many observers got ready to include the Baltics in the long list of unsustainable ‘growth spurts’ that failed to generate sustained prosperity improvements, they came back to again top the EU in terms of growth rates in 2012. What is going on, what can be expected to happen next, and what are the lessons to draw for other parts of Europe?

In assessing the current performance of the Baltic countries it is true that the extent of post-crisis growth was at least in part a reflection of the depth of the downturn that had occurred. The crises had been so deep and left enough capacity idle to make any upturn look strong. However, it is interesting to look more at the anatomy of the recovery. It did occur in the context of strict austerity policies and a still relatively flat level of domestic demand. A key driver was exports, which grew by around 30% in 2010 and 2011 and then slowed to in 2012 around 15% for Latvia and Lithuania and 4% for Estonia. But exports have over time also gained in terms of breadth of products and markets. This was not unexpected given the drastic improvement in relative unit labor costs in response to the ‘internal devaluation’ that the Baltic countries had implemented. But it was a process that seemed to have started already before. Most likely it had to-do with a broader re-evaluation of lower cost locations in Eastern Europe as China was getting more expensive and lost some dynamism.

For the immediate future, however, it is likely that growth will flatten. The 2013 growth rates were already lower; in Estonia they dropped dramatically. Trade has in 2013 fallen in Estonia and Latvia. The one-time opportunities of bouncing back after a crisis are by definition limited. The more structural changes in the attractiveness of the Baltics as an export platform might have the potential to support further growth. But the most attractive opportunities will have come first, and it is unclear how much more potential there is.

Domestic demand is in the meantime likely to recover somewhat as growth has returned and the economic outcome has stabilized. But is not going to support the kind of growth seen in the post-crisis recovery – unless a new overheating is being engineered. The repercussions of the crisis in the Ukraine and the erosion in relations to Russia have created further headwind: some of the recent export success had gone into Russia, the Ukraine, and the broader CIS region. And there could be a negative impact on the risk assessments that some investors make about the Baltics.

What lessons to draw depends on a deeper analysis of the run-up to the crisis and the policy decisions made in the Baltics thereafter? Here is my read: The Baltics weren’t perfect but they did the best given their abilities to implement the general guidelines that they received from Brussels. This was successful in improving the business environment and preparing the ground for investment and growth. But it failed to give the Baltics a clear strategy for competing in the market for export-oriented activities; most investments went into domestic-market serving sectors. And it did nothing to counter-act the danger of moving from catching-up to overheating on the back of private sector capital inflows; this was a blind-spot in the EU’s general policy framework.

During the crisis, the Baltics impressively – but also with severe social costs – dealt with the necessary re-adjustments of balance sheets and cost levels. There successful push towards Euro-Zone membership was the well-deserved price, and is a further asset in their efforts to attract foreign investment. But it also doesn’t amount to a clear strategy that would position the Baltic countries in terms of providing distinct value for specific activities and industries/clusters. Such strategic focus will be important to move beyond the competition based on lower cost, and mount an effective strategy for competitiveness upgrading and higher productivity in line with the capacity of local firms and government agencies.

 

 

 

 

 

Christian Ketels
Dr. Christian Ketels, Institute for Strategy and Competitiveness, Harvard Business School

 

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Promising INDIA: Growth for ALL

India’s tomorrow breathes a new hope for ALL: hope that dwells on the constitutional victory of democracy to introduce reforms and its set-up that makes every Indian proud of his/her constitutional rights and responsibilities, enjoyed since 1956. Rights like Universal suffrage that empowers every citizen, rich or poor, man or woman; working or non-working; deprived or privileged to participate and introduce the wave of change he/she desires. A wave clasped in the hands of the common man. India and Indians witnessed this power of a common man in the Delhi State Elections and the 16th Lok Sabha Elections (2014) much in spirit of the four pillars of democracy. The elections celebrated the people’s mandate (with the highest ever voter turnout of 66%) for the formation of a new government with a single party receiving a majority.

The new parliament has 314 debutante parliamentarians (with 58% of the total new strength), 61 women (18%), a very weak opposition of the previous government (with only 44 seats) and no leader of opposition. With little to complain, the government shoulders expectations to resurrect the economy to 9.3% GDP growth rate with Mahatma Gandhi’s vision of self-reliance backed by a strong secular sovereign federal union as envisioned by our forefathers and freedom fighters.

Growth in India needs a new commitment, cooperation and communication to the “Made in India” brand in the national and international markets whether it is about products, factors or the money markets. Market efficiencies of allocation, production and information can be created with better digital education, healthcare and economic infrastructure; monetized economy; competitive markets; transparent, accountable government regulators, regulations and respect for the law of land. Competitive product markets have already been revolutionized by India’s long standing commitment to WTO, full current account convertibility and partial capital account convertibility. Supply bottlenecks in infrastructure (road, railways, power, water and others), regulations and capital continue to spike asset prices and suboptimal quality. Taxes are attempted to be rationalized using Direct Tax Code (DTC) and Good and Services Tax (GST) reforms with e-governance facilities that are likely to add value to the industrial output.

On the other hand, factor markets demand land and labour reforms with greater financial intermediation that supports new banks (New RBI Bank License scheme has recently permitted IDFC and Bandhan Financial Services and the first woman’s bank-Bhartiya Mahila Bank) or new accounts (under Pradhanmantri Jan-Dhan Yojana launched on 68th Independence day – 15th August 2014) that provide incubators/ lending facilities for old/new entrepreneurial ventures at small, medium (i.e. MSMEs) or large scales with domestic and international players.

Financial intermediaries and markets in India have been resilient to the global financial crisis. All Indian banks meet the capital adequacy requirement as per BASEL III and are required to adopt other risk measures by March 2018. The Reserve Bank of India (RBI) to protect banks from tight liquidity position has followed a loose monetary stance by reducing the CRR (Cash Reserve Ratio) to 4% and the Statutory Liquidity Ratio (SLR) to 22%, further adjusting the repo rate to 8%, the reverse repo rate to 7% and the bank rate to 9%.The Credit to GDP ratio is 52.5% (2012-13),with scheduled commercial banks credit deposit ratio being 77.9% (2012-13). The Saving deposit rate is 4%; term deposit rates are 8-9.05%, and the lending base rate is 10-10.25% (RBI, 2012-13). An overexposure in sensitive sectors such as capital markets, derivative markets and real estate markets is protected by high risk weightages and strict regulations. Public confidence with universal banking, e-banking and mobile banking is linked to capital and goods markets that adds to e-commerce business lines. Capital markets are buoyant at their highest levels ever with BSE (Bombay Stock Exchange) crossing the 26,000 level mark and NSE (National Stock Exchange of India) crossing the 7,800 level mark.

India has been self- reliant in the past two decades and a contributor to the world economy in various respects. India has contributed US$ 10 billion to IMF and has recently been a founding member to the New Development Bank – BRICS bank (Agarwal, 2004) besides several grants that it continues to make to its neighbors and others from time to time. On an average in the past five years (2009 -2013), the country has observed a GDP-growth rate of 6.8%; GDS of 32.16%; GDI of 35.6%; gross fixed capital formation of 31.42% with private and public sector contribution of 25.2% and 8.6%; inflation rate of 7.12%; forex reserves of US$ 294.86 bn with an average import cover of 12.5 months (2000-10); merchandise export and import growth of 12.2 % and 9.4%; foreign direct and portfolio investment of US$ 192.83bn and US$ 18.53bn; external debt of US$ 400bn (in 2013) (Economic Survey, 2013-14).

The recent ADB estimates provide that India is likely to achieve a GDP growth rate of 5.5% , 6% (2014, 2015) where developing Asia is likely to grow at 6.2% , 6.4% (2014, 2015). Inflation is estimated at 6%, 5.8% (2014, 2015); foreign exchange reserves at US$ 304 bn (2013-14) that are likely to keep the rupee stable and is currently hovering at INR/1USD of 60.4270; current account deficit is expected at 2.8% (2014, 2015) with a growth in merchandise exports and imports of 8%, 10.5% (2014,2015), 7.8%, 8.2%(2014, 2015) respectively. Foreign direct and portfolio investment is expected to be US$ 307.63 bn (2014) and US$ 4.8bn (2014) (ADO, 2014).

Fiscal deficits are much in control and provide a comfortable buffer for balanced growth. The government has estimated that the fiscal deficit would be 4.5% of GDP (2013-14) with a revenue deficit of 3.2% and primary deficit of 1.2%. Union Budget 2014 estimates government expenditure at INR 36,555 bn of which 57.8% is aimed at developmental activities (railways, communications and non-departmental commercial undertakings) and 42.32% for non-development [5.57% (defense), 14.75% (interest payments), 0.84% (tax collection charges), 3.23% (police), 17.94% (others)]. Revenue collections (2013-14) are estimated at INR 25,373 bn with 80% revenue collections (income Tax, corporation Tax, customs, union excise duties, sales tax and others) and 19.90% non-revenue collection (internal resources of public sector undertakings). The gap would be financed 98.9% from the internal markets by way of market loans, small savings, state and public provident funds, borrowing from RBI and other miscellaneous capital receipts (Economic Survey, 2013-14)

Factor markets in India are labour intensive and need social reforms and investments in schemes that provide employment opportunity, education, training, healthcare and social security. The introduction of so-called AADHAR card, NAREGA, MANREGA or other employment guarantee schemes along with schemes that target women/ others health and education and other disadvantage groups along with the establishment of new IITs, IIMs and vocational study centers is likely to contribute to the development of the demographic dividend in India along with other developmental government expenditures. Primary education has been largely ignored by the government or has been restricted to the provisions of mid day meals that ensure attendance and not quality education.

The contributions of Indian Army’s wing NCC, social outfits like RSS and many other NGOs like SEVA that can educate, train, employ common people has been neglected. Though, the importance of Panchayat Raj systems and Village administration blocks has been reemphasized. Further, the present government has decided to scrap the Planning commission and set up a new institution that is more grounded to the realities of the economy and its problems. The recent railway budget and Union budget offered progressive steps by retaining social security expenditures of NREGA, MANREGA, Food security bill and subsidies. Passenger fares have been increased in an attempt to reduce subsidies and provide for better and secure services (Union Budget 2014, Rail Budget, 2014).

The government has reintroduced the Kisan Vikas Patra and many other bond schemes to fund its expenditures. This is likely to crowd out a lot of private investment, given 6.90 coupon Government Security maturing in 2019 yield is 8.90-8.097% where the average GSec yield has been 7.2% (2000-10). Call or Money Notice rate has risen from 5.8% (2009-10) to 8.1% (2012-13). In India the modal deposit rate for bank is 7.26%; modal lending base rate is 10.25% with variations in specific sectors {home (10.93%); vehicle (12.38%); agriculture(11.67%); SME (12.95%); education (13.12%)} (Trend and Progress Report, RBI, 2012-13). Variations of 2.72% and -0.5% are presently accepted for tightening and easing monetary stances. High inflation and interest rate often restrict consumerism and industry’s capacity to take loans.

Progress is envisaged that makes this country and its citizens more accountable, transparent and progressive. Much is on the way with the formation of the special investigation team (SIT) on black money and introduction of bills like the Lok pal Bill, Accountability Bill, Whistle blower Bill, Grievance Redressal Bill, Public Procurement Bill and Administrative Reforms Bill that would further empower the common man (Agarwal, 2004; Agarwal 2014). The Right to Information Act (RTI) and Judicial Bill has already put many government offices and their administrations under the scanner of the common man that is within his reach. Many ills would be taken care if the reforms are introduced and implemented well. Many macroeconomic aggregates would see positive corrections whether they are about the GDP forecasts, inflation, asset bubbles, money estimates, investment returns, food scarcities or others. Well, it’s hard to believe that such corrections are possible and I may appear as an optimist building sand castles. But the economic ability exists that such a miracle with its reforms can curb or limit the bad/ black money that throws out the good money, regulations and people from the market. Progress has already started showing the ray of light.

Progressive outlook, banking on the demographic dividend of the educated workforce and young workforce along with high reservoirs of natural and manmade resources make a compelling case for rich dividends for the Indian economy. Dividends that create value for everyone not only in terms of macroeconomic aggregates (measured of output, price and unemployment) but for a promise of life that honors itself with dignity and pride. Meaning that embraces growth and its deliverable for every citizen of this country whether included in the slogan of ‘Inclusive growth’ or in the slogan of “Growth for everyone with everyone’ colloquially put as –“sabka saath, sabka vikas” (that is for 1.228 bn Indian Citizens including 269.8 million people (21.9%) people below the poverty line).

Not just in words but in actions and spirit that lift up the India economically, socially, politically and internationally to a higher pedestal than what it stands today. A progress that protects the honor and dignity of women, provides food, shelter and security to children, senior citizens and the other underprivileged classes – an economic progress that castes away the evils of caste, religion and terrorism and makes every Indian proud of his /her contribution to the country. Jai Hind.

References

Agarwal, J.D. “Volatility of International Financial Markets, Regulation and Financial supervision.” Finance India March 2004: 15-36.

Agarwal, J.D. and Aman Agarwal. “International Money Laundering in the Banking Sector.” Finance India June 2004: 767–778.

Agarwal, Yamini. “Black Money: Its Genesis and Impact on Indian Economy.” National Institute of Financial Management,Public Finance & Policy Program (For Customs and Central Excise Officers). Faridabad, Haryana, 17th July 2014. ppt.1-31.

Bank, Asian Development. Asian Development Outlook 2014: Fiscal Policy for Inclusive Growth. Manila, Philipines: Asian Development Bank, 2014.

Finance, Ministry of. Economic Survey. Delhi: Ministry of Finance, Government of India, 2013-14.

Global Financial Stability Report. Semi-Annual, Washinton, D.C., USA: Monetary and Capital Markets Department on Market Developments and Issues, International Monetary Fund, April 2014.

Reserve Bank of India. Annual Report. Annual, Delhi, INDIA: Reserve Bank of India, 2012-13.

Reserve Bank of India Trend and Progress Report of Banking. Annual, Delhi, INDIA: Reserve Bank of India, 2012-13.

Union Budget 2014-15, Ministry of Finance, Government of India

 

 

 

 

 

Yamini Agarwal
Professor and Vice Chairman (Academics)
Indian Institute of Finance (IIF), Delhi

 

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