Ferraris for all

The following comment by me appeared in the latest Fund Strategy (15 December).

As the days go by explanations for the economic crisis pile up. Initially the favoured explanation was a combination of greedy bankers and irresponsible borrowers. Others added to the list since include insufficient state intervention and timeless financial euphoria.

This column has argued instead that other factors are key. It can be seen as a crisis of green capitalism and of risk aversion.

Green capitalism is key because it means that the growth in productive capacity is being slowed by subjective limits. There is a widespread fear of growth and innovation. As a result a disparity arose between the scale of production and that of consumption. In that sense it can be called a crisis of underproduction.

Risk aversion also plays a role. As the financial sector has swollen it has been shaped by risk aversion. Many key financial instruments that have played a large role in the crisis - including credit derivatives and securitised mortgage products - are essentially mechanisms for transferring risk. Yet, contrary to what their creators intended, they have created the basis for "contagion" as financial problems have spread.

On reflection there is also another important factor to consider. It could indicate the decline in importance of a one-off boost to the global economy.

With the end of the Cold War a huge new labour force became more closely integrated to the global economy. China and India boomed and the world economy enjoyed a strong growth spurt as a result.

Clearly China, India and other emerging economies will still continue to exist and, hopefully, to grow. But it is hard to see any equivalent additional boost to the global economy of the scale of the addition of these countries.

In the past two decades the world has enjoyed an unprecedented period of extensive growth. The scale of involvement in the global economy has grown hugely and many millions of people have benefited as a result.

This boom is entirely different in character to that which followed the end of the second world war. That was much more characterised by intensive investment in technology and machinery.

Experience provides little guide to the character of the economic crisis. Its roots in green capitalism, risk aversion and extensive growth make it unlike any other.

Labels: china, economics, environment, finance, Fund Strategy, india

India’s lunar programme should be welcomed. India is sending an unmanned space probe to the moon and in the course of it explore the possibility of bringing helium 3 – the ideal fuel for nuclear fusion – back to earth.

It was inevitable that many would sneer at such a mission when India is still mired in poverty. But it is wrong to counter-pose missions such as India’s space programme with economic development. On the contrary, the same bold ambitious attitude is required of both.

Randeep Ramesh, the Guardian’s south Asia correspondent, claims he is not against the mission in principle but sees it as precocious:

“India is a nation with a proliferating development needs – the global hunger index ranks it below Laos and Burkina Faso. Hundreds of millions of Indians still openly defecate in fields, at roadsides and beside train tracks. Common tropical diseases easily overwhelm the country's poorly-funded public health system. Its roads, railways and airports all need money and managerial overhauls.”

He misses the point that looking to the stars cultivates the right attitude to solve problems on earth too.

Labels: Asia, energy, india, inequality, science, technology

The backdrop to the 2008 Booker Prize Winner, White Tiger by Aravind Adiga, is evidently inequality and getting rich in India. I could be wrong but it sounds relevant to the growth sceptic discussion. The chairman of the award judges was Michael Portillo, a former Conservative politician in Britain, so it should not be surprising that the winning novel has a political theme.

Labels: book, india, inequality

Jeffrey Sachs writes in an article for Project Syndicate on the spread of mobile phones in the world’s poorer countries:

“market penetration in poor countries is rising sharply. India has around 300 million subscribers, with subscriptions rising by a stunning eight million or more per month. Brazil now has more than 130 million subscribers, and Indonesia has roughly 120 million. In Africa, which contains the world’s poorest countries, the market is soaring, with more than 280 million subscribers.

“Mobile phones are now ubiquitous in villages as well as cities. If an individual does not have a cell phone, they almost surely know someone who does. Probably a significant majority of Africans have at least emergency access to a cell phone, either their own, a neighbor’s, or one at a commercial kiosk.

“Even more remarkable is the continuing “convergence” of digital information: wireless systems increasingly link mobile phones with the Internet, personal computers, and information services of all kinds. The array of benefits is stunning. The rural poor in more and more of the world now have access to wireless banking and payments systems, such as Kenya’s famous M-PESA system, which allows money transfers through the phone. The information carried on the new networks spans public health, medical care, education, banking, commerce, and entertainment, in addition to communications among family and friends.”

Labels: Africa, development, india, Latin America, progress, technology

To many it will probably come as a surprise that China is not already the “workshop of the world”. But according to a piece in yesterday’s Financial Times (FT) it is likely that China will take over from America as the world’s largest manufacturer sometime next year. China will account for about 17% of manufacturing output value added ($6.1 trillion) compared with 16% for America. This will end over a 100 years of American dominance. The exact figure is not quoted in the report but India is expected to remain way behind in this respect, despite often being mentioned in the same breath as China.

Today’s FT included a follow-up comment which argued the main challenge from China’s rise is likely to be environmental.

Labels: America, china, economics, india

After writing my piece on the campaign against the use of Indian child labour by suppliers to Primark (see 24 June post) an interesting parrallel occurred to me. It seems to me there are similarities between the campaign to “save” Indian children with Hugh Fearnley-Whittingstall’s campaign for chicken welfare at Tesco. Both sets of campaigners see themselves as superior beings protecting lower creatures from the forces of greed.

Labels: consumption, ethics, food, india, television

Spiked has published an article by me on the recent documentaries on child labour in India. It argues that ethical consumerism is nauseatingly elitist.

Labels: consumption, ethics, india, spiked, television

Icfai Books in Hyderabad, India, has published Prosperity Index, a collection of articles including my January 2007 spiked essay arguing “There is no paradox of prosperity”. It is edited by Asha B Joshi, a faculty associate at the Icfai Business School Research Centre in Ahmedabad.

Labels: book, happiness, india, spiked

It seems that British documentary film-makers are becoming obsessed with cheap labour in India. After the awful Blood, Sweat and T-Shirts on BBC (see 18 April 2008 and 14 May 2008 posts) it seems that Panorama has a programme on the topic next week while Channel 4 is planning one entitled The Devil Wears Primark (see 1 June 2008 post).

In a pre-emptive strike against possible criticism from Panorama it seems that Primark, a bargain clothes retailing chain, has cut ties with Indian suppliers that used child labour.

There seems to be little understanding that simply cutting such ties is likely to make the plight of poor Indians worse. Child labour is a symptom of extreme poverty rather than its cause.

It is reminiscent of the spoilt western fashionistas in Blood, Sweat and T-Shirts hectoring Indian workers about how their working conditions are “disgusting”. Indians are well aware that they are poor - the difficult part is finding ways to make them rich.

The broader context for this discussion is the feigned concern for developing country workers from the likes of Joseph Stiglitz (see 6 May 2008 post).

Labels: consumption, ethics, film, india, inequality

The following comment by me appeared in yesterday’s issue Fund Strategy.


Only a few years ago the emerging markets were considered suitable only for the young and adventurous. The average investor would have at most a few per cent of emerging market stocks in his portfolio.

Times are changing fast. In recent months Fund Strategy has examined the rise of new funds specialising in such areas as Africa, India and the Middle East. Such fund launches reflect a fundamental change in the global economy. Although the developed economies are growing, the developing ones are typically growing much faster.

As a result, a growing proportion of the world economy consists of developing countries. Back in 2000 the advanced economies accounted for about two-thirds of global output on a purchasing power parity basis, according to the International Monetary Fund. By 2013 the advanced economies are projected to account for only about half of the global economy. The advanced economies remain far richer than the developing ones but, on this measure at least, the gap is narrowing.

This trend is to be wholly welcomed. In the past, the benefits of development - including a modern infrastructure and access to consumer goods - were confined to a largely white elite. Now they are becoming more evenly spread.

One of the most potent symbols of this change is the advent of the Tata Nano. The £1,000 people's car is designed to bring motoring to India's masses. Given that the Ford Model T, which made motoring a popular reality in America, was launched a century ago, the development is long overdue. Even in as poor a country as India, with 80% of the population living on less than $2 a day, cars should become more widely available as long as growth continues.

Of course, it may be that one of Tata's rivals ultimately builds a more successful car. However, the key point is not about an individual model of car but the fact that Indians can now realistically aspire to such things. India will also need to sustain a massive roadbuilding programme to ensure that its citizens can enjoy the full benefits of mobility.

If there is a problem, it is that developing economies still have a long way to go to catch up with the West. Sub-Saharan Africa and South Asia in particular remain desperately poor.

The sooner developing economies can be considered mainstream rather than exotic the better.

Labels: America, Asia, Fund Strategy, india, inequality

The current discussion of the Tata Nano, India’s “people’s car”, reminds me of the brilliant “sculptor” advert by Peugeot a few years ago for its 206. Whoever made the commercial, with a catchy backing track by Bhangra Knights, caught the popular aspiration for a better life in a clever and witty way. Only as an advert it was geared towards selling a particular product rather than making a more general point.

I was also struck to read recently that first production model of the Ford Model T, the car that popularised motoring in America, was assembled in October 1908. In other words India is about a century behind America in that respect. Henry Ford had many faults but he fulfilled his promise to “build a motor car for the multitude”.

Labels: America, consumption, development, india, progress

The following comment by me appeared in yesterday’s issue Fund Strategy.

If demography was key then Zimbabwe, with a median age of only 20.3 years, according to the Central Intelligence Agency, would be a haven of prosperity. Yet it is Africa's worst-performing economy by far. India, too, would have been more dynamic in the past yet it has gone through prolonged periods of sluggish growth.

Conversely, Britain's median age, at 39.9 years compared with 25.1 years for India, might be taken to suggest a relatively poor country. But Britain, although growing more slowly, is vastly more productive and wealthier than India.

The key to a nation's prosperity is its productivity. High levels of productive technology and good infrastructure allow countries to become rich and stay that way. They also tend to lead to older and healthier populations.

Those of working age can produce more, and even the elderly, should they so wish, are in a better position to work, too. The more technology is used, the less need there is for workers to have to draw on sheer physical strength and stamina to perform their tasks.

In contrast, India has a vast population, particularly in rural areas, that is chronically underemployed. Over 60% of the labour force - that is more than 300m people - works in agriculture despite it accounting for only 17.5% of GDP. In this sense it is more closely equivalent to being on the dole in Britain than an efficient form of production.

A key challenge facing India, therefore, is to develop much larger modern industrial and service sectors. Although there is much hype about India's leading-edge technology, particularly information technology, it only accounts for a tiny proportion of the labour market.

For India to continue its economic growth the proportion of employees in modern sectors will have to be increased enormously. A substantial improvement in infrastructure - airports, communications, roads and utilities - will greatly aid the process.

The continuation of India's rapid growth depends on broadening economic development rather than the age of its population.

Labels: Asia, china, Fund Strategy, india

I was planning to watch The Devil Wears Primark, yet another documentary on Indian sweatshops (see posts of 18 April 2008 and 14 May 2008), on Channel 4 this evening. However, despite being trailed last week, it seems to have mysteriously disappeared from the TV listings. Perhaps satanic forces associated with the cheap clothes retailer are at work?

Labels: consumption, film, india, inequality

It is becoming increasingly clear how mainstream concern for labour standards has become (see 6 May 2008 post). It used to be the case that radicals would typically support workers in their struggles against employers. Today self-appointed defenders of labour standards seek to protect employees against greedy companies. In the past it was about expressing solidarity for workers’ battles today it is primarily a case of using state institutions to defend employees as victims. The two notions could not be more different.

Two recent examples of how this works. The awful British fashion brats from BBC3’s Blood, Sweat and T-shirts (see 18 April 2008 post) appearing on Newsnight to talk about labour standards in the developing world. The group were at best gormless (wearing an £800 bracelet while working in an Indian cotton factory) and more often contemptuous of their Indian hosts. Yet they somehow have the moral authority to talk about Indian labour standards on a premier news programme.

A more perceptive piece by TA Frank, a former sweatshop inspector, appears in the April issue of Washington Monthly. Among other things it reminds readers that both Hillary Clinton and Barack Obama have criticised trade deals as unfair to American workers while arguing for future agreements to have higher labour standards. It also makes the point that Robert Reich started cracking down on American sweatshop when he was labor secretary in the Clinton administration.

It is hard to think of many things more nauseating than protectionism masquerading as support for workers. Nor, as some of the Indian workers featured in Blood, Sweat and T-shirts pointed out, is it as simply as banning child labour in the developing world. The alternative for many child workers and their families is often extreme hardship and even starvation. The solution is economic development in the poorer countries. Child labour is rare when countries become rich.

Labels: development, ethics, india, inequality, television

Ceri Dingle of Worldwrite has previewed a BBC documentary series on six fashion designers who visit India to work for firms producing clothes for the British high street. Evidently the young British brats cannot even sew straight and are contemptuous of Indians. The views of the Indian clothing workers are not even represented on screen. Blood, Sweat and T-Shirts starts at 9pm on Tuesday 22 April on BBC Three.

Labels: india, review, television, Worldwrite

An international opinion poll conducted in 20 countries by GfK Research on behalf of the Wall Street Journal Europe shows how gloomy contemporary opinion tends to be. According to the main article in Friday’s (7 December) Weekend Journal Europe:

“the most surprising detail of the survey statistics was the overall negative outlook. "It is striking how negative the attitude is in Europe, but even more so in the U.S.," where 62% said society was getting worse, says Mark Hofmans, a managing director in GfK's Brussels office, who analyzed the survey results…

“The survey didn't point to a single source of dissatisfaction among Europeans but showed a diverse set of worries. Terrorism ranked as the biggest fear for 17% of those surveyed, but issues such as war (15%) and global warming and environmental degradation (14%) were also major concerns.

“By comparison, in the U.S., moral decay was the single-largest worry, cited as the paramount problem by 20% of respondents. In Europe, only 11% of those surveyed said moral decay was their main source of anxiety.

“India, with its booming economy, was the most optimistic country included in the survey, with 51% of respondents saying global society was getting better. By contrast, only 20% of Europeans and 22% of Americans said society is improving. Turkey, where global warming was the single-largest worry for 27% of respondents, was among the most pessimistic countries included in the survey -- only 13% of those polled said global society is getting better, while 72% said it is deteriorating. (The most negative overall was Greece -- devastated by forest fires last summer -- where 74% said life is getting worse.)”

In other words the mood is overwhelmingly downbeat despite the fact that objective trends are generally improving. This is one of the key paradoxes I hope to examine in my forthcoming book.

Labels: America, environment, india, progress

Today’s Fund Strategy includes a comment by me on the revision of statistics on the size of Chinese and Indian economies.

Last week's biggest economic news got hardly any attention. Both China and India are about 40% smaller than they were. Also global economic growth was half a percentage point less than previous assumed. Never mind the Bank of England possibly reducing interest rates by a little bit at some point in the future. This was shocking.

Of course, the Chinese and Indian economies have not literally shrunk. What has happened is that more accurate statistics are becoming available which give a better idea of the size of their economies.

Nowadays growth statistics are often quoted on a purchasing power parity (PPP) basis. This means that the figures are adjusted to take into account different price levels in different countries. So a dollar in America can buy a lot less than its equivalent in China.

The truth is that until now the PPP statistics have largely been based on guesswork. So it turns out that the size of the Chinese and Indian economies has been substantially over-estimated. And since these are large components of global growth it means the world GDP figures are exaggerated too.

Such statistical revisions do not change reality but they do make some comparisons starker. For example, they show that both China and India are considerably poorer than previously assumed. Not only is the average income level lower but the number of people below the standard $1 a day threshold is much higher.

It is a sobering thought that, according to the new data, China's average GDP per head is only 10% of the American level. China may be growing rapidly but its living standards remain well below America's.

Another lesson from this revision is that it is generally better to compare the relative sizes of economies by using GDP at market exchange rates rather than PPP. This may seem a small technical detail but it can make a huge difference to the numbers.

Since countries trade and invest with each other at market rates, these provide the most meaningful comparisons of the relative weights of national economies. Judging on a market exchange rate basis the Chinese economy is still only fourth largest in the world rather than second.

PPP statistics have their uses. But they are more appropriate for comparing living standards between different countries than comparing their relative economic weights in the world.

Labels: Asia, china, economics, Fund Strategy, india

Today’s Fund Strategy includes a review by me of a book on India and China.

The rise of China and India has, apart from anything else, produced a booming economy of books designed to introduce the countries to western readers. Robyn Meredith's The Elephant and the Dragon is one of the best of the genre.

Meredith's perspective is that of an American journalist who has covered recent developments in India and China at first hand. From her base in Hong Kong, where she is a correspondent for Forbes magazine, she has written widely on both countries. Her mission in the book is to help her predominantly American readership better understand the two emerging Asian powers.

Her approach is in contrast to that of David Smith, the economics editor of the Sunday Times, who recently wrote a book on the same subject called The Dragon and the Elephant (see 9 July post). His work, while worth reading, is more historical and based largely on secondary sources. But Meredith has spent much time watching Chinese workers produce goods for western markets, navigating India's awful roads and talking to people in the region. Both books are well written, but Meredith's is more vivid.

She, like Smith, tends to alternate chapters on the two countries. So after a general introduction on "tectonic economics" she has a chapter on China's rise since the 1970s, followed by one on India's ascent. She then moves on to China's manufacturing and India's surge in IT services.

Perhaps most interesting is her chapter on what she calls "the disassembly line". This describes how the world economy has moved from one where production is focused on assembly lines to one where supply chains are key. Under the old system, of which Ford was the emblematic example, each company was responsible for a series of processes that ended up with a final product.

Under the new system, different parts of a product can be made by an enormous array of producers all over the world. Chinese firms play a key role in such supply chains as important links in this new set of processes. Often the final goods end up in the West, under western brand names, even though a good part of their value is created in China.

Although Meredith is generally sympathetic to the rise of India and China, she does discuss problems associated with their emergence as economic powers. First, she says that the rise of the two nations puts strains on the availability of natural resources. Second, she warns that the modernisation of their military forces could create tensions with America. Finally, she discusses the environmental problems posed by the rise of the two Asian giants.

In her conclusion, Meredith looks at what the rise of China and India means for America. She argues that the solution to the challenge they pose is neither an unadulterated free market nor protectionism. Instead, America needs to create more jobs and educate its population better.

Unfortunately, The Elephant and the Dragon takes the mainstream view of the two countries too much at face value. Perhaps this is inevitable in what is essentially a primer. But, like Smith, she accepts what I call the "revelation theory" of economic development.

This essentially argues that China and India lived in the intellectual dark ages until their leaders realised that capitalism was best. If only they had latched on to this perspective sooner they could, so the argument goes, have enjoyed spectacular growth rates much earlier.

What this argument misses is that there was little incentive for third-world countries to open their economies in the decades following the second world war. During the post-war boom the West was generally uninterested in investing in or trading with the developing world. Therefore there was not much incentive for third-world leaders to encourage western investment or trade. This was particularly true of demographic giants such as China and India as their strategy of relying on their large domestic markets seemed reasonable at the time.

This is not to be in favour of autarky in principle. On the contrary, it has many disadvantages. But even if China and India had opened themselves up earlier, it is doubtful whether the West would have been particularly interested in doing business with them. It was only with the end of the post-war boom in the West that an externally orientated development strategy became feasible.

The Elephant and the Dragon is also too much influenced by western, and particularly American, preconceptions. Rather than ask what the rise of China and India means for the world, the "all of us" in the subtitle seems to refer only to Americans. Meredith's primary concern is how American policy-makers should react, rather than what is best for humanity.

Such one-sidedness is particularly apparent in her discussion of the environment. She describes, correctly, how China and India are heavily polluted. But she fails to recognise that focusing on economic development, rather than the environment, can be the correct approach for developing countries. Since human welfare is closely linked to poverty, a focus on development can benefit a country's citizens even if it increases pollution.

Meredith also fails to draw out the fact that economic development provides the resources to tackle pollution. American cities are cleaner than those of Asia precisely because America is so rich. It has the economic resources and technology to clean up its environment. As time goes on it is likely that India and China will make a clean environment a greater priority.

Despite these weaknesses, The Elephant and the Dragon is well worth reading for anyone who wants to get a quick overview of the Asian giants. Given their importance to the world economy, they are countries of which people can no longer afford to be ignorant. The rise of India and China is one of the key trends in the contemporary world.

Labels: book, china, Fund Strategy, india, review

In the discussion on India mentioned below (see 28 October post) I argued that it did not follow from widening inequalities that the poor were necessarily getting poorer. On the contrary, what seems to be happening is a rise in absolute living standards for the bulk of the population at the same time as a widening of inequalities. However, it is also true that greater inequality can lead to tensions within a society. This seems to be the case in a march to Delhi of 25,000 landless workers, indigenous tribespeople and “untouchables” covered in an article in the Financial Times this week.

The relationship between widening inequalities and political consciousness is less straightforward than often assumed. It is a subject I want to discuss in my introduction to the discussion on the new global working class at the ICA later in the month (see 30 October post).

Labels: india, inequality

The main aim of this note is to spell out the correct statistics on India’s economic growth record. A participant in today’s session on India at 60 at the Battle of Ideas conference claimed incorrectly that India enjoyed strong growth in the decades immediately following the second world war. I said I would put the correct statistics on my site so here they are:

1950-1980 – average growth rate 3.75%.

1980-1990 – average growth rate 5.7%.

1990-2000 – average growth rate 6.0%.

2000-2005 – average growth rate 6.9%.

My source for this is a presentation by TN Srinavasan, a professor of economics at Yale, to an International Monetary Fund book forum on December 14, 2006. A PDF is available here (see page 8).

The pattern is confirmed in the recent country report on India from the Organisation for Economic Cooperation and Development. The graph of GDP growth per head here clearly shows that the economy was pretty sluggish from the 1950s to the 1970s.

As it happens there is a serious debate among economists about Indian’s economic growth but it is not about the facts of growth from the 1950s to 1970s. Instead it is about whether India’s growth took off in the 1980s or whether the reforms of the 1990s were truly responsible.

While I am writing I will quickly correct a couple of other misconceptions.

First, while it is true that India’s agricultural sector is important socially it is much less important economically. Although agriculture accounts for 60% of India’s work force it only accounts for 17.5% of its GDP (see the India entry in the CIA World factbook). Therefore even if the output of the agricultural sector grew rapidly it would only have a limited impact on GDP.

Second, it is necessary to be wary of the talk of India’s “middle class” or indeed that of other developing countries too. The problem is that the term is used extremely loosely. It is necessary to be more specific about how the term is being defined before drawing any sweeping conclusions about a rising middle class.

The point of course it not to be against the use of statistics. On the contrary, they are a valuable tool in understanding development. But they need to be used carefully rather than in a cavalier way.

Labels: development, economics, growth, india

spiked has published a letter by me on the desirability of encouraging Indian villagers to use foot pumps to provide themselves with water. It is in response to an exchange between Brendan O’Neill, who argued that carbon offsets were being used to encourage such primitive technology, and Michael Buick of Climate Care who advocated such technology.

Whether you side with Brendan O’Neill or Michael Buick on the use of foot-powered water pumps in Indian villages depends on what you consider appropriate. Those who believe that Indians should enjoy Western living standards and the best modern technology should side with Brendan. Those who favour a life mired in rural poverty should support Michael.

Michael’s claim that Indian farmers choose pedal pumps of their own free will is ridiculous. It is like asking a person who is starving to death whether they are prepared to eat bread infested with maggots. They would probably eat the bread but only because better options are not available to them.

The real question is whether it is right for Indians to aspire to develop a modern industrialised and urbanised economy. As long as 70% of the population remains in the countryside, typically eking out a meagre living from tiny plots of land, the vast majority of Indians will remain poor. The solution to the lack of development is to change the character of the Indian economy rather than selling foot pumps.

Of course if Michael wants to use a foot pump to provide water for his own home that should be his free choice.

Labels: development, india, spiked, technology, water

This week’s New Statesman (2 August), a British political weekly, includes several articles on India. The key piece on the Indian economy is a classic of growth scepticism. Randeep Ramesh, the Guardian’s South Asia correspondent, uses India’s massive inequality and poverty as a way of casting doubt on its rapid growth.

Using a common formula in writing on contemporary China and India the article proceeds as follows:

a)India is growing rapidly at present.

b)But the vast majority of the population is dirt poor.

Therefore the implication is:

c)Economic growth is not beneficial to the mass of the population and is quite possibly harmful.

Or to quote the article: “The puzzle is that India is economically confident, yet sunk in interminable poverty. This is because most Indians live in a vast rural, feudal darkness and only a lucky few are part of the shining new future.”

To be fair to Ramesh he does near the start say that: “There is little doubt that India is experiencing a rapid and sustained rise in living standards for the first time in centuries.” But this point is not explored in the rest of the article and often the thrust of the article seems to contradict it.

Labels: development, india, inequality

This week’s Fund Strategy included a review by me of David Smith’s new book on China and India.

A few years ago David Smith, the economics editor of the Sunday Times, was giving a talk on the world economy to a group of businessmen in London. After someone asked a question about China and India it emerged that the audience had a downbeat attitude towards the rise of the Asian giants. It was in response to this pessimism among business types, in the West overall rather than just Britain, that Smith wrote The Dragon and the Elephant.

Smith succeeds admirably in his aim of providing an overall assessment of the rise of China and India. He concedes at the start that he cannot match the local knowledge of those who have spent many years specialising in the two countries. Instead he brings to bear the relatively detached perspective of a seasoned Western journalist with a strong overall grasp of the world economy.

Smith's approach is essentially chronological. After a brief introduction he starts by examining how China and India fell from their historical position of being leading economic and technological powers. From 1820 to 1914 the European powers were dominant in the world while the rest of the twentieth century belonged to America. In the subsequent chapters he examines how China and India finally set themselves on the path to development. He ends with a chapter comparing China with India and a conclusion on 10 ways the rise of the two countries will change the world.

The Dragon and the Elephant avoids many of the common pitfalls in writing on China or India. For example, he shows both the growing importance of the Chinese economy in absolute terms and its relative poverty. Although China is one of the world's largest economies it is only 107th in the world in terms of income per head. The explanation is that China's GDP has to be divided between 1.3 billion people. But many commentators find it hard to reconcile the two facts,

Where there is a well-publicised debate relating to a country's development the book tends to give both sides of the argument. In relation to India, for instance, many commentators argue that the economic reforms of 1991 were a watershed in the country's development. But other influential voices point out that India's growth rate first accelerated in the 1980s rather than the 1990s.

Smith is also good at bringing out the contrasts between the two countries. China's growth record is much more impressive than India's. China's development is primarily industrial while India depends heavily on services. India's population is, on average, substantially younger than China's. Nevertheless the two countries are still both, at least in population terms, largely rural.

If there is a problem with Smith's book it is a corollary of his project of summarising the received wisdom on the two countries. It is usually the case that the mainstream ideas on any subject are flawed. That is true of perceptions of China and India.

An important example is the exaggerated importance attached to demographics. Many commentators claim that, over the long term, India has an advantage over China because of its younger population. But a key lesson of economic development should be that the more productive an economy becomes the less demographics matter.

Comparisons between those of normal working age and those outside working age reveal little about the character of an economy. As an economy becomes more advanced it becomes possible for fewer people to support a larger number at a higher standard of living than previously. Dependents could be people outside the working age or alternatively they could be individuals who are unemployed or in education. As technology becomes more advanced and health improves it also becomes easier for the elderly to work too.

The problem India has with a huge pool of unskilled, agricultural workers is economic rather than demographic. It needs to promote a form of development that can bring these workers into the industrial and service sectors. The challenge is one of underdevelopment rather than of too many people.

Smith also wrongly takes it as given that economic development necessarily brings environmental problems. He says: "The nightmare, for the global environment and demand on the world's energy resources, would be a rise in Chinese car ownership towards American levels". That would certainly amount to several hundred million more cars on the road but it is not clear that it should necessarily be a problem. A lesson of economic history should be that economic development allows humanity to harness resources more efficiently. A richer society should have the necessary means to build a transport infrastructure able to handle so many cars. Technological development should also mean they are cleaner and more efficient than the present generation of vehicles.

The Dragon and the Elephant can also be faulted for its adherence to what could be called the "revelation" theory of economic development. Smith implicitly accepts the view that rapid development came to China and India because their leaders finally accepted free market principles. Until then, so the argument goes, they were enmeshed in socialism in China or Fabian dogma in India.

But the development process in the two countries was never as simple as that. In the decades following the second world war there was relatively little foreign investment or trade available for developing countries so correspondingly little incentive to liberalise. In any case the state still plays an enormous role in China's economy today and an important one in India.

Nevertheless, as an introduction to the rising economies of China and India The Dragon and the Elephant works well. It should provide a good starting point to anyone who wants a lucid primer on the subject. However, working out the real significance of developments in China and India is beyond the scope of the text.

Labels: Asia, book, china, Fund Strategy, india, review

The Independent is scared of economic development.

Yesterday the newspaper ran a classic Malthusian scare story on its front cover about how food prices were rising while supplies were falling. It said one of the main factors behind this trend towards “agflation” (agricultural inflation) is the “growing affluence of millions of people in China and India is creating a surge in demand for food - the rising populations are not content with their parents' diet and demand more meat.” The other factor it identified was the increasing use of agricultural crops as a source for biofuels rather than food.

The Independent did a poor job of putting recent food prices rises into context. Although food prices have risen recently the long-term trend is for them to fall. To be fair the article did conceded that: “Sixty years ago an average British family spent more than one-third of its income on food. Today, that figure has dropped to one-tenth.”

On Friday it ran an article on what it saw as the threat of relatively cheap cars becoming available in India. Apart from congestion the inevitable threat of climate change was raised.

It is a tiny step from expressing such fears about development to outright hostility. If the Independent’s perspective is accepted then it makes sense to try to limit development.

The alternative is to welcome economic development as it brings better lives to literally billions of people. It also brings with it a better chance of tackling such problems as insufficiently high agricultural productivity and climate change. After all, the experience of the two centuries since Malthus shows that his pessimistic outlook grossly underestimates human ingenuity.

Labels: china, climate, consumption, development, environment, food, india, Malthus

A flurry of new papers on China and India:

A paper by David Dollar, the World Bank country director for China, looks at the combination of rising affluence and increasing inequality in China. He argues that some rise in inequality was inevitable with the introduction of a market-based system in China. However, other factors, such as curbs on rural-urban migration, have probably exacerbated the problem. Dollar argues that the government’s recent attempts to rebalance the economy towards domestic consumption should help reduce these disparities.

Meanwhile, a piece by Sanjay Reddy, an assistant professor of economics at Columbia University, in New Left Review argues that China has performed relatively poorly in raising life expectancy over the past three decades. Unfortunately the whole paper is only available on the internet in exchange for payment.

Finally, a paper on India from the World Bank looks at the unusual combination of rapid economic growth and rising government indebtedness. The authors suggest the main factor in rising debt as a result of a reduction

Labels: Asia, china, development, india, inequality

I have come across so much on happiness in the last few days that I will have to resort to relaying it in bullet point form:

* Happiness debate in the Financial Times. Martin Wolf, the chief economics commentator of the Financial Times, had a belated review of Richard Layard’s 2005 book on happiness published in Wednesday (“Why progressive taxation is not the route to happiness” 6 June). A particularly interesting point he made was that the attack on happiness can be seen as a challenge to modernity itself. Developments such as improvement in life expectancy, the liberation of women from household drudgery or easier divorce do not increase reported happiness.

Two book hitters in the happiness debate replied to Wolf with letters. Layard says that there are some aspects of modernity that should be ameliorated. He gives levels of trust as an example. Meanwhile, Andrew Oswald, professor of economics at the University of Warwick and well-known happiness advocate, makes the familiar point that reported happiness has not increased over time in the rich countries over the last few decades. He goes on to state: “That graph could usefully be pinned up in every minister’s and president’s office”. Why he thinks it should be such a decisive argument is not clear.

* Debating Andrew Oswald at Debating Matters. Talking of Oswald, I will be debating him at the national final of the Debating Matters competition in London on June 29. We will both be “expert witnesses” debating whether happiness should be a goal of national policy. Later on the same motion will be debated by the high school students who are taking part in the competition. In conjunction with the discussion the Debating Matters team has produced a useful topic guide for the debate. (Last year I debated John Hilary of War on Want on globalisation at the same event).

* Quoted in Financieele Dagblad. Yesterday I was also quoted on the happiness debate in a substantial feature in the leading Dutch financial daily newspaper by Esther van Rijswijk. I am hoping to get it translated.

* Paradox of Prosperity essay republished. My spiked essay on the “paradox of prosperity” is to be republished by the Institute of Chartered Financial Analysts of India. The organisation is publishing a book in its professional reference series which is provisionally entitled: Prosperity Index: Assessing Growth Anew. It is due out in November.

* Happiness expert website. Ruud Veenhoven, one of the world’s leading experts on happiness, has a website: here. Evidently he also argues that a “paradox of prosperity” does not exist.

* Parenting-happiness link. A parenting expert made the point to me yesterday that the debates on happiness and parenting are linked. The likes of Oliver James argue there is a clear link between women not looking after children and the outbreak of “affluenza” in society.

Labels: affluenza, growth, happiness, india, media appearances, modernity, speeches, spiked

Professor TN Srinivasan of Yale has written a sharp rebuttal to Robert Wade on the world economy (see 1 May post) in a letter to the Financial Times. Srinivasan challenges Wade’s contention that only China has enjoyed a sharp reduction in poverty. India too has experienced substantial poverty reduction:

“India's average annual rate of growth of per capita real gross domestic product was around 1.5 per cent in the period 1950-80. In the 1980s, the rate more than doubled to around 3.7 per cent, and then accelerated to 4.1 per cent during the 1990s. It has grown further to 5.3 per cent since then.

“Poverty, estimated as the proportion of the population having consumption below a modest national poverty line (rather than World Bank's poverty lines, which have very weak analytical underpinnings), fluctuated at around 50 per cent during 1950-1978. It declined to 39 per cent in 1987-88, 36 per cent in 1993-94, and to 27.5 per cent in 2004-05. Had the poverty ratio in India remained unchanged at 50 per cent after 1977-78, the number of poor in 2004-05 would have been 547m, more than twice what it was: namely, 238m.”

Labels: Asia, development, economics, growth, india, inequality

A bleak view of the world economy by Robert Wade, a professor of political economy at the London School of Economics, in today’s Financial Times. He does not seem to be able to decide whether economic growth is not happening for the mass of the world’s population or whether it is simply undesirable:

• China accounts for the entire fall in the number of extreme poor since the early 1980s.
• In the affluent West people are suffering from over-eating, family breakdown and addiction.
• In developing countries people are becoming disillusioned with economic openness.
• The rise of important new economic states, such as China, brings a risk of war.
• Global oversupply capacity also creates a risk of conflict.

No doubt there are problems and potential problems with the world economy but Wade underestimates the extent to which ordinary people are benefiting from global growth.

Labels: development, economics, globalisation, india

There follows a comment by me on the third world development from the 27 November issue of Fund Strategy.

First we had Brics, now we have Chindia. The first term, coined by Jim O'Neill of Goldman Sachs in 2001, has become widely accepted as an acronym to cover Brazil, Russia, India and China. Chindia was coined by Jairam Ramesh, an Indian politician and economist, and now is the basis for several funds.

As a shorthand way of indicating the countries included have huge populations while remaining relatively poor, such terms are fine. But there are many important differences between them. Brazil, unlike the others, is not growing particularly fast. Russia, unlike the others, is heavily dependent on one commodity - oil - and related products. India, despite its rapid growth, has appalling infrastructure and a weak industrial base. China stands out as by far the largest and most rapidly growing economy.

In other ways, too, the discussion of these countries is often distorted. A typical fund manager presentation on any of these countries starts by noting their huge populations. It then raises the spectre of such relatively poor countries moving towards Western levels of consumption. "Just imagine if every family in China buys a food processor," runs the argument. "The share price of the Shanghai Acme Food Processor Company is bound to rocket."

Such discussions are back-to-front. The primary determinant of consumption is production. In other words, it is necessary to work out how the barriers to raising production can be overcome before considering how much consumption can rise. The only reason China can consume so much more than in the past is because its output has risen rapidly.

Admittedly the level of production does not put an absolute limit on consumption in the short term. Up to a point it is possible for countries to borrow overseas to help subsidise their current consumption. It is also possible, as in China today, for individuals to save heavily rather than go all out to consume.

Despite these modifications, the fundamental point remains that production determines the level of consumption over the long term. Therefore, a consideration of such factors as the level of investment and the ambition of the governing class are crucial in assessing development prospects. If the level of production rises, consumption levels are likely to follow. Stagnant output, in contrast, means that the consumption story will fail. The simplistic story of the Brics and Chindia told by many financial institutions misses out the key elements in the development process.

Labels: china, debt, Fund Strategy, india

I discover today that the campaign against Coca-Cola and Pepsi-Cola has spread to Britain and America. A report in the Independent on 19 August said Sussex University was the first campus in the country to ban all Coca-Cola products from its students’ union:

“The decision to withdraw Coca-Cola from the university comes at a time when its products have already been banned in schools, as concerns rise about rates of obesity among children. Universities in the US have also banned Coca-Cola and a quarter of states in India have outlawed products following concerns that they contain 27 times the permitted levels of pesticides.

“Campaigners also claim that bottling plants in India have depleted local water tables and deprived farmers of their livelihoods. In Colombia and other South American states, the company has been accused of ignoring anti-union abuses at its factories.”

There is meant to be a campaign group called UK Students Against Coca-Cola but I cannot find a website for it.

Labels: consumption, corporations, india

It seems to me that growth scepticism is a central part of Indian nationalism. Most obviously there is the symbolism of the flag – which I will not go into now – and the legacy of Mahatma Gandhi.

Contemporary India also has prominent environmental campaigners including Medha Patkar, Arundhati Roy and Vandana Shiva. One of their main focuses is the Narmada dam project.

This week’s Economist (26 August) has a profile of Sunita Narain, head of the Centre for Science and Environment based in Delhi, which is backing the campaign against Coca-Cola and Pepsi (see 11 August dispatch). Meanwhile, yesterday’s London Times reported that Indian campaigners are running a “safe festivals” campaign. Devotees of Ganesh, the elephant-headed god, are being urged to make their idols out of traditional unbaked clay rather than toxic plastic.

Labels: Asia, environment, india

I read in today’s Financial Times (see below) that many Indian states are banning drinks from Coca-Cola and Pepsico. Allegedly there are unsafe levels of pesticide residue in their soft drinks. I am not in a position to make a definitive judgement but I am suspicious about this campaign. I suspect the fears are probably exaggerated and in any case a better campaign would be for India to improve its awful system of water supply (for more on this read the World Bank’s latest development policy review on India).
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Indian states join Coke and Pepsi ban
By Jo Johnson in New Delhi

A quarter of India's 28 states have announced partial or total bans on Coca-Cola and PepsiCo in the wake of fresh concerns over pesticide levels in soft drinks.
More bans are expected in the coming days in a political backlash against the US companies that has the potential to disrupt flows of US and other foreign investment to India.

Labels: corporations, india