Wednesday, May 15, 2013
A new era has arrived in immigration. Many countries - the United States, the UK, France, Germany, the Netherlands - have for decades taken in poor immigrants with the express intention that they would do work that native citizens had become reluctant to do. The labor was either too hard, too cheap or too dangerous for the locals.
Now the rich countries don't want poor people. Many of the production-line jobs they came to do have been automated - or the industries they came to work in, as the cotton mills of Lancashire in the UK, have mostly closed. The Immigration Bill now before the U.S. Congress and Senate is crafted to legalize the estimated 11 million illegal immigrants and to "attract� the world's brightest and best-educated people." As automation takes over more unskilled work and as the demand for labor emphasizes skills that higher education usually teaches, the needs of the United States and other developed countries change.
The heated debates over immigration and its consequences power the rise of the populist parties in Europe and push centrist governments towards tougher curbs. But the debates may soon seem beside the point: The traditional emigrant states are beginning to want their best minds back. The hunt for clever people is globalized: Universities, companies, even government bureaucracies seek them here and seek them there. The needs of the developed world and the greater needs of the developing world now conflict.
Western immigration has a long history. Pakistanis were employed to staff the declining cotton industry in the north of England from the 1960s. Mexicans have come into California and Texas to work on farms since the mid-19th century: The massive flows have been in the last few decades, with nearly one-third of the Mexican foreign-born population arriving since 2000. Germany imported Turkish immigrants since the sixties with no right or prospect of citizenship, to work in its automobile and other industries.
These days, citizens (including ethnic minority citizens) see in immigration a threat to jobs, social services and their culture. The problems aren't illusory or, as some liberals have maintained, merely the product of racist attitudes. Germany's 3-4.5 million citizens of Turkish origin do pose a real problem of integration. The economist Theo Sarazin's 2010 book, Germany Is Destroying Itself, was excoriated by much of the establishment for its uncompromisingly bleak picture of an unassimilated Turkish population, until part of his argument was accepted by Chancellor Angela Merkel.
As the head of the Demos think tank, David Goodhart, stresses in his recent book, The British Dream, over the past decade and a half UK immigration has been unprecedentedly rapid and large, as it has been in France. It has meant a substantial change in the look and culture of some urban areas and increased ghettoization. Goodhart, a liberal himself, was also harshly criticized - only to later see some of his critics agree with him.
Tensions are present in emerging countries as well. Last month, the Turkish Industry Minister Nihat Ergun said that his country no longer wishes to transfer qualified labor to Germany; he has called for a "reverse brain drain." Turkey is now economically successful; it wants to continue being so, and that takes skilled and ambitious citizens.
This wasn't the first such declaration and won't be the last. The rich Western states, many looking at shrinking populations, should all try to emulate Canada's immigration policy and target highly educated immigrants. As Ergun's comments show, highly skilled and professional workers were always part of the exodus: Now, the emigrant countries will strive to keep them or woo them back. At the same time, though, Western states will spurn most of the unskilled workers and their families, generally with little education, who had been the mass of immigrants, legal and illegal, in the United States (mainly Mexican), the UK (Pakistani), Germany (Turkish) and France (North African).
Emigration can help poor and relatively poor countries because emigrants send back money to their families - it's estimated to be around 10 percent of the Philippines' GDP, 2 percent in Poland and Mexico. It's much higher in the poor states of Central Asia, whose men increasingly find low-paid work in Russia. But it tends to fall the more successful the emigrants' countries become. In the mid-seventies, as workers flooded into Germany, the cash they sent back was more than 4 percent of Turkish GDP: Now it's 0.12 percent. Emigration gives hope - but it's also a sign of failure.
Mexico, presently undergoing a welcome spurt of growth, needs its professionals and skilled workersas Turkey does. The demands of countries that are leveraging themselves out of mass poverty should trump those of countries that did so decades ago. The rich world's duty is not to take their best-educated people but to support growth that is sustainable and not corrupt. That can mean more aid, fewer trade barriers, the sharing of expertise, and investment. The influence of the poor who seek a better life has grown, is growing and will grow: As the barriers go up, they need hope at home.
The old arguments about racism, which have so exercised liberals, are not wholly beside the point - racism remains everywhere - but they are less relevant than they were. The fortunate rich countries will benefit at least as much when the aspiring poor countries grow; and for that they need their cleverest people. It's truly liberal to say: Keep your tired, your poor, your huddled masses�and your energetic, your aspiring, your entrepreneurial individuals - and improve their lives. Then the racism and condescension that thrives on the struggles of immigrants in unfriendly host communities will dwindle, and maybe even, over time, die.
Monday, May 13, 2013
Would you like to build your own gun? There are plenty of ways to do so, legal and otherwise. Last week, a group called Defense Distributed offered you a new one: It published instructions for creating a plastic firearm using a 3D printer. One guy even fired a real bullet with it.
Not long afterward, the U.S. State Department demanded that the group take the blueprints down, alleging that they may violate export-control laws. Defense Distributed complied, but not before at least 100,000 people had downloaded the plans.
Fears of teenagers now printing a plastic arsenal are overblown, but the episode is emblematic. Three-dimensional printing, also called additive manufacturing, can be a powerful force for economic and social progress. But it also holds potential for abuse: Weapons, counterfeits and designer drugs are just a few of the products an unscrupulous user might someday produce.
The questions -- which Bloomberg View will be exploring in a series this week -- are not just how this technology may disrupt our lives, for better and worse, but how to prepare for this manufacturing revolution in the making.
Three-D printing a gun, like printing most other things, is pretty simple. You download a digital file for a design you like. The printer reads the file, then shoots out layer upon layer of specialized plastic -- or another raw material -- through a heated nozzle in the specified shape. Not long afterward, your gun parts materialize.
The technology is roughly 30 years old, but has only recently become cheaply available and widespread. Global sales and services related to 3D printing reached $2.2 billion in 2012, according to Wohlers Associates Inc., an increase of 28.6 percent over the previous year. The company expects that figure to increase to about $6.5 billion in 2019.
And no wonder. Consider the Urbee 2, a car being produced by Kor Ecologic using a 3D printer. When completed, it will weigh some 1,200 pounds. Made with about 40 pieces of thermoplastic, it will be resilient, aerodynamic and mind-bogglingly efficient. Its production will require far less material than a traditional car. It will need almost no labor and take little time to assemble. Its designers can employ unorthodox shapes and materials to maximize efficiency, mold the lightweight plastic with precision to strengthen vulnerable areas, and fit most pieces together without joints or welding (although the engine and chassis will still be made of metal). In effect, they’re compressing much of an automobile assembly line into a printing device.
The economic potential is stunning. Across a range of industries, R&D costs are already declining and product-development cycles are accelerating as more inventors experiment with cheap 3D-printed prototypes. The question is whether the technology will transform manufacturing more broadly.
At the moment, 3D printing is a very small part of the economy. The printers are typically slow, and the material they use is expensive and inconsistent. As the industry advances, however, printing on demand could reduce assembly lines, shorten supply chains and largely erase the need for warehouses for many companies. Reducing shipping and eliminating the waste and pollution of traditional subtractive manufacturing could be an environmental boon.
In a few decades, things could get really interesting. Engineers should be able to blend raw materials in new ways, endow products with nanotechnology and artificial intelligence, and create objects that interact with their physical environment. Imagine military armor embedded with sensors that track wear and tear, or a turbine blade that monitors its own temperature.
The technology is already liberating entrepreneurs. As consumer-grade printers improve, a basement enthusiast will be able to make replacement parts for products he owns, invent and sell customized objects online, and potentially create new industries. As Hod Lipson and Melba Kurman write in “Fabricated: the New World of 3D Printing,” the technology will be “the platypus of the manufacturing world, combining the digital precision and repeatability of a factory floor with an artisan’s design freedom.” In other words, the era of mass customization is quickly approaching.
But if 3D printing promises expansive opportunities, it will also present new problems -- as the plastic gun suggests.
The intellectual-property system will face plenty of new challenges. Whole categories of products will be newly subject to counterfeiting. Amateur printers are already appropriating pop-culture artifacts to create clever new objects, copyrights be damned. And businesses threatened by this new technology will be tempted to drive newcomers out of existence -- or underground -- through lawsuits and lobbying.
Or consider product safety. Millions of new physical objects might be unleashed on the world -- from strollers and action figures to junk food and prosthetics -- the quality and safety of which will be highly variable. When those products malfunction or injure someone, possibly in another country, who’s liable?
The medical uses of 3D printing are also thrilling and terrifying. Already, printers are being used to make hearing aids, dental implants and prosthetics. Hospitals are printing precise replicas of patients’ organs to plan surgeries. Researchers are using 3D printers to arrange human cells to create bone and blood-vessel tissue. Before long, we may be printing replacement organs. This holds great promise -- but what happens when the power to create body parts on demand becomes routine? We lack even a moral vocabulary for this brave new world.
Finally, 3D printing seems likely to throw a lot of people out of work in the medium term, especially in industries that depend on assembly-line labor. Eventually, as with most technological breakthroughs, it will probably create new jobs in new industries. But that transition period will be hazardous, and displaced workers will need help to navigate it.
A recent report from the Atlantic Council predicts that 3D printing “has the potential to be as disruptive as the personal computer and the Internet.” The comparison is apt. Three-D printing will make the world a very different place -- and, with the right policies, a better one too.
Sunday, May 12, 2013
ELITE management consultancies shun the spotlight. They hardly advertise: everyone who might hire them already knows their names. The Manhattan office that houses McKinsey & Company does not trumpet the fact in its lobby. At Bain & Company’s recent partner meeting at a Maryland hotel, signs and name-tags carried a discreet logo, but no mention of Bain. The Boston Consulting Group (BCG), which announced growing revenues in a quiet press release in April, counts as the braggart of the bunch.
Big trends that befuddle clients mean big money for clever consultants. Barack Obama’s gazillion-page health reform has boosted health-care consulting; firms would rather pay up than read the blasted thing. The Dodd-Frank financial reform has done the same for financial-sector work. Energy and technology are hot, too.
Companies are reluctant to talk about their use of consultants, and consultancies are relentlessly tight-lipped. Bain is said to use code-names for clients even in internal discussions. Such secrecy makes this a hard industry to analyse.
It also lets stereotypes flourish. McKinseyites are said to be “vainies” (who come and lecture clients on the McKinsey way). BCG people are “brainies” (who spout academic theory). And the “Bainies” have a reputation for throwing bodies at delivering quick bottom-line results for clients.
In fact, the big three all learn from each other. All three now use their alumni networks to gather intelligence and generate business—something McKinsey is famous for. All three stake some of their fees on the success of their projects, a practice once associated with Bain. And all three show off their big ideas to the wider public, as BCG’s founder was once among the few to do.
Consulting is no licence to make easy money. Cynics sneer that clients spend millions on consultants only to give the boss an excuse to do what he planned to do anyway. But that would be implausibly wasteful in these days of tight budgets. Consultants today cannot just deliver a slideshow and pocket fat fees. Even the elite three now make most of their revenue from implementing ideas, from finding ways to improve clients’ internal processes and from other tasks not traditionally considered “strategy consulting”.
As the elite firms move down into implementation and operations, they are meeting big new rivals hoping to move up into the loftier realms of strategy. Over the weekend of May 4th-5th partners at Roland Berger, a mid-tier consultancy, met to discuss a possible buyer for their firm. The most likely candidates are thought to be PwC, Deloitte and Ernst & Young, three of the “Big Four” accounting firms (the other is KPMG).
The big accountancy firms now do more consulting than McKinsey, BCG and Bain. Much of this involves manpower-intensive tasks such as technology integration. But their strategy and operations practices are ambitious, too. In January Deloitte bought Monitor, a brainy strategy firm, out of bankruptcy. In 2011 PwC bought PTRM, a respected operations consultancy. All four have scooped up smaller firms too. A successful Big Four bid for Roland Berger would reopen an old question: can the Big Four crack the elite tier?
It is too early to know whether the brainboxes of Monitor will fit comfortably into the Deloitte juggernaut. When EDS, a computer-equipment and services provider, bought A.T. Kearney, a midsized strategy firm, cultures clashed calamitously. A.T. Kearney bought itself free in 2006.
Nonetheless, Mike Canning, the head of Deloitte’s strategy consulting in America, says the Monitor integration is going smoothly, and that clients are showing new interest in Deloitte. Is Deloitte competing with McKinsey, Bain and BCG for work? “Day in, day out, on a regular basis,” says Mr Canning. Dana McIlwain of PwC echoes that: “We are definitely competing today, and only more so in the future.”
Bob Bechek, Bain’s boss, puts it differently: competition with the Big Four is up “very slightly in the past few years, but I mean like a couple of percentage points”. He salutes the Big Four: they do what they do well and profitably. But he argues that the heavy-lift, repeatable work at which they excel is a different kind of business. Strategy consultants concoct novel solutions to unique problems, which is hard.
Rich Lesser, BCG’s boss, acknowledges the challenge from the Big Four, but is confident. Having new rivals is nothing new, he says. Tom Rodenhauser of Kennedy Information reckons that the Big Four “are cracking the C-suite, but they’re not first on the speed-dial for strategy work”.
The elite firms are keen not to seem complacent. While boasting about opening offices in Bogotá or Addis Ababa they acknowledge that emerging-world bosses are not blown away by flashy names. The consultants aim to win trust with quick projects that show bottom-line results, before looking to book longer engagements.
Clients in the rich world are changing, too. Fifteen years ago Indra Nooyi, then the head of strategy (now the boss) at PepsiCo, was a demanding client for consultants, having been one herself at BCG. She was a rarity at the time. No longer: the consultancies have seen many of their alumni go on to fill senior positions at big companies.
Some, such as McKinsey, make it easy for big firms to poach their people, by putting potential employers directly in touch with consultants who tick the right boxes for a vacancy. The idea is that this outplacement service makes McKinsey a more attractive place to work. It also keeps the talent churning, constantly refreshing the firm’s intellectual capital.
Clients are increasingly demanding specific expertise, not just raw brainpower. McKinsey and BCG, in particular, are hiring more scientists, doctors and mid-career industry types, and reducing the proportion of new MBAs in their ranks.
Vainie: “Vidi, vici”
The firms spend big sums on “thought leadership”: ie, papers, books and conferences. This is not all airy-fairy theory. McKinsey has invested heavily in proprietary data. Its boss, Dominic Barton, says: “With the push of a button we can identify the top 50 cities in the world where diapers will likely be sold over the next ten years.” The firm invests $400m a year on “knowledge development”, and Mr Barton touts its “university-like capabilities” to impart it to its consultants.
It is fashionable to complain that consultants “steal your watch and then tell you the time”, as one book put it. But customers clearly value what the consultants offer. Otherwise, the elite three and the Big Four would not be growing so fast.
Things are harder for the next tier, however. Old firms such as A.T. Kearney and Booz & Company (which considered but abandoned the idea of a merger in 2010) are seen by some potential clients as too small to bestride the globe but too big to be nimble. They will watch Roland Berger’s fate with interest.
(Source: The Economist)
How profoundly will the new computing platform loosely known as “the cloud” disrupt the business software empires of companies like SAP and Oracle?
SAP went on the offensive this week, with the news that it would start running software for its customers in its own data centres. Hasso Plattner, SAP’s chairman and the man with the best claim to the title of Europe’s software visionary, called it the biggest thing from the German company since its flagship business applications software put it on the map 20 years ago.
It is right in thinking that companies are ready to move wholesale to new services such as this, the switch could be very big indeed.
One customer, Coca-Cola, has more in-house computing resources at its disposal than Saleseforce.com, the biggest of the pure “cloud” players, according to SAP executives.
Moving faster than its main rivals might make it look as if SAP is staying one step ahead. But the future structure of the cloud computing market could threaten the old guard of business software.
The danger for the likes of SAP is that the market will split. On one side, this would leave a small number of large-scale cloud platform players – companies like Amazon and Microsoft that run the computing infrastructure on which the new cloud-delivered applications depend.
On the other side, riding on these platforms, a wave of new cloud application companies is working hard to infiltrate through the cracks left by the monolithic software suites of companies such as SAP.
The trick for these new companies has been to find a way to appeal to end users directly, rather than the IT specialists or business managers who have made corporate technology decisions in the past.
Michael Crandell, chief executive of software start-up RightScale, describes this as “rogue IT” – or the even less wholesome-sounding “IT leakage”.
Step one is luring workers with a free version of an application they will find useful in their jobs. Step two, when enough have been hooked, is persuading their bosses to start paying for extra features and services to make the technology more manageable.
Besides RightScale, companies that follow this pattern include Optimizely, which allows users to trial new services for their customers; Asana, a collaboration tool for teams of workers; and Zendesk, a customer support service for help desks.
Peter Fenton, a partner at venture capital firm Benchmark, which has funded all four, compares this to the Southwest Airlines approach to competition.
The upstart airline succeeded not by stealing customers from the established carriers, he says, but by creating a new market. It lowered fares to a point where travellers moved from Greyhound buses or started taking trips that they wouldn’t have made before.
Companies such as SAP clearly have significant advantages in this battle. Their customers are careful about allowing their corporate data to seep out on to networks beyond their control. And they have made a huge sunk investment in their existing systems.
However, younger companies without ties to old IT are freer to build on a new computing architecture – a worrying sign for the old guard of the software industry, since these should be their customers of the future.
Also, corporate managers are learning fast how to adapt to the so-called “consumerisation” of IT, which promises more rapid adoption of technologies with productivity-enhancing potential.
SAP knows it has to respond to these changes. Mr Plattner worried publicly this week that his company’s prices are too high. And the German company has set its sights on eventually getting its software in front of 1bn end-users – a feat that would pull it out of the backroom of corporate IT and put it on a par with mass-market technologies such as Facebook and the Windows operating system. For now, that is a far-off ambition.
Running applications for customers in its own data centres is the necessary first step, according to Mr Plattner. It promises to give SAP a direct connection to office workers for the first time, creating a feedback loop through which it could learn more about how its technology is working in practice and make faster headway in improving usability.
SAP still has a lot to learn in the new world of cloud services. Mr Plattner – who has sought to bring a new sense of urgency to a company he has described as at risk of becoming moribund – must be hoping that it won’t be another 20 years before the results are apparent.
Treasury 10-year note yields rose the most in two months as signs the U.S. economy is improving stoked speculation that there is no need for the Federal Reserve to ramp up monetary stimulus.
The benchmark notes fell, pushing yields to the highest level in six weeks, as the Fed and other central banks pump cash into their economies or cut interest rates, prompting money managers to seek higher-yielding assets. Stronger-than-forecast employment gains reported last week and fewer-than-projected jobless claims helped the dollar rally versus the yen after passing the 100 level on May 9. Consumer sentiment this month may have reached the highest level this year, according to a Bloomberg News survey of economists.
There is little doubt that the next Fed move will be less easing, not more,” said Michael Mata, a money manager in Atlanta at ING Investment Management Americas, which oversees about $125 billion. “Fear of increases in balance-sheet expansion have gone way down. The strong employment numbers started to change that sentiment.”
The U.S. 10-year yield climbed 16 basis points this week, or 0.16 percentage point, to 1.9 percent in New York, after reaching the highest level since March 26, according to Bloomberg Bond Trader prices. It was the biggest yield climb since the week ended March 8. The 1.75 percent note due in May 2023 reached 98 21/32.
The benchmark yield traded above its 50-, 100- and 200-day moving averages yesterday for the first time since March 25. Pacific Investment Management Co.’s Bill Gross wrote in a message on Twitter that the 30-year bull market for bonds “likely ended” on April 29.
The yen fell beyond 101 per dollar yesterday for the first time since April 2009 after a government report showed Japanese investors boosted holdings of overseas bonds. Japan’s currency dropped 2.7 percent to 101.62 per greenback.
“The yen move has taken other asset classes screaming with it,” said Eric Lascelles, the chief economist at Toronto-based Royal Bank of Canada Global Asset Management, which oversees about $280 billion. “We are expecting the yen to depreciate further.”
Hedge-fund managers and large speculators cut net-long position in 10-year note futures in the week ending May 7 by 71 percent, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 37,956 contracts on the Chicago Board of Trade, compared with 132,044 contracts a week earlier.
Treasuries due in a decade or more are close to the cheapest levels in a month relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on Treasuries was 49 basis points higher than those in an index of other sovereign debt May 9, just below the 52 basis points reached on May 6, the cheapest level since April 4. As recently as March 25, the gap was at 57 basis points, the cheapest level since August 2011.
“The time is right for some of these safe-haven markets to see some unwinding,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “There was a huge move in Japanese government bonds and also in stocks and the dollar-yen. Yields are going to push higher in coming months as there isn’t that sense of urgency that pushed them toward record lows.”
The U.S. central bank is buying Treasuries and mortgage debt each month to support the economy by capping borrowing costs. The Bank of Japan is purchasing more than 7 trillion yen ($70 billion) of debt each month in expanded easing measures announced April 4.
Fed purchases have suppressed volatility. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries fell to an all-time low of 48.87 basis points May 9. The measure averaged 62.6 during the past 12 months.
The number of Americans filing claims for jobless benefits unexpectedly dropped to 323,000 last week and the average during the past month fell to the lowest level since before the last recession, the Labor Department said May 9. On May 3, a report showed stronger-than-forecast 165,000 increase in jobs in April and unemployment at 7.5 percent, a four-year low.
The Thomson Reuters/University of Michigan final index of consumer sentiment rose to 77.9 in May from 76.4 a month earlier, according to the median projection in a Bloomberg News survey of 56 economists before the report May 17.
The U.S. sold $72 billion in notes and bonds this week, including $32 billion in three year notes, $24 billion in 10-year securities and $16 billion in 30-year bonds.
The yield on the 10-year note is forecast to end the year at 2.20 percent, according to the median estimates of economists in a Bloomberg News survey May 3 to 8. The figure is down from a forecast of 2.25 percent in a Bloomberg News survey conducted April 5 to April 9. Thirty-year bonds may yield 3.25 percent at the end of the year, compared with a forecast for 3.37 percent in the previous survey.
Friday, May 3, 2013
Cargill, Wilmar and Bunge, three leading commodities trading houses, have taken delivery of the biggest amount of sugar on record from the main futures exchange for the sweetener.
The record delivery of 1.4m tonnes of sugar – almost equal to the annual consumption of Malaysia, one of the world’s top 10 sugar importers – comes as the trading industry attempts to balance growing supplies from Brazil with strong demand in Asia and the Middle East. The previous delivery record was set at 1.3m tonnes of sugar in 2009.
“The largest delivery in the history of the exchange coincides with a record Brazilian crop,” said Michael McDougall of commodities brokers Newedge in New York.
Commodities trading houses usually deal the sweetener in private, but the futures exchange is increasingly becoming a key channel for trading physical sugar. The companies taking delivery held their long futures positions until the expiry of the contracts, hence accepting physical sugar.
The companies delivering against the ICE May sugar contract, Noble Group, Louis Dreyfus Commodities and Sucres & Denrées held short positions until expiry, according to brokers.
“The market has been surprised how much sugar was delivered,” said Jonathan Kingsman of sugar consultancy Kingsman in Lausanne.
According to the IntercontinentalExchange, home of the raw sugar benchmark, 28,210 lots or 1.4m tonnes of the sweetener was delivered against the May contract. The number was the highest since records started in 1989 and beat the figure seen in 2009, where 26,783 lots, or 1.3m tonnes were delivered against the July contract.
The delivery comes as demand in Asia remains strong and as record crops in Brazil have depressed prices. With the ICE July benchmark trading at 17.35 cents a pound, receivers of the physical delivery were betting on demand from Asia and the Middle East remaining firm.
Analysts said that China was expected to continue to take advantage of the low prices to build up its strategic reserves while speculation that Indonesia, one of the world’s leading importers of sugar, was raising its import tariffs for the sweetener in July also spurred long positions.
However, the high level of supplies matching demand, contrary to earlier expectations, was a bearish sign, said traders. Availability of Brazilian sugar was not expected to be high despite the bumper harvest due to bad weather earlier in the month, which delayed the harvest and the crushing, as well as congestion in the ports. Traders said the May delivery pointed to larger supplies for later in the year.
Thursday, May 2, 2013
For a country as poor as India, growth should be what Americans call a “no-brainer.” It is largely a matter of providing public goods: decent governance, security of life and property, and basic infrastructure like roads, bridges, ports, and power plants, as well as access to education and basic health care. Unlike many equally poor countries, India already has a strong entrepreneurial class, a reasonably large and well-educated middle class, and a number of world-class corporations that can be enlisted in the effort to provide these public goods.
Why, then, has India’s GDP growth slowed so much, from nearly 10% year on year in 2010-11 to 5% today? Was annual growth of almost 8% in the decade from 2002 to 2012 an aberration?
I believe that it was not, and that two important factors have come into play in the last two years.
First, India probably was not fully prepared for its rapid growth in the years before the global financial crisis. For example, new factories and mines require land. But land is often held by small farmers or inhabited by tribal groups, who have neither clear and clean title nor the information and capability to deal on equal terms with a developer or corporate acquirer. Not surprisingly, farmers and tribal groups often felt exploited as savvy buyers purchased their land for a pittance and resold it for a fortune. And the compensation that poor farmers did receive did not go very far; having sold their primary means of earning income, they then faced a steep rise in the local cost of living, owing to development.
In short, strong growth tests economic institutions’ capacity to cope, and India’s were found lacking. Its land titling was fragmented, the laws governing land acquisition were archaic, and the process of rezoning land for industrial use was non-transparent.
India is a vibrant democracy, and, as the economic system failed the poor and the weak, the political system tried to compensate. Unlike in some other developing economies, where the rights of farmers or tribals have never stood in the way of development, in India politicians and NGOs took up their cause. Land acquisition became progressively more difficult.
A similar story played out elsewhere. For example, the government’s inability to allocate resources such as mining rights or wireless spectrum in a transparent way led the courts to intervene and demand change. And, as the bureaucracy got hauled before the courts, it saw limited upside from taking decisions, despite the significant downside from not acting. As the bureaucracy retreated from helping businesses navigate India’s plethora of rules, the required permissions and clearances were no longer granted.
In sum, because India’s existing economic institutions could not cope with strong growth, its political checks and balances started kicking in to prevent further damage, and growth slowed.
The second reason for India’s slowdown stems from the global financial crisis. Many emerging markets that were growing strongly before the crisis responded by injecting substantial amounts of monetary and fiscal stimulus. For a while, as industrial countries recovered in 2010, this seemed like the right medicine. Emerging markets around the world enjoyed a spectacular recovery.
But, as industrial countries, beset by fiscal, sovereign-debt, and banking problems, slowed once again, the fix for emerging markets turned out to be only temporary. To offset the collapse in demand from industrial countries, they had stimulated domestic demand. But domestic demand did not call for the same goods, and the goods that were locally demanded were already in short supply before the crisis. The net result was overheating – asset-price booms and inflation across the emerging world.
In India, matters were aggravated by the investment slowdown that began as political opposition to unbridled development emerged. The resulting supply constraints exacerbated inflation. So, even as growth slowed, the central bank raised interest rates in order to rebalance demand and the available supply, causing the economy to slow further.
To revive growth in the short run, India must improve supply, which means shifting from consumption to investment. And it must do so by creating new, transparent institutions and processes, which would limit adverse political reaction. Over the medium term, it must take an axe to the thicket of unwieldy regulations that make businesses so dependent on an agile and cooperative bureaucracy.
One example of a new institution is the Cabinet Committee on Investment, which has been created to facilitate the completion of large projects. By bringing together the key ministers, the committee has coordinated and accelerated decision-making, and has already approved tens of billions of dollars in spending in its first few meetings.
In addition to more investment, India needs less consumption and higher savings. The government has taken a first step by tightening its own budget and spending less, especially on distortionary subsidies. Households also need stronger incentives to increase financial savings. New fixed-income instruments, such as inflation-indexed bonds, will help. So will lower inflation, which raises real returns on bank deposits. Lower government spending, together with tight monetary policy, are contributing to greater price stability.
If all goes well, India’s economy should recover and return to its recent 8% average in the next couple of years. Enormous new projects are in the works to sustain this growth. For example, the planned Delhi-Mumbai Industrial Corridor, a project with Japanese collaboration entailing more than $90 billion in investment, will link Delhi to Mumbai’s ports, covering an overall length of 1,483 kilometers (921 miles) and passing through six states. The project includes nine large industrial zones, high-speed freight lines, three ports, six airports, a six-lane expressway, and a 4,000-megawatt power plant.
We have already seen a significant boost to economic activity from India’s construction of its highway system. The boost to jobs and growth from the Delhi-Mumbai Industrial Corridor, linking the country’s political and financial capitals, could be significantly greater.
To the extent that democratic responses to institutional incapacity will contribute to stronger and more sustainable growth, India’s economic clouds have a silver lining. But if India’s politicians engage in point-scoring rather than institution-building, the current slowdown may portend stormy weather ahead.