And The Brick Finally Drops

5 Lessons From the Rise of the BRICs

STATE CAPITALISM WORKS

Only one of the four BRIC economies could be considered free: India. The other three are deeply capitalist, sure -- finding success on international markets has been a big part of their rise -- but their version of capitalism includes the strong guidance of the government. State capitalism means state-owned firms like the massive China National Petroleum Corporation or Gazprom, but it also means heavy regulation, frequent intervention, and sometimes a degree of state control over markets and firms that doesn't look so capitalist. But this a statist means to a capitalist ends, designed to maximize long-term growth and encourage development. It doesn't always work out that way, but their success is hard to ignore, especially as the great free market stalwarts -- the U.S., Europe, Japan -- fall on increasingly hard times.  

The state capitalist model will be an attractive one for other developing economies. Rising neighbors in Asia, Africa, and Latin America may seek to engage with the global markets but, rather than opening everything overnight and letting Westerners conquer their entire economies, protect and grow domestic firms that can compete internationally and will funnel money back into development. But the West can learn as well. As free markets -- especially financial markets -- fail and fluctuate, free marketeers in Washington and London and elsewhere may want to ask if a bit more state intervention and regulation is worth considering.

"India's income inequality has doubled in 20 years"

India's income inequality has doubled in 20 years

NEW DELHI: Inequality in earnings has doubled in India over the last two decades, making it the worst performer on this count of all emerging economies. The top 10% of wage earners now make 12 times more than the bottom 10%, up from a ratio of six in the 1990s.  

Moreover, wages are not smoothly spread out even through the middle of the distribution. The top 10% of earners make almost five times more than the median 10%, but this median 10% makes just 0.4 times more than the bottom 10%.  

... 

Wage inequality has driven more general income inequality in the country. India has got more unequal over the last two decades-India's Gini coefficient, the official measure of income inequality, has gone from 0.32 to 0.38, with 0 being the ideal score. In the early 1990s, income inequality in India was close to that of developed countries; however, its performance on inequality has diverged greatly since then, bringing it closer to China on inequality than the developed world.

There is evidence of growing concentration of wealth among the elite. The consumption of the top 20% of households grew at almost 3% per year in the 2000s as compared to 2% in the 1990s, while the growth in consumption of the bottom 20% of households remained unchanged at 1% per year.  

In comparison, the income of the bottom 20% of households in China grew at double the rate in the 2000s as compared to the 1990s, while the increase for the top 20% of households was much slower. In Brazil, household incomes have been growing faster among the poorest households than among the richest for the last two decades.  

Creating Vast Net Wealth

Link.

India continues its rise as an economic superpower, creating vast net wealth along the way. After analyzing data from a wide range of government and banking sources, alongside conducting detailed explorations of proprietary research and media reports, Wealth-X estimated the presence of at least 8,200 individuals or families in India worth more than US$30 million. The collective net worth of India’s ultra high net worth category is at least US$945 billion when accounting for shares in public and private companies, residential and investment properties, art collections, planes, cash and other invertible assets.

Farming: The Unasked Questions

Harsh Mander writing about a friend who took up a life of farming late in life:

In their new life in the village, Naren and Uma learnt about the plight of farmers in the most authentic way possible: by becoming farmers themselves. The questions for which they sought answers were: why are farmers continuing to commit suicide, even while our country is poised to record growth of nearly 10 per cent annually? And is it a historical inevitability that as we ‘ develop', our farming population will have to be reduced from 60 per cent to 15 to 2 per cent, as it has happened in ‘developed' countries? If so, where will they go, what will they do? What is the future of 600 million people engaged in farming?

Indeed. Where will the 600 million people go and what will they do?

Growth Of 'Agricultural' Credit

Has been good from 2000 onwards. Only, it is not agricultural in the sense that one would recognise.

FDI In Retail: Who Will Do The Back-end?

Not Carrefour definitely. All they want is the front-end part.

The company, that is keen to enter India in front-end retailing, has pointed out that the clause seeking investments into agriculture infrastructure, if made into law, would limit foreign investments.

Government sources told Business Line that the world's second largest retailer was willing to comply with regulation on local hiring and sourcing out of the country. It had, however, raised its reservations on the proposal asking foreign investors to invest in agriculture infrastructure.

It may be recalled that the DIPP had sought stakeholders' views on foreign direct investments in multi-brand retail trading.

In the paper it had detailed mandatory investments in “improving post-harvest management, cold storage and improving crop processing, among others.”

Though Carrefour's Executive Director Growth Markets, Mr Thierry Garnier, had met Indian Government officials recently and welcomed the DIPP's discussion paper on opening the sector, the company does not seem keen on the mandatory clauses.

Investment in the back-end is one of the big reasons given by supporters of FDI in multi-brand retail. Carrefour, one of the big retailers who is interested, says it is reluctant.

Inclusive Growth, Lip Service Only

A commission setup to 'review the status of the unorganised/informal sector in India' submits its report.  The report paints a bleak picture of the current situation - "77% of the population in 2004-05 had to make do, on an average, with no more than Rs 20 perday per capita" -  and makes some recommendations.  And the commission winds up after submitting the report.  In April 2009.  End of story.  

Inclusive growth indeed.  Link to EPW article on it: India's Social Question in a State of Denial (PDF).  The actual report is here (PDF).

FDI - Takes Away More Than It Gives?

Businessline looks deeper into FDI and comes up with some interesting conclusions. 

Cloning Mr Reddy. a.k.a. The West Knows Best!

From The Business Line:

For adhering to the general view more staunchly than was expected by a mere governor of a central bank, the Reserve Bank of India and its then Governor, Dr Y. V. Reddy, drew enormous flak. Such was the bad blood that was created — largely by hired guns — that even his deputy governor, Dr Rakesh Mohan, was not spared. In the end, the campaign came in the way of his becoming Governor.
He was, it is reliably learnt, seen as being a “Reddy clone”. Ironically, today, every central banker in the world is dying to be labelled a “Reddy clone.”

And these are relevant questions too:

Why is it that if India has an approach to something, Indian economists wait for it to be validated by the West before they accept it? Indeed, why do they attack the Indians who advocate that view before such validation is bestowed by the West? I genuinely believe that the Finance Ministry, which funded the Mistry report, and the Planning Commission, which funded the Raghuram Rajan report, have some serious explaining to do. As indeed do the economists who toed their line and kept up LeT like attacks on the RBI.

Could it be because we have our own share of maroons, blowhards, people with hidden agendas, and people talking their books? Or is it just that we believe the west knows best?

Gloom & Doom

Aplenty (registration required):

The US has already entered into a recession and this recession will be much uglier than the mild recessions of 1990-91 and 2001 as a shopped out, saving less and debt burdened consumer is on the ropes and faltering.

The world will not decouple from the US hard landing; there will be significant recoupling and a sharp global economic slowdown. When the US sneezes the rest of the world catches the cold; and today the US will not experience just a simple common cold but rather a protracted and severe case of pneumonia; thus, the real and financial contagion to other economies will be severe.

Whatever the Fed does now is too little too late; the Fed had a wrong diagnosis of the economy and was behind the curve for over a year. The Fed claimed that the housing slump would bottom out a year ago; instead we have the worst housing recession in US history still getting much worse now. The Fed claimed that the subprime would be a niche and contained problem; instead we have had massive contagion to the entire financial system as a credit bubble and excessive debt and leverage occurred throughout the economy and the financial system. The Fed claimed that the housing problems would not spread to the rest of the economy; instead we had had real and financial spillovers and now a fall of most components of aggregate demand: housing, capex spending, commerical real estate investment and now, ominously, private consumption that represents 70% of demand.

The US stock market is now entering in a seriously bearish territory and will fall much more sharply throughout the year as earnings sharply drop in the recession; the Bernanke put and the aggressive Fed easing will not rescue the stock market or the financial markets as a severe recession is unavoidable regardless of what the Fed does. Fed easing cannot resolve severe insolvency problems among consumers, mortgage lenders, home builders, highly leveraged financial institutions and, soon, enough among over indebted corporate firms.

Equity markets around the world are now plunging and will plunge much more as investors are realizing that a severe US recession will lead to a sharp global economic slowdown and a significant fall in profits across the world. In an integrated global economy both economic growth rates and markets are highly correlated.

Many risky assets will face downward pressure in 2008, not just US and global equities: junk bond yield spreads will widen as bankruptcies spread; corporations will default in great number; housing bubbles will pop in many countries and lead to falls in home prices; securitized products - in housing, real estate and otherwise, will experience further massive losses.

Losses in the financial system will be greater than $1 trillion; thus there is a serious risk of a systemic banking and financial crisis. The credit crunch will become much more severe as capital of financial institutions is eroded and reintermediation of financial flows into the banking system occurs.

Udayan Mukherjee a few days ago:

These may be tough days but it may well turn out to be the best buying opportunity of 2008. Do not panic, accumulate slowly, there is still a long bull market ahead of us. Maybe not in the US but in India for sure.

The Chicks

Have come home to roost (via Atrios):

I don't think it's an exaggeration. It's an understatement. You've heard me say here I think we are facing the worst financial crunch and crisis since the Great Depression. You have the entire banking system now that is virtually frozen and there are not just the sub-prime mortgage thing. There are other things called credit default swaps where they're going to lose as much money, 250 billion dollars on. The banks are frozen. They're not making loans because they have such huge debts that they have to take onto their balance sheets and nobody knows how to deal with that because you had a dramatic...you had two bubbles that have burst at the same time. The housing bubble which has collapsed in this country. The first time since the Great Depression that housing values have gone down for a year since the depression and it's going to go down even more next year. The credit crunch, you've just exploded the whole credit system in this country. We were way over leveraged. The banking system was over-leveraged. People didn't even know about it. The bankers didn't know about it. They didn't access the risk. Now that risk is piling in and every body's going to pay the price. Uh it's going to stimulate nothing other, I mean it's going to destimulate the economy. Nobody has money to lend. They're saving all their money to pay off their debts. They're borrowing money or looking at uh the rest of the world to enhance their capital and it's still not going to solve their problems.

This too!

Update: And it's all related:

Citigroup and Morgan Stanley, hit by mortgage-related losses in the US, were aggressive sellers during the day.

I bet these sellers are not selling at a loss. A note to the India Rising folks: the foreign money pours in, and pours out, India Rising or not.